Borrowing, Printing, and War: How to Magically Create Money and Spend Forever
A government, like a family, has bills
to pay and money to pay them with. The government’s bills (in the United States)
are ones like the military, Social Security, and welfare. The revenue it has to
pay them with is taxes.
If the government cannot pay necessary bills,
like a family, it must borrow. An example of why this would happen is if the
country gets plunged into an unexpected war. This increase in expenditure must
be covered by extra revenue.
During World War II, to cover expenses,
war bonds were sold. Below is a WWII war bond poster asking people to buy war
When a person buys a war bond, they pay a
certain amount for it but they will make back that amount plus interest when
the bond matures. When a government borrows money, like when anyone borrows
money, they make the item more expensive in the long run as interest must be
paid. But they borrow as they urgently need the money now.
I contend the war bonds are an example
of healthy borrowing: The government fully advertises what it plans on buying
with the money it raises. Unless people want to engage in the war, they
will not buy the war bonds. It keeps government actions tied to the people:
Unless the people approve of the war, and the way it is being run, they will
stop buying war bonds. It is almost a voluntary tax—although not
entirely, as it is ultimately paid for by future taxpayers.
It is quite simple really. If you want
to buy something, you have to pay for it. In peaceful times, it should be no
problem. Being the richest country in the world, you would think the United
States government would be able to accomplish this. For its first 200 years,
until approximately the mid-1970s, the United States was able to do this.
According to the Fiscal
Year 2012 Historical Tables printed by the Budget of the U.S. Government:
periods of war (when spending for defense increased sharply), depressions, or
other economic downturns (when receipts fell precipitously), the Federal budget
was generally in surplus throughout most of the Nation’s first 200 years. (5)
Starting in the mid-1970s, however, this
all changed. Below is a chart take from Table 1.1 of the Fiscal Year 2012
Historical Tables. It is of the surplus or deficit of the U.S. government for
specific years. This is not a chart of the overall debt of the United States
government but rather how much in one year it took in from taxes versus how
much in that same year it had to pay. It can be compared to a family’s yearly
expenses: in a particular year, they made so much in yearly income and had to
pay so much in yearly bills. (Click on all images for a larger view; please
distribute the below chart with this link.)
The most eye-catching part of this chart
is the sharp decline in the late 2000s. You could do some serious skiing on
This chart very clearly presents a
problem: The government has bills to pay but frequently no money to pay them
with. In response, they can:
pay their bills; in which case, they must decide what government agency,
welfare recipient, or creditor they are not going to pay
back on spending; decide that certain government programs or entitlements are
going to no longer be provided
You can imagine what most politicians
This is a chart with the cumulative U.S.
Government gross federal debt. It is taken from table 7.1 of the Fiscal Year
2010 Historical Tables; the table of which starts in 1940:
You will notice that the two previous
charts largely coincide. Starting in the mid-1970s, the government started to
incur large deficits, which is the same time the gross federal debt started to
climb. In the only years of surplus, the late 1990s and 2000, while the debt
did not decrease, its increase tapered off a bit. We see about the same rate of
increase in the 1980s and 1990s. There is an explosion of debt in the 2000s.
This debt gets broken down into debt the
government owes itself (“intra governmental debt”) and debt it owes to others
(“public debt.”) In 2010, the gross federal debt was $13.5 trillion. $4.5
trillion of this was intra governmental debt and $9 trillion was public debt.
If you take a summation of all of the deficit in the deficit years based on
Table 1.1 (not adding up the surplus as it is clear that this surplus did not
go to pay down the debt), that number is $8.6 trillion. These numbers—$9
trillion and $8.6 trillion—although not exactly identical, are quite close. It is
clear that when the U.S. government is in deficit, borrowed money is covering the gap.
This of course begs the question: what
is the U.S. government spending on? Taken from Table 15.4:
The biggest expense is Social Security
and Medicare, which grows at a completely predictable, and exponential, rate.
Defense spending exploded in the 2000s.
The “net interest” payment shows what
the government is paying for essentially nothing—the mere privilege of
As far as what causes the “fall off the
cliff” deficit in the late 2000s that we see in the first chart, as we can see
in the above chart, it can essentially be attributed to “other” (as well as a
decrease in revenue). Settling isn’t it? It was, of course, the bailout. It is
defined as “Commerce and Housing Credit” in Table 3.1 of the Budget Office’s
report; in 2009 costing a reported $0.3 trillion dollars. This category (“Other
Individual Payments”) costs more than defense spending.
A particularly astute person may look at
all of these numbers and, noting that all of the numbers exploded after 1971,
which is when the U.S. went off of the gold standard, may attribute the large
numbers post 1971 to inflation. The below table shows the U.S. government
surplus or deficit using 2005 constant dollars, i.e. is adjusted for inflation
We can see, even when adjusted for
inflation, the numbers post mid-1970s are just as bad.
I propose that going off of the gold
standard in 1971 does cause the surplus or deficit numbers to skyrocket but not
because the inflated numbers are higher but because fiat money allows for
In 1971, the U.S. went off the gold
standard. Under the gold standard, the dollar was tied to a specific amount of
gold. In 1971, the exchange rate was one ounce of gold for about $41. In theory, money could be exchanged at this exchange rate for gold. (American citizens, however,
were banned from owning gold after Executive Order 6102 signed in 1933.) Under
the gold standard, the monetary supply stays largely fixed—pegged to how much
gold the U.S. owns. When the gold standard was abandoned, it meant the amount
of money that exists is at the U.S. government’s discretion. The government
can, at any time, “print” money.
Borrowing and printing have a
complicated loose yet tethered relationship. The way that fiat money enters the
economy is through U.S. government borrowing. The U.S. government sells most of
its debt to primary lenders, which are currently 18 “private” banks who are
given special permission to deal with the Federal Reserve. These primary
lenders turn around and sell the debt, at a higher price, to others, including
the Federal Reserve. When the Federal Reserve buys this debt, it gives a rubber
check to the primary lenders. It is made-up, magic money. In 2010, the Federal
Reserve held 9% of the federal government’s public debt (Table 7.1).
But more devastatingly, the ability to
print fiat money allows the U.S. government to borrow with little thought to
the consequences. When the U.S. dollar was tethered to gold, if the U.S.
government borrowed $41 billion dollars, it would have had to have one billion
ounces of gold to back it up. Without the gold peg, they can simply print money
to pay back their debt. In the words of Alan Greenspan,
Federal Reserve Chairman from 1987-2006, "The United States can pay any
debt it has because we can always print money to do that. So there is zero
probability of default."
I submit that fiat money has caused U.S.
government borrowing to go out of control, and as such, the U.S. government has
little regard to what it spends on.
This is true regarding the war against
Islamic terrorism. First, let me say that I support the war against Islamic
terrorism. But by having free reign to spend whatever it wants, the government
was able to go to war with little regard for what the public thought.
It is clear, based on these charts, that
the war was an expensive venture. In the 1940s, the government had to sell war
bonds and thus sell the public on going to war; otherwise it couldn’t
have. There was never any such campaign in the wars that followed September 11,
2011; something of which, I think, would have been a positive thing and
If what the government spent was
tethered to gold, which means it would be tethered to reality, which means
ultimately it would be tethered to the people, there probably would have been
much more meaningful debate. The debate would not have been if the war
would carry on (clearly attacks on American soil warrant a response) but how.
There were certainly many things about how the wars were engaged that could
have been cut back on.
While there is benefit to war, it must
be compared to the cost. As of now, politicians see nothing but benefit, and
can plunge American blood and treasure into whatever cause they want, regardless
of actual American interest.
What is also indicative of total fiscal
irresponsibility is that, even without an unexpected war, the U.S. government
cannot balance its checkbook. Defense spending is just one component to the
bloated budget, and not even the biggest offender. The biggest offender is
essentially the welfare system, which should be an entirely predictable
I submit that the United States, the
richest country in the world, should discontinue all borrowing and rely
entirely on taxes to cover spending. Borrowing as a permanent way of political
operation needs to stop. It should require an act of Congress to borrow at all,
such as in times of war, and it should be only for a temporary amount of time.
This would force politicians to actually
face the taxpayers whenever they want to spend. If every time they wanted to
spend, they had to face the wrath of taxpayers, it would streamline spending
into only those things that are essential. It would bring efficiency to
government. As of now, they borrow, and just attempt to push the issue of cost to
future politicians and future taxpayers. They treat borrowing and printing as a
method to make magic money and spend forever. The welfare system,
which is largely funded by borrowing, attempts to allow the United States to
have its cake and eat it too. The cake, however, is being eaten and eaten and
eaten—soon, there will be nothing left.
I strongly support efforts for the
government to have a balanced budget. However, to cut the majority of
borrowing, naturally and effortless, the no-risk loans that the government
takes out need to be cut off at the knees: the U.S. must go back to a
commodity-based currency. If given the ability to write rubber checks, the U.S.
government will always spend. They need to face the need to provide gold for
whenever they pay a creditor back. Gold is real and uncompromising, which is
the only thing that will do when politicians want to spend money.
There is very lively debate now in
regards to the Federal government’s spending, brought to us by the Tea Party.
The current administration, however, is not just not listening to them but
In 2011, the U.S. was at risk of
defaulting on its loans. To remedy this, the government wanted to raise the
debt ceiling even higher in order to borrow even more. The Tea Party provided a
solid voice against this insanity.
Joe Biden, among many others, accused
the Tea Party of being terrorists. Americans with very rational views want to
stop the spending train, and they are getting accused of terrorism by
government officials? Further, Obama and others threatened that Social Security
checks would not go out if a debt deal was not settled. They did not have to
withhold Social Security checks; there are other expenditures that could have
been sacrificed. Politicians, including our President, intentionally scared and
threatened people to get their own way. It very much reminds me of when
teachers went on strike when I was in high school. The school board forbade
sports from continuing in an effort to upset people and pressure teachers to
accept a deal. This is not quite terrorism but it is close: harming innocent
people in some way in an attempt to get what you want.
The Tea Party as well as many others
have very real concerns about national matters. They want the government
spending train to stop. The government just wants to keep doing what it’s doing
without listening to them. It is a very ugly beast and the work it is going to
require to stop it will be grisly. That very peaceful and rational people came
to the negotiation table and got accused of being terrorists by those in charge
is telling and terrifying.
This cannot go on forever. Other nations
have tried this and it has ended horribly. To fully stop the spending spree by
the U.S. government, it must go back to a commodity-based currency. Nothing
else will do.
August 14, 2011