One hundred years ago, the Germans suffered horrible hyperinflation. From a value of 4.2 to the dollar in 1914, the German mark depreciated to 4.2 trillion to the dollar by November 1923. In essence, financial assets became worthless. That experience was so searing that the Germans are still very careful in picking highly competent stewards of their monetary and fiscal affairs.
In contrast, the U.S. has at times been reckless in choosing economic policymakers. For instance, Jared Bernstein, chairman of President Biden’s Council of Economic Advisers, lacks the necessary knowledge for his job. A reporter asked him: “Why exactly are we borrowing in a currency that we print ourselves?” She went on to ask: “Like you said, they print the dollar. So, why, why does the government even borrow?”
After stumbling around, he said, “I mean, the government definitely prints money, and it definitely lends that money, which is why the government definitely prints money, and then it lends that money by, uh, by selling bonds.” After a few more similarly garbled statements, he finally admitted: “I don’t get it.” (If you think I am being unfair, you can watch his entire comments by going to the Washington Free Beacon channel.)
In his defense, monetary policy and the government management of the nation’s money have become so complex that they almost defy understanding. A major reason the Federal Reserve Bank was set up in 1913 was to provide monetary stability — yet inflation has gone from roughly 1% to 8% and back down to 3% or 4% in just the last eight years. Unlike some private sector economists, the Fed was surprised by these gyrations, and it is supposed to be in charge.
Assume that the government does only one thing — and that is build dams where the revenue received from the power generated more than covers the building and operating expense of the dam. Assume the dam cost $100 million to build, and that the government pays the builders with money it just prints — which would be inflationary if there were no offsetting revenue. But if the sale of the electricity more than cover the cost of the dam — the dam project is deflationary because the real national wealth has increased, meaning the existing stock of money is worth more.
Most government programs, however, either shift wealth from a less favored person to a more favored person or actually destroy wealth by taking away incentives to work, save and invest. If the government “pays off” student loans by canceling the asset on the government books or pays welfare to illegal immigrants without raising taxes or reducing other spending, it will be paid for by increasing the money supply. More money being put in circulation without more wealth being created is inflationary.
Governments issue bonds to cover their deficits rather than just printing money because bonds implicitly promise to reduce spending or increase taxes in the future. The bond enables the government to spend more now by reducing the savings of individuals or businesses that bought the bonds.
If the government issues so many bonds that people no longer believe the government will ever pay them back after inflation, they will either demand higher real rates of interest or stop buying bonds. Thus, excessive government debt poses significant dangers to both the economy and society as a whole.
Higher interest rates crowd out private investment, and businesses find it more expensive to borrow money for expansion or investment. This leads to slower economic growth and reduced innovation.
As governments struggle to repay their debts, they may raise taxes on individuals and businesses to generate added revenue. Higher taxes reduce household disposable income, dampening consumer spending and hindering economic growth. For businesses, higher taxes mean reduced profits, making it harder for them to compete and innovate in the global market. Higher tax rates reduce the incentives to work, save and invest, often resulting in less revenue, not more.
Governments often print money rather than tax more and spend less. As the value of money decreases, prices rise, eroding purchasing power. This can create uncertainty in the economy, making it difficult for businesses to plan their future and undermining consumer confidence.
Government debt can result in intergenerational inequity. When governments borrow money, they are essentially passing the burden of repayment to future generations. Younger generations will be saddled with the responsibility of repaying the debts incurred by previous generations, limiting their ability to invest in their own futures and exacerbating income inequality.
Perhaps most important, government debt undermines individual liberty. As governments accumulate debt, they often increase their control over the economy through regulation and intervention. This can stifle entrepreneurship and innovation, as individuals and businesses face greater bureaucratic hurdles and compliance costs. As governments become more indebted, they may seek to expand their power through authoritarian measures, further eroding individual freedoms.
Excessive government debt can lead to financial instability. When governments accumulate large debts, they become more vulnerable to market shocks and investor panic. Suppose investors lose confidence in a government’s ability to repay its debts. In that case, they may refuse to lend more, triggering a debt crisis, which can lead to widespread unemployment, poverty, and social unrest.
Germans learned a hard lesson in 1923. Many in the United States and elsewhere appear to have forgotten.
• Richard W. Rahn is chairman of the Institute for Global Economic Growth and MCon LLC.
https://www.washingtontimes.com/news/2024/may/13/hard-economic-lessons-from-germany-that-many-ameri/
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