Debt, Spending, and Monetary Policy

Frank Shostak of the Mises Institute has written a wonderful article.  He says that the economic problems are not really about the debt.  He says that the problem is monetary inflation.  As he concludes in his article, "the threat to the US economy is not the high level of debt as such but loose fiscal and monetary policies that undermine the pool of real funding."

I recommend that you read the whole article if you haven't already.  He has a very clear understanding of economics.

I don't think the U.S. debt is irrelevant.  There are consequences that will be felt from the high debt.  As I have written before, it isn't that our grandchildren will have to pay it.  Government debt hurts us right here and right now.  It takes away from savings and investment and diverts resources into ways that the market wouldn't have.  In other words, it misallocates resources.  The only reason the high debt hurts our grandchildren is because there is less capital investment taking place.  Our grandchildren won't have as much wealth as a result.

The other important thing to point out about the debt as it relates to Shostak's article is that the debt is one of the causes of monetary inflation, and spending is a cause of the debt.  If the government didn't spend so much money, then there wouldn't be a high national debt.  If the debt weren't so high, then the Federal Reserve would not have to create money out of thin air to monetize the debt.  The Fed and the government work hand-in-hand.  The Fed and its money creation is what allows the government to run such massive deficits.

One other important thing to note is that government spending also diverts funds and misallocates resources.  So whether it is the Fed's loose monetary policy or the government's profligate spending, it is diverting precious resources away from their ideal use as determined by the market.  It is misallocating resources and hurting savings and investment.  And as Shostak emphasizes in most of what he writes, savings and investment, or the pool of real funding, is what grows an economy.

In conclusion, the Fed's money creation and the government's spending make us worse off.  They lower  our standard of living in comparison to what it would be without their interference.  That is why we should do everything we can to reduce the power of the Fed and reduce government spending.