Notes on the Forgiveness

1. Gold Can't Do This

If we were on the gold standard, the Forgiveness could not be done. You can't print gold. Fiat money is flexible. Unfortunately, we have not yet learned how to take advantage of the features of fiat money. We know only how to create inflation.

2. Money from Nothing

Internet people don't like the idea that the Fed creates money from nothing. At the Fed they don't like it either. Sure, the March 2009 decision to print a trillion dollars was unanimous. They all thought it was necessary. And the decision turned a lot of internet thumbs down.

So yeah, the Fed created a trillion dollars from nothing. But after they printed that money, they used it according to gold-standard principles: They didn't just give it away. They used it to buy stuff. They bought existing debt.

More specifically: They didn't use that money to pay off debt for people. They did not use it to directly address the monetary imbalance. Instead (if I have it right) they kept that debt on the books, but put it on different books. They bought existing debt from some overloaded banks so that maybe those banks wouldn't collapse.

At the Fed, they still have principles. They refuse to print money and give it away. As if the decision to print money was as difficult as getting gold from the mine. Yeah, they have principles. The wrong principles.

If they used that money to pay off debt for people the debt would cease to exist. The economic burden created by that debt would cease to exist. And the money would go into the banks just like it did anyway.  But... it would have been better to eliminate some debt in the process, no?

I suppose at the Fed they'd say you can't just give money away! But why not? They didn't work for that money. It's not like they earned it. They printed it. There is no moral imperative that says you can't give money away, when that money was free to begin with.

I'm not saying we can be careless with money. But the thing that was careless was the unfettered growth of debt over the past 40 years. Given that debt -- that mess -- the priority now is to clean up the mess.

People may say it's wrong to pay off people's debt because that only helps debtors. Well sure it helps debtors, but it helps creditors too: They get their money back. Anyway the moral imperative at the Fed has nothing to do with fairness. The only imperative is to do what must be done to improve economic conditions. No matter who it helps.

It is a different world, this fiat world. As Friedman said, "A world monetary system has emerged that has no historical precedent." We have yet to learn what's different about it and how to take advantage of those differences. We only know about the inflation.

I'm not arguing for a relaxed, inflationary fiat policy. But there are options we have, options we did not have under the gold standard. And those options are not clear, because fiat money is still relatively new. But when a financial crisis threatens to end civilization as we know it, I say we want to consider those options.

What rule says we must lend out Bernanke's newly printed trillion? If it really is free money, if it really is money from nothing, then what do we lose by giving it away? Nothing. What do we gain by using it to pay down debt? Plenty! But the Fed is not doing that. At the Fed, they don't want to do things to remind people that Federal Reserve Notes are money from nothing.

But everyone knows it anyway.

3. The Forgiveness Is Not Inflationary.

Banks create money by lending. And by paying back what they borrowed, people destroy that money again.

Paying down debt destroys money. A fact is a fact. A dollar of debt paid off is a dollar destroyed.

But if paying down debt destroys money, it doesn't matter where the money came from. Newly printed money is destroyed, just the same as old borrowed money, when it is used to pay down debt. So, the trillion-dollar forgiveness is not inflationary.

4. Intentional Misunderstanding

"How soon will normal business enterprise come to the rescue? What measures can be taken to hasten the return of normal enterprise? On what scale, by which expedients and for how long is abnormal government expenditure advisable in the meantime?"

Keynes recommended government spending to get us out of the Great Depression. But he also asked When will business return to normal? and How long will government intervention be required? In other words his proposal for deficit spending was offered as a temporary expedient, to deal specifically with an economic crisis.

Somehow that got all turned around by people who called themselves Keynesians in the 1950s and '60s.

"By proper use of monetary and fiscal policies, nations today can successfully fight off the plague of mass unemployment and the plague of inflation."

By the 1970s we had deficits that would not go away. And Keynes got blamed for it.

Things get turned around and misinterpreted and good ideas are made to look bad. Why? Idunno. But I respect people who try to understand. I don't respect people who try to misunderstand. Anyway, the economic situation is serious. But it's not serious because of what's been going on for the last year. It's serious because of what's been going on for the last 40.

Recent policy actions -- printing a trillion and such -- are bizarre. But they are responses to the problem. Recent actions are not the problem. It's important to remember that. And it's important to remember that when a crazyman says Print money and use it to pay off debt, it is offered as a response to a specific problem. It is not offered as policy for normal times.

When we have the right solution, the problem goes away.