Inflating Away Debt Doesn't Work in the Real World

debt, inflationThis fanciful notion held by some commentators, and apparently deeply believed by some economists, that the United States can simply inflate away the debt will be permanently maimed by an insurmountable obstacle – it doesn't work. The problem with inflating away the debt is the very nature of the way the Federal Reserve operates. All new money is brought into existence by creating debt. In other words, the Fed directs – oops, meant to say the government decides – government printing presses to create another batch of American dollars and member banks loan them out into the economy, thus creating debt.

See the conundrum that develops? Present “thinking” by the politicians in charge is to deal with the sluggish economy and insanely high amount of debt percolating through it by injecting more money into the mix in the hopes that such an infusion will spur economic activity by the masses. But the very nature of the injection creates more debt. Our question is, “Exactly how is this going to help the debt problem?”

Th interesting thing about this whole discussion comes from none other than former Federal Reserve chairman, Alan Greenspan. It was (is) his belief that a government with a central bank cannot become insolvent no matter how much money it prints, because it cannot go bankrupt in regard to obligations denominated in its own currency. By this way of thinking, the government can literally take on an infinite amount of debt, provided that the central bank is prepared to purchase it. The idea of infinite debt makes some economists nervous, as it should, though what has heretofore been an abstract theory is apparently currently in the process of being tested by the current resident at 1600 Pennsylvania Avenue, Washington, DC.

But the Fed runs into a little problem if they intend to expand the money supply at a time when private citizens are attempting to rein in their personal debts, which is happening now. People are trying to pay down credit cards and are shying away from taking out new personal and business loans, fearful that they won't be able to make payments in the face of a still crumbling job market. But if the government decides to increase its own debt at a faster rate than private citizens are curbing theirs, the overall money supply can still grow, which creates a devalued dollar and, in REAL terms, actually reduces the amount of private debt. Unfortunately, the Law of Unintended Consequences is bound to kick in at some point and reveal to us the reason why a legitimate government should not print currency ad infinitum just because it can.

The American Monetary Association Team

American Monetary Association

Flickr / Rose of Academe_

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