We Can Always Print Money to Do That
Aug 8, 2011 at 1:13 PM
This piece was originally published on my personal site here.
"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default." -- Alan Greenspan, August 7, 2011
Is Mr Greenspan the greatest troll alive? Following this quote, we can only hope that's the case.
It's certainly true that we could just print more and more and MORE money to pay off the government's $14 trillion+ debt. Actually, we wouldn't even need to physically print anything -- we'd just add a few zeros to some balance sheets here and there and then set up a some wire transfers to our various lenders. Voila! Problem solved. Remind me again why we had that whole debate last week?
The difficulty here -- and presumably the reason why we haven't taken advantage of this ostensibly simple solution already -- is that this would cause massive overnight inflation, probably collapse the dollar, and generally wreak havoc on the world's economy.
See, whenever you just print huge quantities of money based on nothing, this results in devaluation, or inflation, of the unit of currency. The effect of the very policy Mr. Greenspan recommends may be clearly seen in the history of our money's value over the course of the last 100 years of the Federal Reserve's print-happy ways. The dollar's worth has declined to less than five cents of what it was at the beginning of the 20th Century.
The presence of 14 trillion new dollars would dilute -- and thus inflate -- our money supply at an unprecedented rate. As simply defined by Austrian economist Ludwig von Mises, inflation "means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check."
Basically: making more money out of thin air = less value per piece of money.
In practice, we often use the term "inflation" to discuss the resultant rise in prices which this new quantity of money produces. Unfortunately, this habit is not only inaccurate but also dangerous:
When inflation is seen as a general rise in prices, then anything that contributes to price increases is called inflationary....In this framework, not only does the central bank have nothing to do with inflation, but, on the contrary, the bank is regarded, against all evidence, as an inflation fighter.
Though his statement admitted no such possibility, Mr. Greenspan and the central bank he used to head are both veteran agents of the inflation they claim to fight. Nevertheless, his suggestion of printing our way back from the edge of default is impressively reckless even for a (former) Fed mouthpiece.
To quote Mises again, "Continued inflation inevitably leads to catastrophe." And the catastrophe hurts worst those who can least afford it:
Savers and those living on fixed or low incomes are hardest hit as the cost of living rises. Low- and middle-incomes families suffer the most as they struggle to make ends meet while wealth is literally transferred from the middle class to the wealthy. Government officials stick to their claim that no significant inflation exists, even as certain necessary costs are skyrocketing and incomes are stagnating.
The transfer of wealth comes as savers and fixed-income families lose purchasing power, large banks benefit, and corporations receive plush contracts from the government -- as is the case with military contractors. These companies use the newly printed money before it circulates, while the middle class is forced to accept it at face value later on. [emphasis added]
Not coincidentally, those who suffer most from inflation are also those who have the fewest cocktail party acquaintances working at the Fed -- "Oh dahling, let me just print you up a couple hundred for the powder room...and a couple billion to bail out your failing corporation!" So although Greenspan's remark is couched in the assumption that we must prevent a default on behalf of all Americans, the real life results of his proposal wouldn't be nearly so egalitarian.
In the end, "we can always print money to do that" is less a reassurance and more an off-the-cuff summary of the last century of government growth, leeching off the leaking wallets of the lower and middle classes. How possible default may be I'm not sure, but printing our way out of it is most certainly not the answer.