Posted by Curt on 17 May, 2016 at 9:59 am. 5 comments already!


John Gray:

Among Donald Trump’s more ridiculous statements lately is his claim that should he win in November, he may attempt to pay down the debt by printing more money. This may seem stunningly simplistic. But it’s actually not. In fact, printing money, otherwise called monetizing or debasing a currency, is an attempt to cure the ills of debt straight out of antiquity. Unfortunately, history proves it’s been a poor effort at that. This is ultimately an inflationary policy prescription: paying down the debt with cheaper currency.

This idea goes back to the beginning of currency. In fact, Trump’s idea is not too dissimilar from that of Dionysius, a fourth century Grecian ruler who decided to pay off his debt by doubling the supply of money. He collected all currency in circulation, re-stamped the one-drachma coin as a two-drachma coin, and then, poof! He paid off his debt. (For those that had any doubts about the wisdom of his fiscal policies, Dionysius had an answer: He killed them.)

What makes printing money such a nefarious policy (besides massive inflation and currency devaluation) is that it’s much less transparent than other fiscal measures. Consider that when the government raises taxes explicitly, it is not only transparent, but our diminished spending power becomes apparent. But raising cash by printing more of it is totally discreet.  In fact, the number of dollars in your wallet remains the same. Yet, those dollars can afford fewer and fewer goods.

Think of it like this: When the government prints new money, the amount of money in circulation goes up, but the value of money goes down. The increase in supply of new money is inflationary.  And this inflationary phenomenon acts as a covert tax on all your wealth and savings.  This is where Trump’s simple idea of paying down the debt with newly printed dollars actually impacts you.

Assume for a moment that you stuff $1,000 under your mattress.  Next, assume Trump prints more money, and thus reduces the value of a dollar at five percent each year for a decade (which is a modest estimate, as inflation was much higher even during the early 1980s).

Guess what happens 10 years later?

You still have $1,000 under your mattress.  No one touched your cash, not even the government.  However, when you go to spend that $1,000, you’ll quickly realize that its purchasing power is far less than when you originally stashed it away. The purchasing power is nearly $400 less!

How outraged would you be if an IRS agent arrived to collect $400 from the money under your mattress?  Mad, right?

Trump’s idea has been tried throughout history.  If his idea worked, every indebted nation would merely print away their debt tomorrow.  Just imagine if you woke up tomorrow and the Trump printing press wiped away our $14 trillion in debt?

It didn’t work throughout history, and it wont magically work for us.  The Roman empire tried to employ this trick, and it eventually led to its collapse.  England’s King Henry VIII nearly destroyed his nation debasing his currency, too.

Perhaps we all know about the most famous example in the 20th century: the German Weimar Republic. Saddled with war debts from World War I, one policy prescription was to print money to pay the nation’s debts.

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