A while ago, I was pleasantly suprised–and stunned–to read a Marketwatch columnist (the online market site for The Wall Street Journal) point out the obvious, yet rarely recognized, reality that we are no longer on the gold standard. As I noted:
One of the key innovations of the last century–and unappreciated, not to mention unknown, by most–is fiat currency: we are not on the gold standard anymore. The total amount of money we can have isn’t fixed by how many shiny pebbles we can pull out of the ground. If we need to print more money so we [can] eliminate idle capacity (human and industrial), we can simply do that. Inflation can arise once we eliminate that idle capacity. Likewise, if we flood a sector (or economic class) with money, that can lead to inflation in that sector as well as misallocation of resources. As much as I would like it, pumping $250 billion per year into microbial genomics probably wouldn’t be a good idea. But arbitrary concerns about deficits shouldn’t limit our economic activity.
So in a Bloomberg News article about the Republican claim that we are nearly ‘broke’, a senior economist at UBS Bank states:
George Magnus, senior economic adviser for UBS Investment Bank in London, says the U.S. dollar’s status as the global economy’s unit of account means the U.S. can’t go broke.
“You have the reserve currency,” Magnus said. “You can print as much as you need. So there’s no question all debts will be repaid.”
Again, this isn’t a Dirty Hippie Liberal. This is from a senior economist at a multinational bank. Taxation and spending should be used to manage unemployment and inflation, not to worry about budget deficits. In fact, that’s been the idea all along:
Unlike today’s debt critics, Hamilton “had no intention of paying off the outstanding principal of the debt,” historian Gordon S. Wood wrote in “Empire of Liberty: A History of the Early Republic 1789-1815.”
Instead, by making regular interest payments on the debt, Hamilton established the U.S. government as “the best credit risk in the world” and drew investors’ loyalties to the federal government and away from the states, wrote Wood, who won a Pulitzer Prize for a separate history of the colonial period.
For entities with a lot of cash, Treasury securities are essentially a savings account (that typically has better interest rates than a savings account, by the way).
The implications of this is that policies (funding the NEA for example) should be judged on their merits (and capacity to cause inflation or price distortions), not on concerns over budget deficits.