The Absurd Ridiculous

The budget deficit isn’t our biggest problem, by a long shot.

Furthermore, it’s a problem that is already, to a large degree, solved. The medium-term budget outlook isn’t great, but it’s not terrible either — and the long-term outlook gets much more attention than it should. It’s true that right now we have a large federal budget deficit. But that deficit is mainly the result of a depressed economy — and you’re actually supposed to run deficits in a depressed economy to help support overall demand. The deficit will come down as the economy recovers.

So opined the Fool as Economist, Dr. Paul Krugman, in a recent op-ed piece in the New York Times.

How could a Nobel prize winning economist say something so absurdly ridiculous? Just what are they teaching in the schools these days?

In contemplating this, I first assumed that the Fool was a man of great intelligence whose thinking was logical given some set of presuppositions and premises. But what could they be?

Ah yes, silly me! It's the Federal Reserve. As the Fool is well aware, the Federal Reserve has the legal ability to create money out of debt. They are authorized to buy debt with money they have created out of nothing. Of course no one can create money out of nothing. But they pretend to do so and as long as everyone believes the con, they appear to do so. In a pinch they could buy the entire US debt tomorrow at 2:33 PM or, if you please, at midnight tonight.

Since the 1940's the Fed has been returning the interest on the notes they create to the US Treasury. If they were holding the entire US debt, the interest would be a wash in terms of the federal budget. All the interest the US paid on the debt would be returned to the US Treasury, minus operating expenses, which are an insignificant fraction of the total interest. At that point, the Federal Reserve could simply cancel the debt with no one appearing to lose any money - including the Fed themselves.

Such a move would be hyper-inflationary and it would tend to destroy confidence in the faith and credit of the United States, stealing trillions in the process. But it would remove the debt, or any portion of it that the Federal Reserve desired. If one ignores or denies this devastating effect of fiat money (and John Maynard Keynes was probably right when he said that inflation was a tax that only one man in a million could diagnose), then our Fool appears to be right.

But God is not mocked. He has the last word which is that those who borrow and do not pay back are wicked. (Psalm 37:21) All men, including the respected Federal Reserve, will reap the wickedness they sow.