The printing press: A fearsome, powerful tool. Used in the hands of a private man, he is branded a counterfeiter, and rightly so; his fake bills were created into existence without any value in exchange.
Used in the hands of the government, however, the printing press suddenly becomes a legitimate policy tool, used to manipulate the shape and direction of the economy. The government becomes the circus master, and we are the animals in the circus.
Let’s say I have a printing press and I print myself one million dollars. I can go buy myself a nice car, house, and take a one year trip around the world. However, my profligacy is only possible because I am exchanging worthless notes in return for real resources. For this to happen, everyone else’s dollars have to lose some of their value, which means now everyone else’s dollars will buy less than what they could have.
When the government spends, it has three options: Tax, borrow, or print. Taxes work so long as the population does not revolt, and borrowing works as long as someone is willing to buy the debt because they believe that the money they get back plus interest will be worth more than the money they are investing now. This only works up to a certain point, of course; if China spent the trillion dollars or so of U.S. debt that they hold, do you think they would get back a fair amount of real resources in exchange for everything they have exported over the years? It is hard to believe, since an influx of a trillion dollars into the U.S. economy would bid up prices significantly; just the same as when a very wealthy person walks into an auction and is easily able to crush anyone else’s bid. This is China’s dilemma.
When taxing is at its limits and borrowing doesn’t work, there are only a couple other alternatives: Go bankrupt, or print! Greece is in severe straits right now because they are unable to raise more money by borrowing (few want to buy their junk bonds!), and they do not have a printing press handy since they do not have sovereignty over the currency. This is why they had to seek a bailout.
However, if a country does have sovereignty over a currency, then they can counterfeit the same as a private citizen with a printing press can: They can print new bills and pay for their bills with those! Nevermind that doing so will devalue everyone else’s bills and thus take away their purchasing power 🙂
The Deficit: Nine Myths We Can’t Afford
In spite of the moral reprehensiveness of printing dollars to pay one’s bills, there is a stubborn belief that if only we let the government print to its heart’s desires, we could print our way to paradise. The Huffington Post has an article up about the so-called nine myths about the deficit that we can’t afford to continue. I would prefer to say that we can’t afford to goad people into believing that printing away one’s troubles would actually work! Although it is an extreme example, the Weimar Republic tried this; the results are similar to as seen on the left. Since then, other countries have also gone through bouts of hyperinflation which, although not as extreme as seen in the picture here, still had the impact of destroying much of the purchasing power of the currency.
So, what are the nine myths? Let’s go over each one and see the so-called myth and the reality behind it.
So-called Myth#1: The government should balance its books like a private household.
So-called Reality: Our federal government is the issuer of the currency, which makes its budget fundamentally different than the average citizen’s.
What this really means is that while it is illegal for most people to print dollars to pay their bills, it is perfectly legal for the government to do so.
So-called Myth#2: Fixing Social Security and Medicare will require “tough choices.”
So-called Reality: Social Security and Medicare are not facing a financial crisis.
While I don’t dispute that the government can pad the cheques with any numbers of 0s that it desires, the truth is that as these entitlements grow in size, so will the demands on real resources, which will by necessity have to be redistributed from those who have saved such resources.
So-called Myth#3: We are passing on debt to our grandchildren.
So-called Reality: Payments on Treasury securities are a matter of data entry, not a financial burden.
Try telling the Chinese that the trillion or so that they hold in debt is simply a matter of “data entry”. Either we will have to pay off that debt in an equivalent amount of real resources, or we will cheat by devaluing the currency and thereby paying back the Chinese in worthless dollars.
So-called Myth#4: What we don’t tax we have to borrow from the likes of China for our children to pay back.
So-called Reality: Paying our debt holders back consists of transferring funds between accounts.
Can I transfer a few billion to my own account? I would sure like that… again, see the point above.
So-called Myth#5: The government must tax or borrow to get money to spend.
So-called Reality: Government spending is not constrained by revenue.
Right; it is actually constrained by the willingness of third parties to exchange real resources in return for paper notes and by the degree of control the government is able to exert over the use of its currency and by the same control prevent the use of third-party currency.
So-called Myth#6: Deficits and government borrowing takes away savings.
So-called Reality: Deficits add to income and savings.
No, they actually add to account balances of depreciating dollars. If the government prints a trillion dollars and distributes it to everyone equally, nothing has changed in terms of real income and savings since functionally, the economy is identical in terms of real capital. If in turn the government prints a trillion and gives it to one company, then it is again a zero-sum transfer in terms of the entire economy, but it is a net gain for that one company and a net loss for everyone else whose dollar balances have depreciated in real terms.
So-called Myth#7: We’ll end up just like Weimar Germany or Zimbabwe.
So-called Reality: Hyperinflation in both countries was caused by circumstances far different than ours.
Perhaps; it doesn’t mean that you can print dollars without consequences and without inflation.
So-called Myth#8: Government spending increases interest rates and ‘crowds out’ valuable private sector investment.
So-called Reality: Banks can lend essentially without limit, and the Fed can hit any interest rate target it chooses.
See Myth #6.
So-called Myth#9: The money spent paying interest on the national debt could be spent elsewhere.
So-called Reality: Interest rates can easily be brought to zero and are not an obstacle to federal spending.
An interest rate of 0% implies no time preference; it means that you see no difference between getting $1000 today and getting $1000 in 100 years from now. How can this possibly be true? Nothing comes for free; an interest rate of 0% will reflect itself in excessive borrowing and an adjustment of asset prices upwards to reflect this increased leverage.
So, what do you guys think? Am I off in my analysis? If so, I’d love to hear about it; I have an open mind and I am always open to change. However, part of my objection to the above so-called myths and realities is philosophical: Do we really believe that those in power have only benevolent intentions and will truly redistribute wealth in the most optimal manner for everyone? Do we really believe that a handful of men can be intelligent enough to analyze and forecast every variable in a complex economy and plan it out better than the collective actions of individual players? I simply cannot believe that, though the reasons why would greatly bloat this blog post. I will leave it for another time 🙂
The Importance of Capital Theory (see: A Sushi Model of Capital Consumption)