When documenting the early-21st century decline of the American Empire, future historians are surely going to have a good time poking fun at the conventional wisdom at the time that a pure-fiat money system was sustainable and the increasingly tortured rationale provided to justify that belief, in the process, perhaps recalling the words of Michael Gold in the Big Chill who famously said, “I don’t know anyone who could get through the day without two or three juicy rationalizations. They’re more important than sex.”
Said tortured rationale these days seems to revolve around the idea that debt, deficits, money printing, and all sorts of other activity that is either ill-advised or illegal for American citizens is just fine for the U.S. government, that is, so long as the consumer price index stays low. In this interview at The Gold Report, Marshall Auerback explains:
As far as government deficits go, what we argue is that there are no financial constraints—there is a real resource constraint. In other words, inflation is the ultimate constraint. We shouldn’t be constructing fiscal policy with some sort of vague, undefined notion that it’s fiscally sustainable. Nor should we define “fiscal sustainability” via some arbitrary number as Kenneth Rogoff and Carmen Reinhart have done in their recent book, This Time Is Different: Eight Centuries of Financial Folly, wherein they say if a debt-to-GDP ratio gets above 90%, then bad things start to happen.
Under the type of regime we have in Canada or the U.S., there is no inherent reason why any level of government spending should be fiscally unsustainable over a longer period.
It’s counterintuitive to the extent that we normally compare government spending to household spending. People say we can’t spend beyond our means, and that way of thinking fits into people’s own intuitive experience. But you and I are not the same as a government. A government is a monopoly. It’s controlling the currency. If you and I had printing presses in our basements and we were able to print $20,000 whenever we needed, we wouldn’t be debt constrained in the same way that private businesses or individuals are today. Clearly, a government is in a unique position because it’s the only entity that issues currency and, in effect, creates new net financial assets. The household analogy breaks down because we fail to distinguish between users and issuers of currency.
I’ll never come around to this way of thinking, the most important reason being that I understand how fatally flawed the U.S. consumer price index is in this context, namely, that it has been artificially low for two decades or more as a result of cheap imported goods and other factors that make it a particularly dangerous basket to put all your eggs in.