Pulling up the Ladder

I would imagine most people, myself included are of the cohort of people who are in debt. I don't mean massively, just. In. Debt. Period. You've done your best over the past few years to lower your debt, and you keep yourself informed of current events, so that you can make informed decisions the best you can.

Say you live in the United States, you switch on Fox Business and you hear "The United States is $40.5 Trillion in debt", I'd imagine you'd be pretty peeved at that. Why are you supposed to tighten your belt, but the US Government isn't. That's a fair question, but the answer is not what you might think, or have already heard... from economists like me.

Debt: Its not made equally

So in order to understand the question, you need to understand the context. What is money, who makes it and why? The first of those questions is simple to answer, money is anything that;

1. Is divisible, you can cut it into smaller chunks like into coins or even smaller than that

2. Is uniform, each dollar bill must look identical to every other dollar bill

3. Is in limited supply to maintain its value

4. Is easy to carry around, its portable

5. Is durable, can withstand the wear and tear of everyday life

6. Is widely recognised as valuable and a legitimate form of payment

Great so since we know what money is, how is debt related to this. Well, I want you to pay close attention to numbers 3 and 6. Number 3 points to the currency being in short supply, number 6 points to it being of value. So how does money have value? Well to put it simply, its backed by something. Back in time, dollars would be backed by Gold, Art, Real estate, etc. But nowadays, not so much. Most major currencies are fiat currencies meaning they are partially backed by assets or not at all, but most of their value is based on trust, trust in who? The Government? Why? Well in order to create money, the government creates it... largely out of thin air.

That's part of the answer you've heard before, "The Government can just print money, so its not debt like you or I are in debt, its more taking money from the future tax revenues to keep the economy going". That's a true statement, but lets pry a bit deeper. Why does government need to do that?

The top heavy economy

To put it simply, if the government doesn't print money, you don't have wage growth, your employer, or in the case of small businesses, you directly rely on cash being liquid. In other words; it has to flow freely through the economy, if the government tightens its belt, you will feel it. So why do we constantly hear "the government must reduce debt"?

Well first you have to ask, who benefits from the government reducing its debt? You would think, everyone. But that isn't the case, an economy with zero inflation, zero debt, is an economy with no money. Money is an IOU, all of it is. If you live or have worked in a country in Europe, such as the United Kingdom. Look at a £5 bill, or any bill it says something to the effect of "I promise to pay the bearer of this bill the equivalent of five pounds" its an IOU.

Money as we know it today, in most countries is circulating government debt. It has value because its backed by government debt, in a sense. The government borrows from the future, the future isn.t a person, its you, the collective you. In order to give you more money in your pocket in the case of stimulus checks, better protection, in the case of military spending, a longer life in terms of healthcare, etc, etc.

So who would want a government to reduce its debt, but NOT eliminate it? Look back at number 6 and number 3 on that list;

Is in limited supply to maintain its value, Is widely recognised as valuable and a legitimate form of payment.

- earlier

Part of a currencies value is tied to how rare it is. This is about exchange rates if that wasn't clear. You are in debt, you aren't going on vacations very often, nor are you personally importing anything. So why a high value benefit you personally? In short, it doesn't. Because you, are not the person who needs money to have high value, you know who does?

Rich people. Why would those with the most money, need less of it in the economy? What do rich people hate the most about capitalism? Competition. They don't want you to be rich, they want themselves to be rich, and for you to aspire to be them. Because if you, with your hand-me-down clothes, and college debt can climb the ladder up to their level. You devalue their space, if you can own their yachts, marry their kids, play in their spaces, their spaces are no longer exclusive, because you got in.

Its called "pulling up the ladder" in economics and finance, if you can make it, then they aren't special. So you lobby the government and you misinform the public about what money and debt is, or more insidiously, you become trustees of Ivy League schools and push Neo-classical economics and convince an entire generation of Econ students who will then propagate the same narrative. Then they'll want to reduce the debt, let the poor vote for their own poverty. That's the long and short of it.

So, what about inflation? Yeah lets talk about that.

Moderation is key

The key argument against uncapped government spending is usually: "What about inflation? You don't want to go the way of the Weimar Republic, do you?" That sounds like a solid critique on the surface, until you look at what actually happened in 1920s Germany.

The hyperinflation of the Weimar Republic was not caused simply by a government printing money to build roads or fund healthcare. It happened because Germany was slapped with crushing foreign war reparations (payable only in gold or foreign currency) and then suffered a massive collapse in domestic production when Allied troops occupied their main industrial engine, the Ruhr valley. The government kept printing money to buy foreign currency on open markets while its own factories stood still. More money chasing drastically fewer real goods creates hyperinflation every single time.

Printing money does not automatically equal inflation. Inflation only takes off when government spending exceeds the real physical capacity of the economy, such as when you try to buy labour, energy, or materials that simply do not exist.

When the government spends money on sectors like healthcare, education, welfare, transportation, and small business grants, it is spending on high-liquidity, productive areas. Every dollar spent here has a high Marginal Propensity to Consume, meaning that at least 60 to 80 cents immediately circulates right back into the local economy as workers, teachers, and nurses pay rent, buy groceries, and shop locally. Because that spending actively expands domestic productive capacity, allowing healthy and educated workers to move goods faster and produce more, the economy grows to absorb the money supply.

That money keeps circulating until it reaches you, whether you are a small business owner, a factory worker, or a person relying on a safety net. And even if the currency takes a mild, manageable dip in exchange value, there is a built-in upside: a slightly cheaper currency makes your goods cheaper for foreign buyers. That drives international demand, fuels exports, and pumps outside capital straight back into your local business, your community, and your paycheque.

In conclusion

You have been fed a lie, a convincing lie about the national debt. But I can guarantee you, you have everything to gain from the debt increasing. The question isn't should the debt increase? Yes it should. The question is, what does it pay for? Does it pay for a bailout in the "free-market" or does it pay for food, quality free or affordable healthcare, does it pay for better public contracts, does it pay for better roads and infrastructure? I know what I'd be advising policy makers on, and speaking as someone who has rubbed shoulders with the wealthy, the last thing they need is a bailout.