Thus far the trillions of dollars spent on the wars in Iraq and Afghanistan, the trillion or so already pumped into or promised to Wall Street and the auto companies, and the trillion or so being proposed for a stimulus package have not been funded by simply printing money, which would rapidly lead to inflation. They have been funded by assuming more national debt, by selling more Treasury notes to nations like China. This will work so long as there is a market for the Treasury notes at a reasonable rate of interest. Here is the history of the US Federal debt for the past half-century:
One might note that in recent times “tax and spend” Democratic presidents have lowered the debt, while under supposedly fiscally conservative “small government” Republicans the debt has ballooned.
Now Garret Hardin wrote a book in 1986 called “Filters Against Folly: How to Survive Despite Ecologists, Economists, and the Merely Eloquent”. In it he suggested that for any proposal one ought to ask three questions: (1) are the ideas reasonable, (2) do the numbers work out, and (3) and then what? For the current bail-out and stimulus proposals, (1) the ideas sound reasonable – inject money to save jobs and businesses. (2) No one can really tell if the numbers work out, because no one really knows how this will play out. But (3) the “and then what” question is worrisome.
What happens if other nations stop buying US Treasury notes, and we can no longer roll over this massive debt? They might stop buying them because they too are having economic problems and don’t have spare cash to invest. They might stop buying them because they begin to suspect that someday the US won’t be able to pay back the loans, and they don’t want to lose their investment. Either way, we are suddenly in a world of hurt.
• The government could of course simply default on the debt – say we won’t pay it. That would ensure that no one ever loaned the U.S. a dime again!
• We could go to work and pay it back from taxes – that means all of us, every man, woman and child of whatever age – need to pony up an average of $35,000 in taxes over a few years, either as direct income taxes, or hidden in the prices of goods and services to pay the corporate taxes.
• The government could print more money, but that would rapidly lead to high inflation, and by the way would discourage buyers of Treasury notes (because at the end of the term they would get paid back in money worth much less).
• We could offer higher and higher interest on the loans to attract reluctant buyers, but of course that just pumps up our debt some more. (Last year we spent about $138 billion on interest payments on the Federal debt.)
None of these options is very attractive. It’s a worrisome long-term prospect. Yet Congress is hell-bent on increasing the debt by trillions more, under the guise of various stimulus programs. And no doubt they will add yet more trillions later in the year with all the new programs that President Obama promised and/or that the Democratic Congressional majority wants to push.
Clearly, while there is a short-term crisis to be addressed, someone had better be thinking about the longer-term consequences. Someone had better be asking Garret Hardin’s “and then what” questions.
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