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Printing Money IS Defaulting On Debt   April 26th, 2011
It's the same thing under a different name       


More observations...

Over the weekend the L.A. Times printed a whopper of an article that demonstrated an impressive ignorance of economics.

The author of the article was primarily offended by S&P's stating the obvious fact that the finances of the U.S. Government are in bad shape. While his complaints about the S&P's statement were amusing, it was the following gem that blew me away:

Short of a blockade on the debt limit, there is virtually no way the U.S. government can default on its debt -- as a sovereign nation, if worst comes to worst it can simply print sufficient greenbacks to pay its bills.

Printing money to avoid a default is just a different way of accomplishing the same thing: Repudiating debt.

If I loan the government money today and the government pays me back with money that only buys half as much, I've lost money. I've lost just as much money as if the government had defaulted and told investors they're all getting a haircut and will only receive half of the original investment. Either way, I've lost half my money.

The difference is that when the government prints money we all get to share in the losses whereas a default would only cause direct losses to those that were insane enough to actually have loaned the government money in the first place.

Printing money is the "last resort" for a sovereign nation, but it's not a solution. It's a stealth default that hurts every individual in the nation. In the case of the dollar, it hurts every individual in the world.

While the chances of a technical outright default by the U.S. are, in theory, slim to none, the risk of the government trying to print its way out of this situation are extremely high. That represents a very real risk to investors and it's entirely appropriate--even long overdue--that S&P warn about it.

If printing money were really a solution to our debt, we would've done it already and our country would be living gloriously debt-free. That we haven't done so is evidence that we can't. The bond market won't let us. The world won't let us. Ultimately, not even American citizens will let our government do this much longer.

Printing money is already costing Americans money on a daily basis. In gas, food, clothing, and most other commodities. All of these are rising in price, mostly absent strong demand, because the Federal Reserve is printing money to finance America's deficit.

Are you invested in U.S. debt? If you're buying anything in the U.S. (gas, food, clothing) the answer is yes. And unlike a bad stock that you can sell to cut your losses, there's no way for you to opt-out of inflation. And once investors see the writing on the wall and dump U.S. bonds, prices will spike even further and each of us will pay the price. But, hey, the U.S. technically won't have defaulted, so we'll be ok, right?

There is no such thing as a free lunch, and printing money is not a free lunch. It's actually the most expensive lunch on the menu. In fact, it's a lunch on the menu that costs twice as much by the end of the meal as it did when you ordered it.

The myth that printing money is any kind of a solution must be dispelled.

Printing money is a default. It's a gradual default that we're already all paying for every time we go to the gas station. Or buy food. Or clothes.

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