Supersonic Man

July 29, 2011

to print or to borrow?

Filed under: Rantation and Politicizing — Supersonic Man @ 4:30 pm

Okay, first political rant of the new blog.  Brought on by the debt ceiling crisis.  But it’s not about the posturing and brinkmanship going on now, in which both parties seem to be threatening to crash the economy if the other does not submit to their will on what kind of ceiling-raise to pass, both are threatening to screw people out of “entitlement” payments that are not part of the general fund that needs balancing, and both seem to have conveniently forgotten that to default on owed payments is unconstitutional.  It’s about the general situation of why and how we keep running up debt, and what the alternatives are. 

The naive view is that the US gummint just likes to spend money, and keeps spending more than it has.  The analogy usually made is to a family that only earns so much, and then uses credit cards to spend more than it takes in.  This is a false analogy, mainly because a typical wage or salary earning family has lots of choice about spending and very little choice about their income level, while for the government it’s the other way around: there is a far wider range of choice about what money to take in than there is over what money to spend.

It simply is not realistic to think we can arbitrarily cut back government spending to some level drastically smaller than it is now.  The economic consequences would be catastrophic, even if you can stomach the moral argument for why it would be justified.  About the only really big federal expenditures we have that are truly optional is the cost of the wars we’ve jumped into, and even with them, you have a lot less choice after it’s under way than you do when deciding to start it.

Where we do have plenty of free choice, though a lot of people don’t want to admit this choice into the debate, is in what revenue to raise through taxes.  If you look back at the history of spending vs revenue, you’ll see that the spending side has mostly accumulated as a result of many small choices that were, in hindsight, largely necessary and inevitable — costs we had to face up to and pay even if we preferred not to.  On the revenue side, on the other hand, we see a series of completely arbitrary ad-hoc changes of policy, driven by personality and politics and whim and special-interest influence, not by any kind of social inevitability.  It’s always been a matter of choice.

When it comes to the choices that created our federal debt problem, most of the blame goes to the policies of cutting taxes, not the policies of spending.  It’s the tax cuts — first those of Reagan, and then those of Bush the Lesser — that took a steady system that worked and turned it into an unsustainable exercise in childish irresponsibility.  People talking about the budget deficit like to point out lack of restraint… but if you look at the record, the spending side mainly has shown restraint — it’s had slow growth, and stayed a smaller portion of GDP than most other first-world countries.  The lack of restraint has been by those who passed out tax cuts like party favors, shouting down anyone who pointed out the consequences that would have to be faced later, and spouting bald-faced lies about how they would magically create jobs and prosperity by trickle-down from the rich.

There is a second way the home credit card analogy is false… and that is because a wage earning family can’t print its own money.  Our government always has that option available.  And it’s used it plenty.  In fact, whenever the government’s revenue falls short of its spending, there is a clear zero-sum choice to be made: you can either borrow the money, or print it.  If you can’t raise revenue for a while yet, you must choose between those two.  We need to make that choice consciously and carefully, not automatically, with the awareness of the consequences of each.

The traditional view is that printing money is something that should be kept to a bare minimum — ideally, money should just represent a stock of gold, and expanding the money supply relative to concrete wealth is just a recipe for inflating away the currency’s value.  But somehow, things don’t seem to work that way for the US dollar.  The interesting thing is that we keep on ballooning the amount of dollars at a faster rate than the growth of our domestic economy, and they get absorbed and used with no apparent inflationary consequences.

How can this be?  It appears to be that this is because there is a constant demand for dollars, coming from the economy of the rest of the world.  The bankers and rich people in Europe and China and the Mideast and everywhere all want dollars.  And the quanity they want to have in circulation keeps growing.  We have somehow turned a fiat-based paper currency into an export commodity that people pay for with concrete goods.  Deep inside the secret bowels of Washington, this situation is no accident, but a goal that is aggressively pursued… it’s called the “strong dollar policy”.  It took its modern form during the Reagan administration.

Some right wing gold-bugs say that this international overvaluing of the dollar constitutes a bubble.  They may be right.  But in order for that bubble to pop, there has to be some other currency available for all that overseas wealth to move to.  There would have to be a shift in demand from dollars to, say, Euros, and the EU would have to respond to that demand by inflating the Euro supply just as we have done with the dollar supply.  Otherwise, there’s no room in the Euro world for all that overseas wealth, which hypothetically would like to flee the dollar, to fit.  So I don’t think we need to worry about any catastrophic collapse… as seen in the crash of 2008, even if trillions in overseas wealth would like to have gotten away from the dollar when its value dropped, in practice they had nowhere else to go, and just had to ride out the loss.

This situation is very relevant to the problem of national deficit and debt.  The liberal economist James K. Galbraith goes so far as to say that the international dollar demand actually requires a deficit — that it’s impossible, or at least irresponsible, for our government to balance its books as long as dollars keep being vacuumed up overseas!  The traditional view is that running budget deficits also cause trade deficits, but he says the dollar demand creates the trade deficit (we export dollars and import goods) and the trade deficit in turn drives the need for the government to spend more than it raises.  He says that for any country, private borrowing + federal deficit spending = trade deficit.  Or to break it down further, private borrowing + federal borrowing + federal printing of new money = trade deficit.  He says that only an explosion of private credit in the nineties allowed the government to briefly run a surplus.  (I would add that besides “credit” in the sense of loans, you need to also be aware of the inflating effect of investments and banking, which allows the same money to seem to belong to two different people at the same time: the investor who owns stock or whatever, and the entity that was invested in.  This effect counts as part of the “private credit” in the sum above.  Loans have the same multiplier effect: the borrower and the lender both in some sense “have” the money.)

Now I said above that I believe the basic problem of the high deficit and debt we’re now running up is mainly due to irresponsible tax cuts, which as we know were done mainly for the rich.  Greed, opportunism, religiose free market ideology, corruption, and lying propaganda have combined to allow an entire privileged class to be exempted from paying their share to keep the public sector running properly.  This is true not just in terms of the federal income tax and capital gains tax, but even in areas such as California’s property tax system, after the notorious Proposition 13.  But if Galbraith is right, even if we fix the big hole in our tax system and bring revenues back in line with needs, there still has to be a deficit, as long as international finance still needs dollars.  Given that need, should we borrow it or should we just print it?

The downside of borrowing is obvious, and it’s bad.  You have to pay the money back, and the more you borrow, the bigger a part of your total budget has to go toward interest payments.  If you borrow irresponsibly, and your credit rating or bond rating goes down, suddenly the interest rates go up, and suddenly you have to pay a bunch more interest, and your ability to spend money on your own needs is cut back.  As you keep borrowing, your ability to spend the borrowed money in a positive useful way undergoes diminishing returns, and finally it becomes unsustainable.

Furthermore, all that interest payment constitutes a direct transfer of wealth from taxpayers to investors — and that means, in broad terms, from working people to the wealthy.  That means the rest of government has to be twice as aggressively pro-citizen and anti-plutocrat — it has to redouble things like the progressivity of the income tax, to avoid nurturing an oligarchy.  Unfortunately, right now our government’s capacity and willingness to do this at all, let alone in redoubled degree, is just about zero, and oligarchy is just what we’re getting.  Borrowing only makes it worse.  This may actually be why the oligarchs’ party, the GOP, is usually so friendly to forcing more borrowing.

With printing money, on the other hand, the only drawback is that you have to be very careful not to print too much.  You have to very carefully estimate demand for the currency, and print to meet that need. If the amount of deficit funding you need is more than the worldwide demand, the rest definitely ought to be borrowed, not printed.  Some borrowing is okay for, like, antirecessionary stimulus, but if you’re borrowing in good times, that’s a sign that you need to raise revenue instead.

So the prescription is, to me, pretty clear: print as much as possible, and borrow as little as possible.  Yes, we should be printing even more money than we already are, which is a hell of a lot!  Remember that credit and investment have the effect of inflating the apparent money supply.  During the late bubble, the world economy became accustomed to having that money around.  Since its disappearance in the crash, when all the loans and derivatives which were “worth” X amount suddenly turned valueless, we’ve essentially got a deflated currency.  Printing more money, just to blow the pile up to near its previous size, will not overshoot proven demand and therefore will not further devalue the dollar.  And the more we print, the more we can escape the harm done by borrowing, which essentially amounts (when overseas investors do the lending) to exporting dollars overseas and getting no goods back.

…..So, as long as the Strong Dollar persists, printing instead of borrowing sounds great, and progressive.  That would be why liberal economists favor it and right-wing ones oppose it, presumably.  But we ought to consider……….. what if the dollar bubble might pop?

In that case, running up a huge debt suddenly looks like a great idea.  We get to borrow dollars that have tremendous purchasing power, and then pay back dollars that are relatively worthless.  We’d essentially be able to tell all our creditors “Haaa haaaaa, sucks to be you.”  We’d have gotten a pile of free money from them (in purchasing power terms) and there wouldn’t be shit they could do about it.  That would greatly ease the pain caused by having the dollar suddenly devalued, such as the exploding cost of everything imported, causing higher prices throughout the domestic economy, and the possible price-inflating effect of suddenly having way too many dollars.

On the other hand, if we’ve been going along before that point by printing money, it might be very difficult for our institutions to turn on a dime and suddenly stop, as they would now need to.  We could have hyperinflation.  Even if we did stop sharply, we’d now have a deficit that would suddenly have to be covered by borrowing, and lenders might be leery of making the loans, especially in dollar form.  We might have to pay a lot for the loans, and we sure wouldn’t get the privilege of paying back less real value than we borrowed.  Or we could have a sudden recessionary tax increase… which might at least help counter inflationary pressure because we’d be sucking back the excess dollars that are now running around loose because nobody wants them like they used to.  But it would be no picnic.  And imagine the political fallout.

In conclusion, I guess I still advocate less borrowing and more printing.  But it’s with the caveat that we really have to watch for signs of the dollar bubble starting to sag.  And either way… fix the damn tax breaks!


1 Comment »

  1. […] years ago, I wrote a post about deficits, and whether we should respond to the recession by printing even more money.  It discussed the causes of our deficit spending, and the theory which says that it’s […]

    Pingback by the end of the US trade deficit? | Supersonic Man — October 11, 2013 @ 8:59 pm | Reply

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