"High inflation led to negative returns."
True, dat. Printing money doesn't make us richer.
True, dat. Printing money doesn't make us richer.
This says nothing of the long term effects of seniorage, just that printing money does, currently, make us richer.
Assuming that printing dollars results in a net transfer of wealth from foreigners ("them") to citizens ("us"), sure. But the "us" I was referring to was "people who hold or use U.S. Dollars" (or dollar-denominated assets).
Printing money is wealth transfer, straight up, in pretty much the same manner that an individual counterfeiter transfers wealth to himself.
Aside from the wealth itself, there is a tremendous opportunity cost, since capital is moved from productive to outright destructive and criminal sectors of the economy.
The primary vehicle of these transfers is monetary expansion. All else being equal, a sound currency would bring orders of magnitude improvement in the real economy and dramatically increase standards of living for the bottom 90% of the population far beyond what can be achieved through programs like the ones you mention. Of course, there would be a deflationary collapse first, but this would be the best thing that could possibly happen for the vast majority of us.
http://www.washingtonpost.com/wp-srv/politics/interactives/b...
Social security and medicare combined are 35% of the Federal budget. Income security is another 10%. National defense is 19%. Interest payments (essentially a transfer of wealth from taxpayers to T-bill holders, i.e. poor Americans to rich foreigners) are another 9%.
It's also not true, in strict monetary terms, that the vehicle of these transfers is monetary expansion. Total federal spending is about $3T. The total expansion in the monetary base since 2008, even with the massive explosion due to quantitative easing, is only $1.2T. Tax receipts still form the bulk of the budget.
I hate government waste as much as anyone, but get your facts straight before arguing.
First, spending on social security, medicare, income security, and domestic programs is of a qualitatively different nature than military spending, bailouts, and the interest payments you mention in that it is inserted directly into the real economy instead of being diverted and for the most part removed for good. Yes, some small portion of the military budget really is for 'National Defense' and so would come closer to domestic spending, and perhaps some portion of the bailout funds wind up in the economy instead of banks in Zurich or Dubai, but the bulk of it is simply absconded. So you must strongly weight the impacts of these different types of expenditures in relation to each other to gauge their true comparative impacts, which you haven't addressed.
Second, the monetary base is only a small part of the picture since this only includes physical currency and highly liquid assets. $1.2T is an enormous expansion that constitutes a doubling of the base, but much more important are M3 and MZM since these include credit, which contributes exponentially more to inflation and wealth transfer due to fractional reserve banking, which is only possible on anything remotely close to this scale in a fiat system. This graph illustrates my point quite well, and it only shows up to M2, presumably since the Fed stopped reporting the even more damning statistics: http://en.wikipedia.org/wiki/File:Components_of_US_Money_sup.... So again you have ignored or confused critical factors.
The last point you left unaddressed is opportunity cost, which is really the core of my argument. In a sound economy with sufficient resources available, the capital stock (wealth) increases on an exponential scale, not linearly, because the more capital that exists, the more that can be invested in creating even more capital. Therefore, interfering with this process of accumulation through wealth transfers and the instability caused by monetary manipulations has deceptively gargantuan opportunity costs. All the resources that are funneled into bombs and guns are employed in actively destroying capital when they would otherwise be accelerating its accumulation. Likewise for resources funneled into estates, yachts, and private jets for finance industry billionaires that SHOULD have gone into producing capital goods for the real economy. If you truly consider the full consequences of these policies and the functional relationships involved, the implications are almost unbelievably staggering.
1. GDP growth requires printing money, or else it will create a deflationary environment, which is dangerous because it creates an incentive to delay business purchasing.
2. Low levels of inflation create a more efficient way for the economy to adjust the mix of labor skill demand. Research shows that it is difficult to nominally lower a worker's pay year over year, but giving no raise in an inflationary environment allows a company to do just that. This is important to lower the rewards for resources the economy has a lesser need for, such as when bar codes reduced the need for grocery store staff.
3. And finally, printing money can help an economy recover from an aggregate demand gap (i.e., a supply-demand disequilibrium that doesn't automatically recover). This can happen in period of high unemployment, where wages need to fall to create more demand for labor, but a fall in wages reduces personal income, further reducing aggregate demand, further reducing the demand for labor. Printing money reduces the cost of money and gives an incentive for companies to invest more, which reduces the aggregate demand gap.
Either that, or counterfeiters also create wealth.
I specifically state that it does, in certain situations, create wealth. There is a tremendous amount of economic research to support this.
Of course, I agree with you that printing money does not always create wealth. Far from it. There are many cases in which it does not create wealth. Highly inflationary economies are a good example of this.
But if you re-read the three situations I describe, you will see that they do indeed describe places that the printing of money will create wealth that would not have existed otherwise without the printing of money, and which are above and beyond the mere reallocation of wealth.
Perhaps to better understand why your point is not true is to understand your claim from a different perspective: that the money supply should always stay exactly constant, year after year.
Even a cursory understanding of my first point (that economic growth in and of itself requires a corresponding increase in the money supply) shows this to not be true. Imagine the economy grows and the money supply stays constant. The value of products available per dollar now increases annually. This is deflation.
Now you are implicitly claiming that deflation is a good thing.
To read more on deflation, see:
Yes, deflationary collapses that are preceded by artificially induced inflationary booms cause massive pain. This is why we shouldn't have artificially induced inflationary booms. They massively misdirect resources and create a necessity for a massive restructuring, which is painful and destabilizing, but necessary and inevitable to return to economic viability. You are confusing the heroin with the withdrawal, the alcohol with the hangover, the sickness with the cure.
Printing money may enable the creation of wealth (by reallocating existing wealth) but is not, itself, wealth creation.