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Economic Error #13: The Government Can Pay Off Its Debt, Inflation-Free, by Printing Money.

Gary North
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Ellen Brown believes that the Congress of the United States has the ability and the moral responsibility to create wealth by printing pieces of paper, so long as the pieces of paper have a statement on them that says that these pieces of paper are "legal tender."

"Legal tender" means that debtors can pay off creditors with these pieces of paper, and the creditors by law must accept payment. She believes that this legal tender fiat money should apply to all creditors, especially creditors who have loaned trillions of dollars to the United States government. Here is her solution to the national debt.

The idea that the federal debt could be liquidated by simply printing up money and buying back the government's bonds with it is dismissed out of hand by economists and politicians, on the ground that it would produce a Weimar-style runaway inflation. But would it? Inflation results when the money supply increases faster than goods and services, and replacing government securities with cash would not change the size of the money supply. [Web of Debt, p. 375.]

She says that Congress creates money out of nothing. Well, not quite. It creates it out of pieces of paper and ink. The Federal Reserve creates it in its computers without paper or ink. So, Congress is not as efficient as the Federal Reserve System. But I digress.

Consider what she is really saying. People have loaned money to the U.S. government on the basis that they will be repaid their principal plus a specified rate of interest. Brown is saying that instead of accepting more loans, the government should print money and spend it into circulation. How? When the old loans fall due. The Treasury will hand over newly printed paper money. That will eliminate the existing Federal debt.

The United States government has to roll over all of its debt to the general public every five years. So, sometime during the next five years, Congress would have to print approximately $9 trillion, as of the end of fiscal 2010. It will then hand over this money when the debt expires. Instead of asking for new loans, it pays off the lenders. Who are these investors?

First, about half of the debt owed to the public is owed to American investors. These could be insurance companies, trust funds, mutual funds in government bonds, and other pools of investment assets. People have forfeited investments in other assets in order to buy U.S. Treasury debt certificates. Now, however, the Congress of the United States prints up paper money and sends it to these investment organizations when the debts expire. Do you think the investment organizations will spend this money? Of course they will. They will buy other kinds of assets.

They will deposit this money in their bank accounts. Unless the Congress has previously legislated 100% reserve banking, thereby bankrupting the world's banking system, this new money will multiply through the fractional reserve banking system. The local bank will turn over the money to the Federal Reserve. This new money then multiples at about two-to-one.

This money has come out of nowhere. Congress has simply printed up. So, these organizations will now buy other investment assets. The price of those assets will rise. This will cause a stock market bubble. It will cause a commercial bond market bubble.

This new money always is spent by the recipients. When the money is spent, individuals receive that paper money. If Congress has legislated 100% reserves, people will then go out and buy things with the new paper money. Paper money has the same effect on the banking system as the purchase by the Federal Reserve System of Treasury debt certificates.

Second, let us consider what happens when Congress pays off foreign investors. The government owes them about $4 trillion. Those investors will now look for ways to get rid of that paper money. They will use that money to buy investment assets of other kinds from other countries. These assets may be corporate bonds, or commodities, such as oil. Whatever they buy, they will expect a positive rate of return.

Brown says this:

Given the choice [between outright U.S. bankruptcy or fiat money], foreign investors would probably be happy to accept the fiat money, which they could spend in real goods and services in the economy (p. 379).

Indeed, they will. Where can they spend these fiat dollars? In the United States. So, they will buy goods that Americans will no longer be able to afford. The goods will flow out. Prices in America will rise.

Whoever receives those paper dollars will also want to have a positive rate of return. The obvious thing for the recipients to do is to buy American products or buy American companies. Maybe they buy corporate bonds. Maybe they buy stocks. Whatever they buy, they become the owners of the assets. They buy these assets from somebody. Some Americans will them the assets. What do the Americans do with the paper money they receive? They deposit it into their banks, and the banks lend it out. Unless the bank turns it over the Federal Reserve as excess reserves, this newly printed money multiplies through the fractional reserve banking system.

So, at least $9 trillion of new money will be released into the economy to buy back the bonds. This will be added to the adjusted monetary base: the legal basis of the creation of new money. What is it today? About $2 trillion.



So, the base money supply will go up by over 4.5 times. Yet Ellen Brown says this will not be inflationary.

She does not tell the reader that currency deposited in a bank becomes what is called high-powered money. As we have learned since 2008, it need not be high-powered if the banks are afraid to lend. If they turn the money over the Federal Reserve System as excess reserves, the money will not multiply through the fractional reserve banking process. Nevertheless, those $9 trillion that are used to purchase Federal debt that is owned by the general public will be spent, sooner or later, in the American economy. Nobody sits on green pieces of paper with dead politicians' pictures on them. People spend the money to buy something.

If people invest the new fiat money, then the money goes to buy commodities, or pay laborers, or buy land, and producer goods. The recipients of this money deposit it in their banks.

If the money is created out of nothing, then it floods the economy with new purchasing power. The result is price inflation. The value of the existing money falls in value. Individuals who are on fixed incomes suffer.

The government also owes another $4 trillion to various government agencies, primarily the Social Security Administration and Medicare. The government pays interest to the Social Security Administration and to Medicare. The interest payments in fiscal 2009 totaled $146 billion. This money was used to pay the beneficiaries of Social Security and Medicare.

By law, the trust funds must invest their money in nonmarketable Treasury debt certificates. So, she is saying the government will not pay off that debt with paper money. It can't. It would flow back into the government. The best that the government can do is to pay interest on those Treasury debt securities in paper money. That paper money will be sent to the beneficiaries.

There will be no new taxes on the public to reduce the money supply from the general economy. So, this money is pure fiat money. It will be spent by the beneficiaries. This new money will drive up prices.

If the Congress of the United States pays off all of the national government's debts by printing paper money, nobody is going to buy any more new Treasury debt. That is Brown's goal: no new debt. Then what happens to the annual deficit? The United States government is running a deficit of something in the range of $1.5 trillion a year. It relies on investors to buy all of that debt. No investor is going to buy any of that debt if the government does not pay a rate of interest. No investor is going to give up money, which can be invested in anything else, or for the purchase of goods and services, in order to hand it over to the government. In any case, Ellen Brown says this new money will eliminate all Federal debt. Therefore, the Federal government will never again be able to borrow money to fund the deficit. So, where is the Federal government is going to get the money to cover the deficit? The answer is obvious: by printing more fiat money.

She says that Treasury debt is the same as money.

Federal securities have been traded as part of the money supply ever since Alexander Hamilton made them the basis of the U.S. money supply in the late 18th century. Federal securities are treated by the Fed and by the market itself just as if they were money (p. 375).

This is nonsense. Let me show you why. If you own a U.S. savings bond, you cannot go down to the local Walmart and buy anything with it. It's an IOU from the government. It is not money. The same is true of every other form of Treasury debt. People give money to the government in order to be issued IOUs. These IOUs are not money. They are promises to be paid money sometime in the future.

She thinks that the addition of fiat money is a mere substitution of a new form of money for an old form: no net change. She does not understand the difference between money and an IOU. So, she says that her program will not be inflationary.

Here is an unbreakable law of economics: You can't get something for nothing. Ellen Brown, as a Greenbacker, does not believe this. She really believes the Congress the United States can create wealth, without raising prices, by printing pieces of paper with President's pictures on them. This is magic. This is quackery.

Ellen Brown lives in fantasy land. If you believe her, then so do you.

For a detailed critique of Ellen Brown's economics, go here:

http://www.garynorth.com/public/department141.cfm|



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