by Richard J. Grant
A reader asks why people believe that “the printing of money by the U.S. government is such a bad idea.” It seems to her that it would not cause inflation “in a society that is glutted with goods, services, capacity and unemployed people as is America today.”
Let us set aside for a moment the question of how you can inflate without causing inflation and what it means to be “glutted with goods” in a world of scarcity. She asks a very important question: “What if the government simply created new money to buy things such as disaster relief or infrastructure repair or research to benefit society?”
She is not alone in believing that no one would be hurt by this. On the surface, it really does appear that “no one would have to borrow it, lend it, or be taxed to pay it back.” We can skip over the roundabout process through which federal government spending is financed by issuing Treasury bonds and then having the Federal Reserve buy those bonds with money it creates. The net effect is that the government spends money it creates from nothing.
The belief that no one would “be taxed to pay it back” is widespread. That is why inflation of the money supply has been so popular with governments throughout the centuries. At first glance — which is more than the average citizen gives it — it does appear that we are getting something for nothing.
We see more government dollars; and we see those dollars going into disaster relief, infrastructure repair, and research. What we don’t see are those goods that are never produced and services that are never provided because the current resources were bid away by government spending. Even at a time when people and resources are unemployed and wages and other prices are falling, inflation of the money supply keeps those prices higher than they would have been.
Although in the short term it appears that more money means more wealth, all we really have is more money. If prices are higher than they would have been, it means that each dollar buys less than it would have. It is like the story of Yogi Berra at a restaurant. When the pizza arrived the waiter asked, “Mr. Berra, would you like this cut into four slices or eight?” Mr. Berra replied, “Cut it in eight pieces; I’m extra hungry tonight.”
If you have twice as many slices (or twice as many dollars), could you share half of them with the government and still have as much pizza (or wealth) as you had before? You are giving pizza (or wealth) to the government. You are paying a tax. When the government creates money to finance its spending, anyone who holds assets denominated in dollars is paying a tax.
The transfer of resources to the government affects overall spending patterns. The short-term effect that money creation has on interest rates will affect investment patterns, often setting us up for future reversals. Some people will gain, many will lose. But in total, we won’t get something for nothing.
When money is created for political purposes, including the purposes of special-interest groups, it is less useful for its natural social function, the facilitation of trade. It is not more money that we need, but more of what it can and cannot buy.
Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.
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Copyright © Richard J Grant 2012