Surely you have read or heard about the above theory. It has been bubbling about for a number of years. It is one of the pet proposals of the Left. It is advanced to support the concept of a very, very large government. A government that runs the economy from top to bottom and establishes a standard government approved culture. To do all this even the most committed lefties agree it will take money–money on a scale not only never considered before but never imagined.
The theory basically holds that the government can spend more or less as much as it wants. Since we have a fiat currency (that is a currency issued by government and backed by nothing of intrinsic value except that government) the government can borrow all the money it needs without ruining the economy with inflation or having a concern about the size of the debt. They believe that all the “good” that will come from government spending will more than make up for any inconvenience of a larger debt. The view is that worrying about the size of debt and paying the national debt is a relic of old thinking, hence the “modern” in their theory. There are a bunch of articles about this theory and you can read any you like it you think my analysis is incorrect. I am cutting to the chase in my opinion.
The debt was already very large before the china virus struck and now we have added about 5 trillion in the last 12 months and Federal City is ramping up 4/5 trillion more for government expansion programs. We are throwing money around like the proverbial drunken sailor on leave. Might be worth it to remind ourselves exactly how the Feds get their money to spend. There are really only two ways. We’ll ignore gifts and other anomalies that are so small as to not be worth measuring in any event. Those people in the Federal City get their money by collecting taxes or borrowing it. They haven’t yet resorted to outright confiscation but don’t be so naive as to think that couldn’t happen, history is replete with examples of that occurring especially under Communist or socialist regimes. If they collect 4 trillion and spend 5 trillion there is an obvious shortfall of 1 trillion. Those numbers are pretty normal these days and that is before counting the insanity of spending in the last 12 months. So how do the Feds make up the difference in the shortfall? They borrow money from individuals, hedge funds, pension funds and foreign governments. Not many individuals if any actually buy those bonds except those old fashion e bonds if they still do them. A few decades ago just for the self education I explored how you went about buying those bill, notes and bonds issued by the Treasury. I found out I could go to the local Federal Reserve bank in Dallas and buy them, but they came in really big dominations. You couldn’t go buy $100.00 worth, it was tens of thousand then.
So far we have been able to sell all the debt we wanted to or needed to. But like any borrower the Feds must find someone willing to loan them the money. And when the borrowed money and the taxes collected still don’t add up to enough what happens? Which has happened a lot recently. You have read about the Federal Reserve buying US treasuries because it has been all over the news for years now. The Fed is the ultimate backstop for the drunken sailors; it has so far been the bottomless pit of money. The Treasury offers bonds for sale and the Federal Reserve “buys” them. Of course the Federal Reserve isn’t like you and me. They don’t really have to have any money on hand to make the purchase like a real human being. Some unknown bureaucrat making 179k goes into the backroom and on their computer makes an entry for say 100 billion worth of bonds. That entry is transferred to another bureaucrat making 179k at the Treasury which shows up as a credit on its books. So now the Feds magically have have that 100 billion to spend on all the Federal programs. It is truly an example of seeing the little man behind the curtain in the Wizard of Oz. Except this little man actually is real and dangerous.
We will save for another day the dilemma of what will happen when investors, real investors like individuals, pension funds, hedge funds and other governments decide not to loan/buy our US debt. It can happen and has so many times to governments around the world and several times in just your lifetime if you care to study the matter.
So the theory is that the Feds in Federal City can spend as much as they want on all manner of programs for social welfare and government sponsored industries and not be concerned with the debt problem or any balance sheet shortfall. They can just print up the money and everything will be fine. We’ll all be wealthy and Mother Government will provide everything we need from cradle to grave.
If the theory is truly legitimate then why even go to the trouble to collect taxes? Just print up however much the Feds think they need each year and give it to us in the multitude of Federal programs. These theorists have at last solved the riddle of the free lunch. Enjoy your hash.
Any enduring society is based on religion, language and its unique cultural norms. That will never change except for transitional lapses. See I can talk just like Jerome Powell.
Olcranky truly wishes all a thoughtful and encouraging Easter celebration. What greater blessing can one have than to be redeemed for our faults.