My mother used to say, "money doesn’t grow on trees". It was a common phrase for those who grew up during the Great Depression. They understood the virtue of thrift and they knew the importance of saving and investment. But now politicians and economists know better.
They are much better educated and more sophisticated than my mother ever was. They are disciples of John Maynard Keynes. They read Paul Krugman in The New York Times.
In the USA, the world’s largest economy, the government revenues from taxes are 18 per cent of GDP and their expenses are 24 per cent. The 6 per cent gap is made up by borrowing. The US Government debt is over US$19 trillion and growing – and that does not include the huge unfunded liability for social security.
Unable and unwilling to raise taxes or reduce spending, the US Congress must now increase its level of debt. Fortunately, this is quite easy. The Federal Reserve simply prints more money. So the punters don’t get nervous, the politicians perplex them by calling it quantitative easing (QE). So what is all this fuss about fiscal cliffs? Surely they can continue to print money forever.
Well, there is a problem. As you print more money its unit value declines; that is, you have inflation. It may not be immediate, but it is inevitable. The burden of inflation is not born equally. It robs the savers and benefits the borrowers. It distorts investment decisions and leads to malinvestment, making everybody poorer.
The currencies of the world are all what is called ‘fiat money’, supported by nothing more than the reputation of the government that printed them. There was a time when they were backed by gold and before that gold was the currency of choice. The US dollar was backed by gold until 1971, when President Nixon reneged.
Since then, the world money system has been inherently unstable and could collapse at any time. I think my mother was right and Dr Bernanke was wrong.
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