Monday, March 1, 2010

Deficit Fear-Mongering Is Just Class Warfare

It seems like all you ever hear about these days is the deficit or our massive national debt. But here's a question:

Can the United States ever be forced to default on its debt? 

The answer to this would seem to be important, since there are a lot of people out there who believe that the United States is heading towards bankruptcy, and that we could one day be forced to default on our debt. 

Representative Barney Frank recently posed this question to Fed Chairman Ben Bernanke:

Frank: Do you think there is any realistic prospect of America’s defaulting on its debt in the near future?
Bernanke: Not unless Congress decides not to pay….

So how is this possible? We know that nations can and do default on their debt, as Argentina notably did in 2001. Why couldn't the same thing happen to the US?

The reason is that, unlike Argentina in 2001 and Greece today, the debt that the United States owes is in a currency which it can simply print more of. The United States is borrowing dollars. In fact, the United States can print as many dollars as it wants to, and this ability is literally limited by the supply of paper in this country. 

Greece, on the other hand, owes a lot of debt in Euros. It does not have the ability to print euros, and so if it runs out of them, its only other options are to create its own currency, or to default. And while it can create its own currency, there are two big issues with that option. The first problem it would have to withdraw from the European Union, and the second problem is that that it would have to use its new currency to buy euros so it could pay back its euro debt. And its new currency wouldn't be worth very much. 

The United States does not face this problem. All of its debt is in dollars, and it can simply print as many of them as it wants. 

This may seem unbelievable. It's rather hard to believe that the US can just make its debt go away tomorrow by printing new dollars. But it can.

Why doesn't it? Because printing $12 trillion new dollars would make the dollars that we already have worth far less. In other words, it would lead to massive inflation. 

And here is where we should realize that the debt is simply a political issue, and in fact concern over debt is nothing more than disguised class warfare.

There are currently 20 million unemployed people in the United States today. This means that 20 million people are sitting around doing nothing, when they could be doing something productive like working on badly needed infrastructure projects. Roads, bridges, broadband access, public water systems, etc -the list goes on. We could print more money and pay these people to work, and the country as a whole would be better off for it. So why don't we do that?

Again, the fear is that printing more money would make the money we already have worth less. But this effect is a class-based effect. Simply put, if you have no money, you aren't worried about inflation, because you have nothing to lose. And if you have no job, you'd far rather have inflation and a government job building bridges than no inflation and no job.

If you have $58 billion like Bill Gates, 10% inflation (far above anything we've seen since 1979-1981) means that after one year, your money will be worth $5.8 billion less in today's terms.

On the other hand, inflation means that nominal wages will rise, while fixed payments like mortgages will not. So if you have a mortgage and a job, you'll get paid more money for work, but you won't have to pay more for your mortgage. It's kind of like getting a raise. 

But, if you own a lot of bonds (your average American does not), inflation is terrible, as the interest rate on these bonds can suddenly become far less than the rate of inflation, which means that bondholders will lose money.

So the point is that government spending is not intrinsically good or bad. In fact, whether the level of government deficit spending is good or bad depends on two things:

  • What it's being spent on, and 
  • Who you are.

What It's Being Spent On

Deficit spending on useless projects is a bad idea for everyone. Building bridges to nowhere does not add much to the overall wealth of the United States, and deficit spending should add exactly that. (It might be better than paying people to do nothing, but that depends on whether people would be more productive on their own, or whether the work experience and dignity afforded by being employed is adds more value than say, staying at home and blogging.) Other things that add no real wealth are:

  • Bailouts of the massive banking industry, a large portion of which adds no value, but which can properly be viewed as parasitic.
  • Large portions of our "defense" budget, which serve no purpose other than to enrich defense contractors and which encourage us to invade other countries so as to justify the expediture.
  • The War on Drugs, which is a horribly destructive waste of money.
  • Medicare/Medicaid waste and fraud, and all government waste and fraud in general. (I am certainly not advocating an end to Medicare/Medicaid, just pointing out that waste in that sector is unproductive and adds no value. There are other considerations.)

The list goes on. 

However, deficit spending on other things is good. 

  • Necessary national defense.
  • Necessary health care.
  • Necessary infrastructure (roads, bridges, rail, etc)
  • Useful Government research programs.
  • Necessary environmental protections.
  • Financial regulation.
  • Air Traffic Control.


These things add real value. You may think that the private sector can do some of them better, and in some cases you may be right. But when the private sector is not putting those 20 million people to work, that question is moot. 

Who You Are:
Whether or not the spending adds value isn't the only question. There is always a cost, and that cost is inflation. Inflation affects people in different ways. 

If you're Bill Gates, it might not be that important to you that the government creates jobs building bridges. And the possibility that you will lose 10% of your net worth is probably very important.

On the other hand, if you're a restaurant owner whose business has been cut in half because your customers are all out of work, and you have a fixed 10-year lease, then the benefits of full employment are probably pretty big, and the cost of inflation isn't that big of a deal, since while you'll be paying more for food, you'll also have more customers and the value of your lease payment is going down by 10%.

Or, if you're unemployed and broke, the cost of inflation is negligible to you and the benefits of employment are immense.

Now, I'd like to pause to recognize that it's not just as simple as rich vs poor. Pension funds get hurt in inflationary periods, and rich people benefit from improved infrastructure. But the dynamic here is basically rich versus poor. Full employment/high inflation is bad for corporate profits, bondholders, and the rich, and good for your average American working stiff. (It's also good for the long-term debt outlook, because unless we get people back to work, the massive drop in people paying income taxes is going to explode the deficit anyway.)

But here's the thing: you never hear any of this in the media. You hear this constant fear-mongering about our out-of-control debt that has no basis in reality. You hear about how government should be forced to balance its budget just like American families do, which is ludicrous, as there is no semblance of a similarity between a sovereign government with a fiat currency and your family (most notably, because your family cannot print more money when it needs to.)

And the sad thing is that millions of Americans, who don't really understand monetary policy, are being talked into voting against their best interests and in favor of the interests of the elite. And it is the elite who are convincing them to do this.

We have 20 million people out of work in America today. These people will suffer permanent career damage. They are losing their homes. They are losing their health insurance. They need jobs. Inflation in the United States last year was negative .034%. I realize that Lloyd Blankfein and the rest of the bankers will scream bloody murder if we print some more money to put the unemployed to work doing something useful, but they've had their way with this country for long enough.

It's time we get America back to work.


  1. The US Government doesn't print money; it borrows it from the Federal Reserve. The US Government would owe interest and principal on each new dollar created by the Fed, making it mathematically impossible to pay down the debt by printing more cash (or any other method, for that matter).

    In order for your plan to have a chance, the US Government would have to take away the Federal Reserve's charter as the United States' Central Bank and begin issuing it's own currency as United States Notes (or something to that effect) instead of "federal reserve notes", as is currently the case. Ger it?

  2. Technically correct, but for the purposes of this discussion, irrelevant. An independent Federal Reserve is largely a fiction, and for all practical purposes, the US government can increase the money supply at will.

    I am not saying that a massive increase in the money supply would be a good thing. I'm saying that concerns over the possibility of the US defaulting on its debt are unfounded, and therefore should not be a consideration when we debate the proper level of government spending.