I work for the federal government as a civil prosecutor enforcing the federal labor laws. A few weeks ago, I went through another scare that the government might shut down - and I might be furloughed - because politicians (obviously mostly republicans) were concerned that federal spending is too high.
I created this Daily Kos account because I need to explain to the people that are so concerned about federal debt - to republicans, democrats, and voters generally - some general economic principles that belie their concerns.
The United States has debt because it chooses to have debt. As any 5th-grader knows, the United States has the sovereign power to coin money (i.e. print money out of "thin air"). Ergo, it could clearly just print money to pay all of its debts and liabilities. In fact, it could cease collecting taxes altogether and just pay for its expenditures with created money.
Every 5th-grader has also heard that the United States cannot just print money to pay its bills (thus rendering the need for taxes and federal debt moot) because such behavior would cause inflation.
And, it is true that printing money causes inflation, but there are two key points missing from the above elementary school analysis.
First, inflation only results when the currency supply is increased while the value of goods, services, commodities, etc. within a given economy remain stable. Accordingly, if the government printed money to pay unemployed/non-producing people to produce something new of relatively equal value (say, to build wind farms that would produce new, consumable energy), no inflation would result. Look it up.
Second, there are other forces at work in our economy that already create massive inflation. If we could limit those forces - and restrict their inflationary effect - we could allow some inflation due to government money-creation without any net difference in the inflationary rate. What could these other "forces" be? Banks, of course. Many of you know this, but an alarmingly large percentage of you probably don't:
Under current law, banks are allowed to loan out money that they don't have. Specifically, they are allowed to loan out $100 for every $10 dollars they actually have. Thus, when you take out a mortgage from the bank for $300,000, the bank need only have $30,000 in its accounts in order to be legally permitted to make that mortgage. When you receive the $300,000 mortgage, you give a check to the seller for that amount. The seller then has a very real $300,000 balance in his or her bank account. The seller goes and spends that real money in the economy. This is the process by which banks "create" money. For more on this phenomenon, euphemistically referred to as "fractional reserve banking," see e.g., http://en.wikipedia.org/....
Just as the government causes inflation when it "creates" or "prints" money, banks cause inflation when they create money through their loans. Some of the banks' loans might actually support the creation of additional value in the economy, e.g. loans to start-up businesses, and thus not promote inflation. See principle 1 above. But, most of these arguably fraudulent loans (unlike government spending) just prop up demand for consumer goods, thus, promoting price inflation. The home mortgage/housing-price bubble comes to mind.
Let's put some real numbers to this. As of July 2011, the total value of bank-created money plus reserves in the U.S. economy (known to economists as "M2" money) was 9281.5 billion dollars (not seasonally adjusted). http://www.federalreserve.gov/...
The total value of bank reserves in July 2011 (known to economists "M0" money) was 2672.4 billion. http://www.federalreserve.gov/...
That means, as of July 2011, 6,609.1 billion (6.6 trillion) dollars - or 71.2 percent of total money floating around in the economy - was unilaterally invented by private banks. (I know this is hard to believe, so, again, please look it up if you have any doubts.) The annual budget of the federal government in fiscal year 2010 was 3.45 trillion. http://www.cbo.gov/... (Congressional Budget Office Report on Federal Spending)
You do the math.
If we increased the fractional reserve banking requirements minimally (and thereby reduce the banks' power to create money minimally), we could make room for federal spending on socially important programs (say, universal health care or free higher education for all) or for lowering taxes on the poor, without risking any increase in the current inflation rate.
It is true, that such a move would constrict credit markets because it would make it less profitable for banks to loan money. It is also likely that increasing the fractional reserve limit alone would reduce overall consumer spending and have a depressing effect on the economy. Replacing bank-created money with government-created money, however, should have no overall negative impact on consumer spending, assuming that the government gave the created money to consumers (as aid or in exchange for services). This is because government-created money, once transferred to consumers, would have the same positive affect on aggregate demand as bank-created money.
Bottom line: when Standard and Poor's downgrades U.S. credit, it is not because the federal government's social security costs are too high, or because federal workers are overpaid, or even because the government takes in too little money in taxes from the rich. It is (at least partially) because the government has chosen to allow banks to create money (and profit richly off of that power) instead of creating money themselves, as the founders intended. See Article I, Section 8 of the U.S. Constitution (granting Congress the power to "coin Money, [and] regulate the Value thereof.)
[For the record, I'm writing this in my personal and not professional capacity].
