Download 1 December 17, 2012 KUFM / KGPR T. M. Power Not a “Grand

December 17, 2012
KUFM / KGPR
T. M. Power
Not a “Grand Bargain” but a “Grand Bluff”
All the talk in Washington DC is about how large the sacrifice is that we
collectively have to make to get the federal government budget back in the black. Given
that it has been concern about the federal deficit and the cumulative federal debt that
was the economic club that got us backed into this corner, it is time to ask just what it is
about the federal deficit that is so scary. The standard answer is that we are loading up
the nation and future generations with the burden of this debt. At some point in the
future, we are told, the debt will come due and our children and grandchildren will have
to reduce their standard of living to pay it off. Either that or the federal government will
go into default and have to declare bankruptcy.
That sounds plausible because that is what any household or business that took
on too much debt would have to do. But the federal government has one power
households and businesses do not have. It creates and manages the money supply.
Think about what in involved in paying off a U.S. Treasury Bond. You or your
neighbor or the Chinese government takes the U.S. Treasury Bond to a bank or the
U.S. Treasury itself and says, “This bond has matured; pay me what you owe me.” The
federal government says “Sure, would you like us to credit you checking account by the
amount we owe you or would you like cash.” If you take cash, you trade one piece of
paper issued by the U.S. Treasury that paid interest and get in return some other pieces
of paper called dollars issued by the U.S. Treasury or the Federal Reserve System. The
government does not have to tax anyone to carry out this transaction; it can just makes
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electronic entries in your bank account which you can spend as you use your debit card
or checks. Exactly who is likely to be stressed or hurt by this type of transaction?
The point is that U.S. Treasury bonds only obligate the U.S. government to pay
interest in dollars and then, at maturity, present other dollars to the owner of the bond.
But the U.S. government is the source, the creator, of those dollars. That was all you
were promised. A relatively safe way to temporarily store your surplus dollars while, in
the meantime, earning some interest in dollars.
This basic fact does not mean that the federal government can blithely ignore the
dollars it is creating and the impact its involvement in the economy may have. But the
concerns we should have are not that the federal government will run out of money, will
not be able to honor its obligations, or will have to impose ruinous taxes on its citizens
to pay its debts.
The legitimate concerns involve avoiding high rates of inflation, protecting the
purchasing power of the dollar in international markets, and leaving leeway for the
government to be able to stabilize the economy somewhat, stimulating it at times and
slowing it down at other times.
Clearly if the government adds its demand for goods and services to that of
private businesses and households during a time of full employment and rapid growth,
something will have to give and what will give is that prices will begin to rise. While a
relatively low rate of inflation appears to be better than deflation or falling prices, rapid
inflation is disruptive and encourages unproductive defensive activities. But during
periods like the present, with relatively high rates of unemployment, stable prices, and
slow and halting growth, worries about inflation are not the proper public policy focus.
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We should stay focused on putting people back to work and rebuilding our businesses
and households.
We also have to be concerned about the confidence the rest of the world has in
our currency and the U.S. Treasury bonds in which people and governments store their
dollars. If the U.S. were flooding international markets with dollars or Treasury bonds,
the value of both would decline and interest rates in the U.S. would rise. That would
increase the cost of imports to Americans and make American exports more attractive
to buyers overseas. Given that we have been buying more from foreigners like China
than we have been selling to them, that result might be seen as a good thing as all
those people around the world holding dollars came shopping for American goods,
putting our unemployed workers and underemployed factories back to work. But there is
no sign that foreigners holding dollars or U.S. Treasury bonds want to get rid of them.
Our dollar remains one of the safest ways in the world of storing wealth. There is no
crisis brewing here either.
Finally, one of the primary ways the federal government tries to stabilize the U.S.
economy is by manipulating interest rates. It lowers interest rates, such as it has been
doing for many years since the beginning of the Great Recession, to encourage
investments in new machinery, commercial buildings, and homes. When the economy
appears to be overheating, it raises interest rates to slow the economy down. But if
dollars are being created or debt was being issued by the federal government for other
purposes, this economic regulating device might not be available. That is, one branch of
government could be working at cross-purposes with another, creating confusion or
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paralysis in economic policy. But that also does not appear to be a problem at the
present time.
What this suggests is that the panic over the federal debt is at best premature
and at worst politically contrived to try to force us to abandon a social safety net that has
served us well for seventy years. Cannibalizing it now out of fear that our government is
teetering on the brink of collapse is simply nuts. Beware of those who tell us they are
just trying to save that social safety net by “fixing it,” for they are the very people who
have always opposed it.
We should not fall for this politically contrived game of bluff.
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