A Case for the Magic Money Machine

I’m no economist, so I’m expecting that someone who understands global commerce better than I will set me straight. But until then…

I, like a lot of people, am concerned about American foreign debt. It threatens to compromise the overall value of our currency and is mortgaging the future of multiple generations to come. We’ve embarked on an untenable lifestyle no politician interested in re-election will press us to give up, and we show no signs of abating our appetites.

So we continue to borrow from foreign entities by selling American bonds to them. China, our largets debt-holder, is the one that gets the most attention, partly because of their communist government, and also because they are arguably the next global superpower behind the U.S. Now, I’ve argued (somewhat tongue in cheek) in a part article that our debt to China is the best international diplomacy we could ask for. My logic was that, although we have dramatic differences of opinion about civil rights, governance and international relations, they are literally invested in not seeing the U.S. economy fail. If they do, “poof” goes their one-plus trillion dollar investment.

The fact is that other countries (like Japan) hold nearly as much of our debt as China does, but because we have a more amicable relationship with Japan, it flies much lower under the cultural radar. But suffice it to say there are scads of nations around the world who would dread a collapse of the U.S. economy, whether they like us or not.

Back to the Chinese debt issue. China has long been criticized for manipulating its currency, rather than pinning it to the U.S. dollar or allowing global supply-and-demand forces to valuate it appropriately. And like the U.S., China’s currency is not based on a gold standard (though Glenn Beck and other gold hoarders have been selling the myth that they will for years). So even more so than the U.S. dollar, it seems reasonable to assume that the Chinese yuan is one of the most arbitrarily valued major currencies in the world market.

So their currency’s value is based on little more than the social consensus of what it’s worth, plus whatever the Chinese government can do to manipulate its value. And our currency long since abandoned the gold standard, meaning that the dollar isn’t much better off. And the bonds we’re selling are nothing more than IOUs we’re passing out, promising that, someday, we will pay them back. Meanwhile, there is a fierce public debate raging in Congress about whether we should make repayment of foreign debt a priority, or if we should focus on the homeland, letting creditors sweat it out.

So the whole system is valued based on little more than an idea and a gamble on what those ideas will be worth in the future. And I think it’s fair to assert that, despite our recently downgraded credit rating and our stumbling economy, the dollar is still one of – of not the – strongest currencies in the world. More countries peg their own monetary system to the U.S. dollar than anything else, and nearly two-thirds of all currency reserves in the world are in U.S. dollars.

Put simply: no one, and I mean NO ONE, can afford for the United States economy to crumble. It would be global disaster.

So what to do? Since our currency is relatively strong within the global system, and since our economy is recovering while China sits atop an enormous construction bubble, It seems reasonable to me that the answer is simply to print more money. That is at least until we regain our sanity and accept that we must exist on less. The collective self-interest of other countries will help buoy its value, even if it’s flooded with more bills. And honestly, the bonds we’re selling to countries now are little more than the promise of those same dollar bills, some time in the future. How is that less damaging to our currency’s value than just making more of it right now?

Like I said, it sounds ridiculous in a way, but what we’re doing right now is pretty ridiculous. And frankly, the basis of China’s economic boom has become a joke in the last few years too. So among the handful of horrible options we have, this seems to me to be the least horrible among them.

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  • adc_t

    You might like Deep Thoughts with Ben Bernanke on FB. The fact is that he Fed has, in fact, been running the presses almost non-stop. This is one reason why the dollar has lost over 95% of its value.

    So what you’re advocating (and th Fed is executing) is essentially a massive procurement if wealth from anyone who holds dollars. To whom? No idea, but man, look how high the NASDAQ is! The economy must be roaring!

    • Christian Piatt

      well, it’s kind of a Swiftian “modest proposal” of sorts, but I still don’t see a more cogent alternative. As I noted, spitting out bonds and then buying them back is effectively just adding a step to the insanity, right?

      • timduck

        Wes Morgan passed this on to me. When I saw the header, I thought it was a satire; or if not a total crock! ‘Turns out; you stated your case pretty damn well. I’m not a economist either; but agree that your theory seems to be the lesser of all the evils. I think I’ll sign up or at least read your posts more often….Love & Peace….Duck