Awhile back I posted an article called ‘Your Government is Bankrupt’ and in that article I was right and I was wrong. I was right that the government is bankrupt, bankrupt meaning it takes in less revenue than it spends and can’t pay back its debt, but I was wrong that it matters, it doesn’t, at least not to the government.
The Federal Reserve prints US dollars out of thin air whenever the government wants it and buys government bonds effectively loaning the government the newly printed money. The Federal Reserve banking system does the same thing for the private sector. Whenever someone borrows money, it’s created out of thin air for the borrower, banks don’t need your deposits to make loans. All US dollars in circulation are debt, if all debt were paid off, there’d be no more USDs in circulation. As the supply of money decreases its value rises and so do interest rates. Higher interest rates would mean less borrowing from the banks by consumers and businesses which is financially detrimental for the banks, so the government ensures that the banks keep making money by keeping interest rates low by borrowing continuously from the FED. It’s a perverse fraudulent financial system that has led to every financial crisis for the last hundred years.
The unfettered money printing inflates the money supply and consumer prices rise, too many dollars chasing all the same goods drives prices up. In the long-run all prices rise including wages and exchange rates so the only real problem for the state is fitting all the zeroes on the banknotes as the banking system prints the value of the dollar into oblivion. Effectively, the government can continue to borrow from the FED to pay back existing debt to the FED and domestic and foreign investors with interest even as it accrues new debt. If inflation becomes hyper, they can just deflate it like the former communist countries did in the early 2000s and start all over again. That’s the magic of fiat money, it’s not real money so its value can be manipulated at will.
The problem for consumers and businesses both domestic and foreign is that inflation eats away at investment returns so investors will stop investing in dollar denominated assets and those with existing investments and contractual rates of return will lose purchasing power, the same thing as losing money. Foreign investment during hyperinflation is what has historically destroyed currencies. Governments borrow money internationally for war and empires and then print the money into worthlessness trying to pay their foreign debt back which, depending on the amount and the interest rate, may or may not be mathematically possible.
Those with fixed incomes and locked in rates of returns like non-governmental retirees will see their returns consumed by inflation as prices rise. Those with variable rate loans will see their monthly premiums skyrocket as banks scramble to preserve their returns. Foreign investors will lose money and not make any further investments in the future and American investors will move abroad. In the end, the US economy will exist in its own little imaginary bubble of paper wealth with little to no new investment except by the state. Production will grind down and all wealth will be inflation as the rest of the world moves forward. The US economy’s trade deficit will balloon far beyond its current $700 billion.
As long as the government borrows in its own currency, it can do so without economic consequences to itself, but there will be economic consequences for both foreign and domestic investment that will eventually isolate the US economy.