So I was thinking about debt and thinking about policy and these kinds of questions recently. Part of this is brought about by our current policy debate with respect to the debt and how to handle it. Part of it is my own success at conquering my own student debt, especially when so many of my current generation grapple with the reality of student loan debt. Debt is certainly a serious topic of discussion and one that is worth thinking about how we wish to grapple with it. How we as a country choose to handle debt is going to dictate our current policy along with future policy. Whether those policies deal with the welfare state or whether it is tax policy, rhetoric featuring the debt is likely to play a role at the very least. Given those reasons, it is not unreasonable to think about debt or want to talk about it. At the same time, it makes me wonder why we still have debt, or rather, why sovereign nations still choose to run debt.
First, let me say that I don't have a real issue with our current debt policy as it stands. I'm not concerned that it's going to eat us alive or murder our children while we watch. I understand that there are times in peoples lives where debt is necessary. Student loans are an excellent example of one. Your earning potential is lower at age eighteen with only a high school diploma than it is after 4 years of college. At least, that was the case when the economy was good. It still is the case, just not as readily apparent. People also go into debt when they purchase a home via a mortgage. This too can be a sound practice as a home can build equity and over the lifetime of its use can outweigh the initial debt incurred. You get a house in between those two events so it's even better. These are just two instances of debt that can be useful in addition to the various times we use credit cards and the like. I feel like a lot of the moralizing about debt obscures the fact that it can be very useful in our own lives. I also mention these examples to show that households, like governments, will go into debt at different points and do not always balance their incomes and expenses every single year. Having said that, I've begun to wonder why sovereign nations go into debt nowadays.
One reason I have to go into debt when making certain purchases is that I can't print money to give to people. It's illegal. At the same time, the United States is not under those same constrictions. The US government is the sole source of dollar bills in the world, and those dollars are suitable for the paying of all debts public and private. It seems to me that if the Federal Government wanted to make up for the difference between revenues and expenses, it could just print money of that amount if it wanted to. There's no law barring it, the Constitution would be fine with it, and the money would be legal tender that people are required to accept, it would still function as a medium of exchange. So why is it that at the end of the fiscal year, when tax revenues do not match congressional outlays, the Federal Government has to issue debt to make up the difference? Here's the answer the government gives to kids, not satisfying to me.
I'm sure whoever is reading this might think I'm taking crazy pills. Of course the government has to use debt, it can't just print money and give it to people and expect them think it's worth anything. The problem with that statement is that it's exactly what the US government and governments around the world have been doing for roughly 40-50 years. (I suppose libertarians could complain about this but I don't see them not accepting the money given to them.) The US has been doing it since 1971 when Nixon cancelled the direct convertibility of dollars to an equal amount of gold. Every major world currency from the dollar to the pound to the euro to the yen to the renminbi is fiat. So yes, the government prints money and distributes it through the economy for people to spend on goods and services. People keep accepting it and don't seem too concerned about its source. So if we accept that money, and it's good for paying off debt and all that good stuff, why don't we just print it when we have deficits.
Part of this is due to history. Though fiat currency dates back to 11th Century China, most nations had backed currency for most of their history. By backed currency, I mean that they could be exchanged for a set amount of gold or silver(usually). In those conditions, more money couldn't be created because there was a finite supply of whatever was backing it. It could be the case that sovereign nations with their own currency keep debt out of habit. It could be the case that they don't simply want to print a bunch of money for fear that it might alienate current creditors, though that seems like a weird concern given that they could print their own money rather than take out a loan. Debt may still be necessary for international transactions because while printed money is good in their respective countries, it may not be accepted in other places. This last argument may be off the mark considering the fact that China saw an uptick in the use of US dollars in 2013. It could be the case that governments want to prevent inflation by avoiding the mass printing of money. This seems like it could be right, but then it ignores the fact that debt is just cash by other means. So if pumping a bunch of freshly minted money into the economy is going to cause inflation so would pumping a bunch of borrowed money. It could be the case that the US government, and others, wants to keep a system of debt and taxation to control for inflation and that's really the best guess I have at this point.
I'm sure there is an academic answer out there somewhere. Modern Monetary Theory might have an answer but I can't find it. When I look to the internet with this question, I'm often bombarded with talk of hyperinflation and how we should just switch to gold. I pretty much ignore those kinds of sites because they aren't going to answer the question I have.
No comments:
Post a Comment