If there is a hierarchy in the religion of Keynes -worshiping, left-leaning econnomists, then Paul Krugman is their Pope.  I saw his column March 14th, After the Flimflam.  His advice is very familiar.

Spend more.  Lots more.

It is disappointing that a famous economist would ignore a simple point that should be obvious to absolutely everyone, especially economists.  An economist should know what money is.  An economist should know that those little green slips of paper that we call money are not the point.  You can’t eat money. You can’t live in it, or drive it, or wear it.  Money is only a proxy for the goods and services that we produce. It is those goods and services that are our economy, not the money.

So why is Mr Krugman constantly talking about spending more money that does not yet exist as the solution to all our economic ills?

Money is a proxy for things of value.  Money taxed from the people and spent, at least represents real goods and services transferred to others.  When over 40% of the money spent by our federal government is borrowed, and the Federal Reserve Bank is lending the federal government the money with $85 Billion freshly minted dollars every month, that money is a sham.  It is a sort of legal counterfeiting.

Does this strike you as a little bit crazy?  It does to me.

So why is Mr Krugman constantly talking about spending more money that does not yet exist as the solution to all our economic ills?

The idea that Money printing helps the economy goes back to economist John Maynard Keynes in the 1930s.  Keynes is no longer held in such high esteem among economists, but is still highly regarded by politicians worldwide because his ideas are so useful in justifying deficit spending. Keynes advocated deficit spending when times are bad, and paying back the debt during good times.  Politicians love the first part, and use it to justify deficits.  No one remembers the part about paying back the debt. (long post about Keynes here)

Deficit spending and money creation have the effect of taking value from those who already have earned dollars, and transfers that value to those who get the “new” money.  Imagine a helicopter dropping bundles of $100 bills.  Those who find the bundles will go out and bid up the price of things they buy, competing with those who did not get bundles. Some call this inflation.  Some say this is “monetizing” the debt.  It could accurately be called stealing from the savers to give to the debtors.  Counterfeiting has the same effect.

History tells us that money creation can be inflationary.  History also tells us that exactly when that inflation occurs, and how bad it will be is impossible to predict.

In the end, debt is a promise.  When an elderly couple loans $10,000 to me to buy a car.  I promise to repay that money – $10,000, plus interest. The interest income pays for the groceries for that elderly couple.  If the government steps in and borrows (or prints) dollars and gives them to me, there is now more money in circulation, but no more goods to buy, so the price of the existing goods tends to rise because there are more dollars chasing the same goods.  My elderly lender gets the $10,000 back, but faces higher prices, so the dollars are worth less.  My lender has lost part of the value that was lent out.  That value went to me, who got to spend the “new” money provided by government.  When I hear about “debt forgiveness” or “debt writedowns”, I am always reminded of that elderly couple who lent their money out, and will not get their money back.

Paul Krugman believes that this sort of spending is beneficial.  If we spend enough, all will be well.  Unfortunately, one way or another spending is paid for, either through taxes, or inflation, or default.  He writes often of the macroeconomic effects of this spending, but very seldom of how the massive debts that will result will be repaid.

Who is the real Flimflam man?