Same stupid argument, over and over. "Why don't we just give everyone $1,000,000?" Who suggested that?

Yes, demand-pull inflation is indeed the danger of creating new dollars, if you create way too many. BUT - where is this massive inflation you are worried about? We've been deficit spending for the vast majority of our 240 or so years as a country. That's how dollars are born. The total of all deficit spending minus the total of all budget surpluses = the net number of dollars floating around in the world. Of this total (about $15 trillion or so), most have been exchanged for govt. bonds (including about $6 trillion held by the govt. itself), and the rest exist as currency and electronic dollars in use today. All dollars present and accounted for.

The "national debt" is simply government bonds outstanding. It's merely a measure of dollars that people have invested in t-bills. It even counts govt.-held bonds, which is a bit silly. Point being, it's not debt. We don't "borrow" dollars from China or anywhere else.

America has had six depressions in our history. Each one has been preceeded by a sustained period of federal budget surpluses. Budget surpluses remove dollars from the economy, and this is the genius that Romney and Ryan think will help a down economy. Get ready for a seventh depression if they get elected and get their way.

(BTW, before you call another person's idea's "idiocy," you might want to check out how stupid your own post looks.)

The argument stems directly from John's insinuation that money can be printed without recourse. As I said in my first post, if printing money has no downside, why don't we print enough to pay everyone in the US $100,000 per year? If John is correct, why not make all of us rich, too?
John praises all the virtues of a fiat currency without even recognizing the potential negatives. All those bonds that are sold = IOU's = debt. Sure, we can print money to pay them off, after all, paper is cheap. Put a little green ink on it, call it worth $100 and cover the IOUs. But that isn't a viable long term strategy. It is not nearly as simple as John pretends.
John has a point about fiat currency and how we could have no debt tomorrow if we printed the money to cover it, but his conclusion (we don't have debt) is wholly wrong. Just because we could go to extremes and completely devalue our currency to no longer have debt doesn't mean we don't have debt right now. Besides, he ignores all the problems with his simple solution. If we print that kind of money, it would be calamitous. Prices would rise uncontrollably, the stability of the dollar would be eroded, nobody would trust that $1 would be worth anything tomorrow, so nobody would want them. Really, the monetary system is no different than supply and demand. If we print a lot more currency as John suggests, increasing the supply the demand will go down precipitously. 16 trillion dollars is a lot of reduced demand.

Tom - what you fail to understand is that the $16 trillion has already been printed. There is nothing to "pay off" because govt. bonds are just another form of money. Dollars are exchanged for bonds and bonds are exchanged for dollars. And it happens in far greater quantities than $16 trillion. As of late 2011, the govt. had actually issued $229 trillion worth of "debt" since 1998. $16 trillion (much of which is even held by the govt. itself) is just the amount that has gone unredeemed. So as you can see, we have no trouble coming up with the dollars to make all of these exchanges, and the economy is not affected one bit. (Here is the Treasury's checkbook, if you don't believe me: https://www.fms.treas.gov/dts/index.html ).

The reason you cannot print up $1 million for everybody is because money keeps its value when it is backed by production. If you print up too much, you outstrip the economy's ability to satisfy the new demand, and prices will go up. But as I said, you can certainly add some dollars into the economy and they will spur production (buy stuff) that would not have otherwise been produced, and as long as there are no shortages of stuff on the shelves (or the materials needed to produce them), inflation will not ensue.

I realize that this is a hard concept to swallow after a lifetime of hearing "debt, debt, debt," and the idea of fiat money is not intuitive to anyone who balances a checkbook. But this is how our economy (and many others) works. The creator of fiat dollars has no reason to borrow those same dollars whatsoever. If we stopped selling govt. bonds tomorrow, we could continue to create dollars as before, and the economy would be just fine. The only difference would be that the holders of large piles of dollars - the ones that currently choose to hold that money in the form of govt. bonds - would have to find something else to do with that money. If that ever happened, sales of safes and vaults would probably skyrocket.

JByrd - thanks for replying. Nobody is suggesting that we can "print, print, print" without limits. But we can print to some extent without inflation, as we do every year. We need to create new money to replace that lost to savings, account for new economic growth, new population, and other forms of leakage. There are whole countries out there that use American dollars as their de facto currency - those dollars don't affect our economy unless and until they are spent on American goods. The dollar is also used for about 75% of the world's reserve currency, and we have to provide those through deficit spending as well.

In the last few years, we have created about $6 billion new dollars, yet they have not led to any demand-pull inflation. For years, people have taken it as an article of faith that more dollars must inevitably mean inflation, but the evidence does not back that view up. What little inflation we have experienced can be tied to the price of oil.

As for "unfunded liabilities," why do you focus on entitlements? Are we going to stop funding our armed forces in the future? What about our justice system? Infrastructure? All of these things - including SS and Medicare - are simply bills that we are going to have in the future, and they all fall into the same category. Do you project your electric bill over the next 50 years and count that total against your net worth? Then why do that with the federal government?

Hi John- Please my comments below.

"Nobody is suggesting that we can "print, print, print" without limits. But we can print to some extent without inflation, as we do every year." - The Fed has jumped into uncharted waters with QE1, 2 and 3 and twist. Do you know anyone not buying a house or expanding a biz because rates too high? How will the Fed unwind it's bond purchases? Because of Global Fear, many have flocked to US treasuries, but they can change mind. Just watch PBS video re NYC in 70s. The buyer boycott came out of no where.

"We need to create new money to replace that lost to savings, account for new economic growth, new population, and other forms of leakage." Not sure what this means, however I think you mean generate gov't demand/spending to fill deleveraging void. I agree, BUT needs to be high-rate-of-return spending with transparency and accountability in exchange for giving other gov't spending liposuction.

"There are whole countries out there that use American dollars as their de facto currency - those dollars don't affect our economy unless and until they are spent on American goods. The dollar is also used for about 75% of the world's reserve currency, and we have to provide those through deficit spending as well." True today, but....China just recently agreed to buy oil without US dollars. There's a risk here. We are the least dirty shirt now, but that can change in a heart beat.

Part II to follow.

Part II:

Re "inflation", I agree there's likely a greater risk of deflation before inflation. Again, Fed is in uncharted territory here. No one knows what will happen.

"As for "unfunded liabilities," why do you focus on entitlements?" - For the simple reason that medicare will swallow the ENTIRE budget if not reformed. These is not a partisan issue. We've got a serious problem with our long term obligations.

See, http://www.pgpf.org/Issues/Fiscal-Outlook/2012/09/adv-theres-no-debate-presidential-candidates-must-address-debt.aspx
See also CNBC's "Are we rich or poor?" debate (worth watching):
http://video.cnbc.com/gallery/?video=1604902615

"Are we going to stop funding our armed forces in the future? What about our justice system?" - We need to spend smarter. Reform jails, military,..everything. But these aren't entitlements. We could chance sentencing laws tomorrow to impact spending on jails, etc.

Infrastructure? Here's my proposal: Comprehensively reform spending (short term and long term - Big reforms of entitlements including raising age over time, means testing, etc.) in exchange for tax reform (simplify but raise revenues). And add 1 trillion in high rate of return spending on infrastructure, grid, energy/conservation (e.g., windows, etc.) - However, the spending picked by a Commission (like base closing) & congress votes up.down. I no longer trust DC w spending.

JByrd - sorry for the delay.
What does the Fed have to "unwind"? Dollars and bonds held by the govt. are simply book operations. Your left pocket "borrows" money from your right pocket, but you are no richer or poorer for it.
You have to get the idea of "debt" out of your head. As I explained to Tom, bonds are simply another way to hold dollars, and they are wholly interchangeable. The govt. has created about $16 trillion dollars over the years. Most of that is now held in the form of govt. bonds. If we eliminated bonds tomorrow, redeemed every one of them, there would then be about $16 trillion dollars in existence. What would change? Nothing.

As for QE, I don't want to get into that here, but I have a small economics blog that explains it: http://johnfrmcleveland.hubpages.com

As for the increasing costs of SS and Medicare - you can't address future costs in the present, you can only fret over them. And it is a political football, punted out there by fiscal conservatives who are always trying to cut the budget. But these are the same idiots who are claiming a $16 trillion debt is going to bring down the whole house of cards, and they are basing that on a complete misunderstanding of how fiat money works.

Our economy is bigger than ever. Companies recently had record profits. The problem is not one of production, but one of distribution. Over the past 30 years, pretty much all of our gains went to the top 1%. Even with increased production AND increased productivity, the only beneficiaries were the rich. That is why a lot of people are looking to tax the rich more - they have enough money. If we expect to increase tax revenues due to increased profits, that's where all of the profits are ending up.

The bigger point is that creating more dollars will not lead to inflation as long as our production is high enough to satisfy all of that new demand. New dollars get value for the government through govt. spending, and those dollars are then in the hands of govt. employees and businesses that earn govt. dollars. So new dollars can stimulate new production, production that otherwise would not have happened due to lack of demand. That's one of the benefits of a fiat currency - used correctly, newly created money (deficit spending) boosts economic production over and above what recycled dollars would do.

And again, I noticed that you referred to our "debt." Please consider the possibility that this is incorrect. As I explained before, the government creates dollars from scratch, and bonds are purchased with piles of previously earned dollars. That does not constitute a "debt" situation. If we stopped issuing bonds and just created dollars, things would still work.

Hi John- To be honest, I'm less concerned about current debt (even though 16 trillion is a crushing amount to grow out of), but most concerned about future spending obligations.

In my view, I expect the gov't to do the basics. Namely, basic eduction, roads/bridges, keep us safe, etc. and provide a basic safety net. That's the bare minimum. And guess what, I think failing at the basics on all fronts.

I don't mind spending, but not when based on cronyism, antiquated norms, to obtain votes, etc. I watch every dollar I spend, so should the government.

My basic concern is the long term deficit spending. For example, what Alice Rivlin (a democrat) and others are worried about:

"If current policies continue, the nonpartisan Congressional Budget Office recently projected, federal debt will rise from 70 percent of gross domestic product today to about 225 percent by 2040 — not even remotely sustainable. By that point, the federal government would be spending nearly four times as much on debt interest payments as on education, skills training, research and development and nondefense infrastructure combined."
http://www.pgpf.org/Issues/Fiscal-Outlook/2012/06/062812_OpEd-How-To-Handle-Our-Long-Term-Debt.aspx

Or, see http://bipartisanpolicy.org/projects/debt-initiative/about

So I don't believe there's a dispute about our long term spending problems. Only issue is whether and how to resolve.

Oh, there IS a dispute about our "spending problems." Govt. spending is a big part of our economy. We actually should be spending more right now, as it would help the economy.

Consider again what the "national debt" really is: it is savings. People/businesses/countries/banks that hold large piles of dollars are the ones who buy govt. bonds. They previously earned those dollars, and now they choose to invest them in the safest investment possible (even bank accounts are only insured up to, I think, $250K/account). It isn't much different than sticking those dollars into a vault, except for the small bit of interest that is added.
Since the national debt doesn't go down (although it could), those dollars are basically retired, out of circulation, never to be spent again.
I'm not crazy about the idea of dollars piling up in the hands of a few, but that's how things work. And there is no reason it can't continue.

Malpractice reform, IMO, is missing the point and not much of a drain as people are making it out to be. Sorta like right-wingers making voter fraud this big, widespread problem. Which it's not.

One of the big problems of the system is that people are getting more out of it than they ever paid into it. I remember hearing -- awhile ago -- that people are getting on average of 30% more than they ever paid in. And that's an average.

The reality is is that the age will have to be raised to 67/68. People are just living longer. Just because Biden didn't answer that is irrelevant. It's not like HE has control to do that.
And Ryan's plan would've have taken upwards of 25 years to balance the budget. Too many people seem to think that the budget can be balanced tomorrow. That's laughable.

We are so much in the hole (thanks PRIMARILY to the unfunded Bush-era tax cuts, 2 wars, Medicare Part-whatever all signed by GWB, and Medicare/Medicaid), it will take a good decade to do it gradually.
And a bipartisan study has come out that has stated the tax cuts for the upper-income folks are NOT beneficial to the economy, do not make them "job creators" or anything of the sort from the talking points the GOP have been spewing for the past few years. But, Senate Minority Leader and racist Mitch McConnell had that study tossed. Hmm...wonder why. Can't wait for him to be kicked to the curb in 2014 when he (hopefully) is not re-elected.

"We are so much in the hole.... it will take a good decade to do it (balance the budget) gradually."

Here's the thing, Jack - we are not "in the hole." That's the whole point of the article. Dollars have been created (deficit spending), and those dollars have been earned. Now those dollars are in the hands of the people that earned them, and they are buying things. There is no debt to be paid off. New money has been created, yet no inflation has ensued, because our economy was able to produce more to meet that new demand. Balancing the budget would either mean less govt. spending or more taxes - either way, you are lowering aggregate demand, which hurts the economy. Balancing the (federal) budget is always a disaster for the economy, even in good times. The only time you can get away with a balanced budget is if you are a net exporter, and that ship has long since sailed.

The lesson here is that there is some level of deficit spending that helps the economy, yet does not result in inflation. Even with what alarmists are claiming is excessive deficit spending, we have not yet reached the point where too many dollars are chasing too few goods.

When it came to the auto bailout, what Mitt stated was that, in addition to an "orderly bankrupty" (which is an oxymoron in itself), is that it should be saved by the private section.

Which, at the time was impossible because the banking industry was in turmoil at the time (fresh off the Lehman Bros. collapse), $$$ was frozen and NOBODY was lending money. So, IN REALITY, what would have happened is the liquidation of the auto industry because the auto industry would not have been able to get financing in the private sector. This little SIGNIFICANT tidbit didn't get much mention.

Chris - sorry you took offense, but tell me - were/are you under the impression that the government is under a $15 trillion debt obligation?

Most people are. Until a couple of years ago, I was, too, although now it is crystal clear to me that the "national debt" is not a debt situation at all.

Ever since Reagan's budgets started to really baloon the national debt, we have heard fiscal conservatives warn us of the dangers of "borrowing" to finance government spending. That nonsense has been going on for over 30 years now, and their wrongheaded influence on fiscal policy is greater than ever. And for those fiscal conservatives in positions of influence (the idiots I was referring to), there is simply no excuse for not understanding how a fiat currency works. Their ignorance has been negatively influencing fiscal policy to everyone's detriment. So I feel no obligation to be polite or mince words.

I can understand it when ordinary people do not fully understand how fiat currencies operate - it's an arcane subject, and outdated, gold-standard era neoclassical economics still dominates college textbooks. Worst of all, politicians and economists that pretend to understand such things constantly speak in terms of debt, even 40 years after we have abandoned the gold standard. That's why both sides are laboring under the misconception that the nation is running on credit.

Murphy, this is great news. I was so worried about crazy, out of control spending by the federal government, but not anymore!

All in for another trillion dollar stimulus!

Murphy, you and I should start up a sham company, give it a cool "green" sounding name and get some of that Obama money. We could do it and be guilt free since they can just print more with no worries at all. Someone will buy the bonds even if we get downgraded again and again. The US dollar will always be the investment choice of everybody and that will never change, John told us so.

Intact, I have a great idea, we could start a fake green company that captures the methane from Bulls and reuses it to power the grid. Helps with global warming and is renewable. Further we could gather up all their "patties", process them, and use them instead of coal for additional power generation. The name of our company could be something like The Green BS Co.

Now print some of that fiat currency and send it our way!

MZ, you may not be as stupid as your friends think - much of what you said was actually correct. If you check the numbers, downgrading our govt. bonds had exactly zero effect on their sales and the resulting rates of return. So someone really will buy those bonds, even if we get downgraded again, because there is zero risk that the government will be unable to redeem them.

The sale of govt. bonds, though, really doesn't matter too much. We do not raise dollars by selling bonds. When we need dollars, we get them through taxation and printing. The auction of govt. bonds is now used to control the interbank lending rate, which allows us to control the interest rate. And the govt. is perfectly willing and able to buy those bonds all by themselves.

Easy John, you are clearly an economic expert, but please keep in mind you don't know me or my friends.

Maybe Western Europe should start the printing presses.

"Maybe Western Europe should start the printing presses."

Europe (all members of the Eurozone, not just Western Europe) does not have a fiat currrency. Eurozone countries actually do borrow currency from the ECB, and there is no single governing body in place to determine fiscal policy for all. Every country is on their own in that regard. Eurozone countries are therefore more akin to our states - users of currency, but not creators. Those nations cannot print new money, they have to attract euros from other Eurozone nations.

The ECB could solve a lot of problems by printing more euros, but the member nations can't agree on how to fairly distribute them.

Murphy, there is no debt. That's the best part of this. We don't need to worry about something that doesn't exist. The so called debt is nothing more than the boogie man. However, we should still have another stimulus, this time even bigger! I think somewhere around $500 million for our green start-up company should be fine for us. Then the schools, roads, health care, Medicare, SS, and a roof on Browns stadium ( if they promise not to use it for Browns games).

MZ and Murphy, solving tomorrows energy problems today with The Green BS Co.

Murphy and MZ - we recently increased the deficit by about $6 trillion. So when is the world going to come to an end? Where are the skyrocketing interest rates? Where is the massive demand-pull inflation? Hmmm? Anybody?

Whatever economic theories you guys are working off of can't explain the realities of today's economy. Time to try something new.

John, you seem to be misunderstanding me. I'm all for more massive government spending. You have already proven that nothing bad will happen. The issue is that now I think 6 trillion isn't enough. We should go all out and spend as much as we possibly can. You see, I just want a little piece for The Green BS Co. A measly 500 million will suit me just fine.

Is that too much to ask? If we can truly spend as much as we want with no risk of anything, inflation won't happen, downgrades don't matter, nothing will ever replace the US petro dollar and the world will always buy our bonds, my $500 million should be a no brainer.

Obama phones for everybody!

I think I understand you just fine, MZ - you can't understand the reasoning, so you are making up something to argue against. I already addressed the issue of printing up too much money. Nowhere did I ever suggest printing up unlimited amounts of dollars, and nowhere did I ever suggest that this can be done without inflation. Maybe if you read things more carefully, you could learn something. This isn't coming off the top of my head, this is from a well-developed school of economic thought. http://moslereconomics.com/2011/08/04/mmt-history-and-overview/#comment-61119

And finally, it's not a partisan issue. I don't think the Obama administration knows what it's doing, either. But at least Democrats aren't gung-ho on balancing the budget, so they are far less likely to lead us into another recession or depression.

John, so you caught me with my reading comprehension problem and have called me out for having friends that think I'm stupid.

Since I cannot battle with your superior intellect i simply have a few questions for you. I went back and read your blog s l o w l y, and perhaps because I am stupid I didn't see where you explain how high government spending can go prior to inflation becoming a problem. You state clearly (even to a simpleton like me) that we shouldn't cut government spending because it is a quarter of the anemic GDP. Is it ok to allow the current spending to increase? Further, doesn't it matter what the government spends the money on? Would you suggest that all spending is equal? If the government can simply print more dollars is there a need to raise taxes, is there a need for federal taxes at all? If so, why and what would be a reasonable rate? Is the return on government spending higher or lower than the private sector? If lower, doesn't it make sense to lower taxes? If higher, shouldn't we just let the government make all the calls and go all in for socialism?

By the way John, nowhere did I say I wanted unlimited printing of money, just a cool $500 million for The Green BS Co. We have already thrown way more than that away with the last stimulus.

“...perhaps because I am stupid I didn't see where you explain how high government spending can go prior to inflation becoming a problem.”

Theoretically, right up to the point where we start to run short of resources, including labor.

Consider the idea of a government job guarantee – everybody that wanted a job could work for minimum wage, say, picking up roadside trash (it's not important what the job entails). The govt. writes the checks with newly created money, and the newly employed go out and spend their earnings on the usual stuff – housing, food, utilities, cars, gas, etc. If there is enough housing, food, etc. to go around (and there clearly is), there is no reason to think that prices would rise, as competition would keep prices in line.

“Is it ok to allow the current spending to increase? Further, doesn't it matter what the government spends the money on?”

As we are not experiencing demand-pull inflation (too many dollars), we should be able to increase current spending without inflation.

“Further, doesn't it matter what the government spends the money on? Would you suggest that all spending is equal?”
All spending is not equal, of course, but it's not the government's job to produce stuff for sale. Our private sector does a fine job of that already. What matters is where the government spending goes. If it goes to the poor, then 99.9% of that money will be spent (and the poor will be able to buy shelter and food). If it goes to the rich, then a large percentage of that money will be saved (not spent), and we will have to hope that some of the rest “trickles down” to help everybody else. Which, BTW, does not work.
“If the government can simply print more dollars is there a need to raise taxes, is there a need for federal taxes at all?”
Not really, until the economy is working at full capacity. The federal government can always create dollars to fund its operations. But if the economy is at 100% of its capacity, then new dollars would cause inflation.
“If so, why and what would be a reasonable rate?”
For why, see above. The reasonable rate would depend on the relative disparities in income, and the political ends the country was working toward. Right now, a very small percentage of Americans is capturing a very high percentage of our economy's production (income), and part of the reason we have to print up all of this new money is because those people save so much instead of spending.

“Is the return on government spending higher or lower than the private sector?”
There is no “rate of return.” Those calculations are based on faulty reasoning. All dollars are created by the government – business cannot create dollars. They can only create value, and that allows them to attract more (government-created) dollars.
The more important variable to consider is the velocity of that money. Given to a poor man, a dollar will start at the bottom and work its way through the economy, being spent a number of times, until it eventually ends up in the hands of a rich man, who will eventually save it. At that point, the dollar stops being spent, and it stops doing the economy any good.
“If lower, doesn't it make sense to lower taxes?”
Sometimes. If you lower taxes on the poor, say, by eliminating the FICA tax, almost all of that money will be spent, which does the economy some good. If you lower Bill Gates' taxes, much of that money will just be saved, and it will do less good than if the govt. taxed it and spent it.
“If higher, shouldn't we just let the government make all the calls and go all in for socialism?”
As much as people like to imagine that we have a socialist in office, that is far from the case. Our government, with very few exceptions, does not own or control the means of production. Our government exerts some influence by being the economy's largest consumer, but that's about it.

Are you sure you're replying in the correct thread, Phil? This isn't about Obama or health care, this is about economics.

"This global recession might be putting off our day of reckoning but inflation will surely come."

Based on what? Got anything to support that? Or are you just beefing because your man lost, and you want to blame your troubles on the other guys?

I suppose it was your flippant references to funding a green company (Solyndra?) that threw me. If that served some sort of purpose besides being dismissive, I don't know what it was. Forgive me for being irritated.

There is a bit of a "free lunch" for the producer of fiat currency, if it isn't overdone. But the government gets the same sort of "free lunch" with taxation. In either the taxation or the deficit spending scenarios, the government is skimming a bit of the economy's production for its own purposes. But it is clear that the government can add some currency to the economy every year with no ill effects. In fact, that money induces production that would not otherwise happen.

Argentina had many other problems, including foreign debt. We have no foreign debt. America does all its business in dollars. That's why China, Saudi Arabia, Japan, and other countries with which we have a trade deficit hold large piles of dollars (now, in the form of govt. bonds). And although I'd like to take credit for this being my theory, it's not. http://en.wikipedia.org/wiki/Modern_Monetary_Theory

A week after the election and you're still obsessing over it. A majority of voters are apparently much less intelligent than you. We voted. Your supreme wisdom was summarily ignored. Get over it.

John Galt is a character in one of the most unreadable books ever.

I'm not a big fan of the healthcare compromise myself, but that's what you get when one obstructionist party prevents you from enacting the better - and far more business-friendly solution - single payer healthcare. I'm sure you are blaming the looming "fiscal cliff" on Obama as well, when it was really the brainchild of Republicans, who held up the stimulus until they got this economic Sword of Damocles hung over all of our heads. But, hey, anything to sink the other party's guy, right?

Our potential fate under a budget-cutting Romney/Ryan administration would have been far worse. Obamacare might be expensive, but at least it addresses a real problem (millions of uninsured Americans). Cutting the federal budget, as I have attempted to explain, is a painful solution in search of a problem.