If governments print money, then they don’t spend it

Even beggars turned their noses up at the Deutsche Mark in the 1920s. It’s true. While wheelbarrows full of signs continue to enliven simplistic economic history, the reality is that wheelbarrow signs were trash and treated as such by traders and – yes – bums.

The truth about the circulation of so-called “printed” money comes to mind when evaluating Kevin Warsh’s latest hearing for the Fed Chair. Warsh should withdraw his candidacy with his good name in mind. But for now, he’s still making his case.

What is the problem. To support Trump’s Fed chairmanship, would-be candidates have to write things they otherwise wouldn’t. Warsh writes that “Inflation is caused when the government spends too much and prints too much.” No, it’s not true.

Governments can spend large sums only if they have taxable access to productive private economic activity. In other words, the more the private sector grows, the more governments spend. And since the tax on investment that is inflation is a drag on economic growth, inflation, if anything, curbs government waste.

Warsh knows all this simply because he knows that government spending in the US has skyrocketed over the past 45 years, but inflation hasn’t always skyrocketed with government spending. This is because government spending has nothing to do with inflation, which is a contraction of the unit of measure, in our case the dollar.

Warsh adds that inflation is also caused when the government “prints too much.” The guess here is that Warsh could probably be convinced that so-called printing is what happens after the unit shrinks, but first an attempt will be made to convince that government spending and money printing contradict each other.

To see why, we must say what is true: there is no consumption without production. None. When I was thinking about money printing, if it ever became apparent to the markets that the Treasury was thinking of printing dollars to pay debts not paid for by tax collections, the dollar would plummet (and Treasury yields would soar) long before the printer itself would fire. Markets predict, which explains why so-called “money printing” occurs. after inflation.

However, imagine the impact on government spending if the government printed to pay its bills. If so, government spending would decrease in the short term as would government borrowing. Which should be an obvious statement. Not only does production always and everywhere precede consumption, but no one buys with dollars as much as he buys with money earned through productive labor. Products buy products, nothing else.

Which means governments can print or spend, but they can’t do both simply because production buys goods, services and labor, not printed money. Markets are wise.

So little is Warsh’s line that she followed on spending and printing money. Warsh writes that inflation also rears its head when “money on Wall Street is too easy and credit on Main Street too tight.” No. The supposed “ease” with which money flows on Wall Street is a result of how well businesses that started on or near Main Street do. In other words, the health of Wall Street is a direct effect of the health of Main Street without which there is nothing to finance Wall Street.

As before, Warsh knows all this. Which means he writes to please his would-be masters, not to achieve truth policy. Why he would want to be Fed chairman if his rise to the top requires shrinking his currency and character in the process is unknown.