We Can Always Print Money to Do That

Bonnie Kristian
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.


But, Mr. Greenspan is absolutely correct; and, in fact, it is exactly what we have been doing for all the years since we dropped the gold standard.

On a larger scale, the results can be, as you note, disastrous -- I still have German postage stamps in my collection denomintaed in billions of Marks.

So we have the phenomenon of half the citizens paying no taxes and demanding ever more from the government: welfare, schooling, housing, food stamps, and all sorts of other things paid for by the taxes levied on the productive half. Moreover, much of the federal spending is used to buy the votes of these people as well as various other special interests such as labor unions.

What politician -- whose sole aim in life is to be re-elected -- is going to slow down thepace of vote-buying when he can use taxpayer money to do so? The answer is damn few, as we can see by what went on in Congress this past week.

It will take a major upheaval -- which some voters have already begun to organize -- to bring our fiscal policies back to some degree of rationality, but the odds of that happening anytime soon don't seem to be too high.



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I believe the word you're looking for is "monetization" or, if you want to be fancy, "seigniorage."

Citing Von Mises always ups the chance you'll get pegged as a libertarian crackpot, so it should only be done when he's the only person making your argument. Fortunately for you, any monetary economist will tell you seigniorage  -> inflation, so you'd be better off just taking it as a widely held fact.

As it is, you've followed Von Mises into some strange rhetorical territory. While most economists regard inflation/deflation as relating to the price level (determined by both supply and demand of money), Von Mises is using it only to describe money supply. That might be OK for his purposes, but I'm not sure if you've completely understood the distinction, and your argument suffers as a result.

Be careful when thinking about who inflation hurts and why. The rule of thumb is: good for debtors, bad for lenders. Considering today's extraordinary economic circumstances, a large portion of Americans are debtors. This isn't to say inflation would be good for the economy as a whole; it wouldn't be, but demonstrating that takes more work than quoting Von Mises. 

I hope these comments helped. It's always nice seeing people writing about economics.

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