I’m encouraged when I visit discussion forums on the internet (usually to see where visitors to this blog are coming from), because a growing number of people are challenging others to start placing deficits and debt into proper context by relating them to the size of our economy, and by introducing the positives of economic growth into conversations previously dominated by false hysteria over the word “debt” (...the word which, incidentally, is False Phobia #1; I’ve been writing about it for almost two years now).
But there’s still one button the debt-phobes are fond of pushing, and too frequently it “succeeds” in shutting down the discussion. The show-stopper goes something like this:
Right, just keep running up more and more debt—then watch the government turn the printing presses up to full speed, inflating its way out of the debt burden. Inflation, the hidden tax, is the secret weapon governments use to "fulfill" their debt obligations.
The false fear of “printing money” comes in several degrees. Some people think any increase whatsoever in the money supply is inflationary, having misinterpreted Milton Friedman’s comment that inflation is everywhere and always a monetary phenomenon. Other people think annual money supply growth should be pegged at something like 4%, the number I remember being promoted by the Monetarists a few decades ago. But regardless of degree, the common denominator is a fearful overreaction to the term “printing money.” [Note: In reality, the Fed only has indirect control over the money supply, by controlling its overnight lending rate; however, for this illustration, I'll stick with the "printing money" concept.]
The fact is, when the economy is growing, a growing money supply is necessary, as explained in the first article of the money series. More specifically, there are at least two logical truths about money and the economy: (1) A growing money supply is a necessary but not sufficient condition for non-inflationary economic growth; and (2) an unchanging or shrinking money supply is a sufficient condition for stifling economic growth.
Shaq’s shoe size
Shaquille O’Neal wears a size 22 basketball shoe; that means his foot is around 15” long. My guess is that his foot at birth was around 3” long, and that it took 20 years to grow to its present size. Doing the math: To grow to 15” from 3” in 20 years, Shaq’s foot had to grow at an average real growth rate of 8.38% per year.
It’s a good thing Shaq’s mother and basketball coaches didn’t believe in limiting shoe-size growth to 4% per year, isn’t it? (...not to mention 0% per year.) Footbinding would not have been good for Shaq’s basketball career, would it? Annual growth of 8.38% was required to accommodate real growth, not some arbitrary 4% number. (The 4% might have been a best guess by some group of shoe-size experts—but, as the libertarians have tried to teach us, central planners usually get it wrong when they make their expert guesses about what the masses “need.”)
It’s also a good thing Shaq’s mother and basketball coaches didn’t believe in inflating his shoe size beyond what his real foot needed. Imagine how well (...correction, how poorly) Shaq would be performing today if he were wearing a kayak on each foot. An inflationary shoe-size policy would have been just as undesirable as a footbinding policy.
Same principles go for the USA’s money supply. The inflation question has been addressed ad nauseam by just about everybody, but what about the opposite mistake: Why would anyone think 0% money supply growth is just right for our economy? I don’t know why, but that is apparently what some people incorrectly think a gold standard would “achieve.” [In Ayn Rand’s Atlas Shrugged, one of my favorite books, I can’t remember any explanation in the story about how John Galt’s mini-utopia would increase the supply of its little gold coins, as the mini-utopian economy grew; on the other hand, it’s been more than twenty years since I read it, and my memory could be failing me. Did Galt trust South African and Russian gold mine owners to grow his economy’s money supply at just the right pace? I’ll probably never know the answer to that.]
Similarly, why would anyone think that even 4% growth is just right? That implies they think they know what real growth can be and will be: nothing more and nothing less than 4%. Isn’t that a bit presumptuous? If our economy had the potential for 8.38% real growth, that type of arrogant central planning limitation (4% max growth) would stifle the economy from achieving its potential.
“Printing money” is not the lurking monster that will bring us down. It is a necessity for a growing economy. And—unlike Shaq’s foot—our economy will not stop growing ... unless, of course, we stupidly choose footbinding.
