There was a post in the Democratic Underground which generated quite a lot of amusement in Conservative circles a couple of weeks ago. Put simply, the poster believed that since the government can print money, it can never really go broke. Here is the post.
Let’s say that you have the ability to print your currency using your computer printer, and every merchant accepted your printouts as a valid exchange for goods and services. You need to pick up your dry cleaning? You printout a $20 bill and your cleaners hand over your garments without question. Same would be true for your mortgage, groceries, car note, etc. Your creditors even accept your printouts as payment on your debts.
Given this, how can you ever be broke? Answer, you cannot be broke. The U.S. government is not in debt simply because it can create currency to pay off the debt, and our creditors gladly accept our currency as payment on our debts. You see, the world needs our dollars because the world needs oil, and in order to buy oil, you need dollars, which means that the world needs to stockpile dollars, and that means that the U.S. can print all of the money that it wants without incurring massive hikes in interest rates to attract lenders.
So, why the hue and cry about America being broke? Simple. The elites in this country need to create a defcit and scarcity crisis in order to dissuade the public from voting for increased social spending on things like a universal health care program, better education, better benefits for SS recipients better infrastructure, etc. You cannot argue against the logic nor the need for these programs, but you can argue that you cannot pay for them. Additionally, more social spending means that the public is not as dependent on corporate America for their economic survival. For example, if you have universal healthcare, you don’t have to take a job just for the health benefits. If you have a generous Social Security program, you don’t have to invest in the market.
To be fair, the majority of responses to this display of economic illiteracy correctly pointed out that the large scale printing to money to pay the country’s debts would lead to hyper-inflation, with many using Weimar Germany as an example. That is all true, but I think it is worth exploring why this is the case. In doing so, perhaps we can clear up some misperceptions about money and the national debt.
To begin, those pieces of green paper you have in your wallet are not actually worth anything. I am not some crank urging you to go put and buy gold and silver. Gold and silver are not worth anything by themselves either. What you actually do when you buy something at a store is exchange some good or service you possess for a good or service at the store. When you go to work and get your paycheck, your employer is trading its goods and services for the labor and skills you give it. Bartering is rather cumbersome for all but the simplest of economic activities so in order to facilitate all of this trading, people have invented money. All money is therefore, is simply a method of keeping score, or a medium of exchange.
There are two others uses for money which are a little beyond the scope of this post, but which I have to mention in passing. One is money as a unit of account, that is a way of expressing how much a good or service is worth compared to other goods and services. It makes more sense to refer to prices in dollars or euros than terms of varying goods. The third use of money is as a store of value. This means that money can be used to store wealth. You know that the dollars in your pocket will still be worth something next week and can be easily traded.
It doesn’t actually matter what is used as the medium of exchange. It could be gold or silver, or candy bars, cigarettes, leaves, sea shells, or anything. It is better, however, to use something that is not consumed, and does not go bad. Bananas would not be very useful as money because you might get hungry and eat your savings. Also, bananas go bad after a couple of days. The medium used should not be too common or too scarce. Leaves from trees would also not be very useful. Anyone could go out into the woods and get a windfall. Gold and silver have generally been the most common substances used for money since they do not corrode easily and are scarce enough to be considered money. Most countries in the world today use fiat money. That is the government says a dollar is worth a certain amount.
If you pay for something with counterfeit money, you are cheating the other person. You are trading their goods or services with something worthless. Governments cannot actually counterfeit money, since they are the ones creating it, but they can devalue the currency which has almost the same effect. If a government prints large amounts of money without any addition to the total goods and services produced by the nation, then each individual unit of currency, a dollar bill, for example, represents less and less actual value. The total amount of wealth in the system, so to speak, is divided among more dollar bills. When this happens, each dollar bill is worth less and less, leading to inflation. If the US government printed $16 trillion dollar bills and used them to pay off the national debt, it would, in effect, be cheating its creditors.
Now, you might be thinking, “So what? Who cares if we rip off the lousy Chicoms.” Well, the fact of the matter is that despite all of concern about China owning the US, the truth is that the Chinese government only holds about 8% of the national debt. Most of the debt is owed the the citizens of the United States, through treasury bonds held in retirement accounts, mutual funds, banks and state and local governments. The Social Security Administration holds about 19% of the debt in the Social Security Trust Fund. If the federal government tried to pay off its debts in hyper-inflated dollars, most of the small investors, who were counting on a return on their investment would be ruined. Larger creditors, including foreign governments could well refuse payment in worthless dollars and insist on being paid in euros, or gold. The rest of us would experience the joys of triple or quadruple digit inflation.
The point I have been trying to make in this long post is that money is not the same as wealth. Money represents wealth and wealth cannot be created from nothing. If you or the government just prints a dollar bill, you are not creating wealth, you are only spreading existing wealth among more money. Sorry, but we can’t print our way out of our debts.
- A Predictable Crisis (smallthoughtsfromasmallmind.wordpress.com)
- Big Inflation Coming 3 (safehaven.com)
- Hyperinflation: The Story of 9 Failed Currencies (mint.com)
- One chart that tells the story of US debt from 1790 to 2011 (qz.com)
- The Origins of the US Dollar (mint.com)