A lot of people believe that the popular notion fed to the public by political leaders and mainstream economists of austerity versus unsustainable debt is a false notion and, moreover, that there's a real solution available that worked in the past and would work again today.
Let's put things into perspective, and then talk about the solution.
At the moment, the nation's money supply, also called M2, is approximately 10 trillion dollars whereby investors are sitting on about $2T and $8T is available to consumers. Our current GDP is approximately $16T and that puts our M2/GDP ratio at 62.5%, a figure that's much too low according to economists.
It's clear, in the minds of some experts, that the key to a robust economy is to at least double the nation's M2 money supply. If that's the case, the question then becomes how could the federal government reach what seems to be such a lofty, challenging goal under present economic conditions.
Under current law, the Federal Reserve's options to increase the nation's money supply are very limited (in a real sense) and don't actually include the ability to directly add to M2. To be sure, the Fed could takes actions (to help the economy) such as increasing its bank reserves, lowering long-term interest rates to ease borrowing, indirectly increase commodity prices, and generally raise expectations about economic prospects. None of these measures are guaranteed to increase our M2.
An increase in the nation's money supply, or consumer demand if you will, can only happen under certain circumstances.
If bank loan growth was to expand enough, that could help add to the M2. However, currently this type of growth only adds less than 5% to our M2 annually because investors don't see enough opportunity in the prospects of the market. On the bright side, if our economy was to see a significant boost to the M2 (by some means not yet discussed) we would see bank loan growth increase too. On the downside, bank loans only provide M2 for investment purposes, not consumer consumption. Additionally, with loan repayment costs, any boost to the M2 would almost certainly disappear.
Experiencing a foreign trade surplus would significantly add to M2, but our current trade deficit is now draining more than 5% of M2 annually and that cancels the effect of any potential bank loan growth.
In fact, contrary to popular belief, some economists believe that federal deficit spending is the only net M2 source for consumers as long as some additional certain legislative conditions were also applied. Proponents of this philosophy would assert that if every federal budget since 1789 had been balanced, M2 would be close to zero and we'd be bartering for our goods and services.
Experts contend that our unsustainable debt is the net sum of all budget balances and is roughly equal to the total of all privately held cash in our nation. In other words, unsustainable debt is not an IOU but rather only the sum of all government spending not recovered by taxation.
Some economists believe that federal deficit spending is crucial and inflation is the one and only constraint to potential growth. The same experts contend that deficit spending is the only thing keeping the economy out of a depression today. When Obama's policies added over a $1T to our M2, he potentially avoided President Hoover's collapse (that happened in 1929) and a national unemployment rate in excess of 20%. Some would also argue that President Obama's fiscal policies actually saved in excess of 20 million jobs instead of the popular belief that he created only 5 millions jobs during his first term.
The roadblock essentially to further increasing the nation's money supply is that Congress fears more spending would fuel the purported unsustainable debt – a fear that many believe conceals a massive fraud upon the people set up to benefit the nation's wealthiest 1%.
Let's look at history and bring this school of thought into better perspective.
A century ago, our wealthiest 1% successfully lobbied Congress to pass legislation requiring the Federal Reserve to finance budget deficits by auctioning bonds. Since that time, trillions of dollars in bond interest payments have been redistributed from middle-class tax payers to the richest 1%. Many would argue that's precisely why we have unsustainable debt today.
When the U.S. entered World War 2, then-President F. D. Roosevelt temporarily suspended that purported fraud to help finance the war and begin a real economic recovery. To finance the war, the Federal Reserve fixed Treasury Bonds at an interest rate close to zero and purchased enough bonds to pay the nation's wartime salaries. After the war ended, consumers spent their savings, turning farms into suburbs, and starting 35 years of prosperity without harmful inflation. That prosperity stopped when President Truman took office and reinstated the elitist law enabling the alleged fraud to continue where it left off and providing fuel and a clear starting point for today's unsustainable debt.
If that legislation were overturned today, as it was during the Second World War, some experts believe that we could finance our infrastructure and employment needs by purchasing near-0% Treasury Bonds and foster an economic condition that would allow our Treasury to spend money on infrastructure without paying bond interest and create millions of new jobs.
Someone once said that we must remember that the federal government is not a business that needs to balance its budget, but rather it's a sovereign state that can create any amount of fiat currency, has no need to borrow and can never become insolvent or enslaved to another nation. Proponents of this school of thought say the successful policy employed during WW2 by President Roosevelt of purchasing Treasury Bonds (at near-zero interest) proves its viability.
It's true that printing too much money causes out of control inflation, but thoughtfully increasing our money supply by $1T annually would only amount to $11 daily per capita. According to the Congressional Budget Office’s infrastructure multiplier, GDP would rise $1.6T, yielding a $0.32T federal tax revenue increase plus half of that at the state and local government levels. There would also be a $0.5T savings in benefits for 25 million unemployed and working poor.
Unlike tax cuts, proponents say that infrastructure spending really does pay for itself.
Once the unemployment rate is low enough, Congress could begin to once again restrain infrastructure spending. Moreover, as bank lending increases under favorable conditions the Fed could continue to watch economic indicators and stop inflation when interest rates start to increase again.
