Could the U.S. Print Its Way Out of the Debt Crisis?
By mid-August the government coffers could be running dry if there isn't some upward adjustment to the federal debt ceiling made by Congress in the next few days. One proposal to deal with the issue: Print more money.
But printing more money can mean several different things in government-speak. The first way for the nation to make money is to literally print it up at one of the money factories in Washington, D.C., or Fort Worth, Texas. Currency is printed year-round to meet both for increasing demand for more bills and to replace those that wear out and are pulled from circulation. Last December, the Fed placed its 2011 order for 6.7 billion new notes at a value of more than $214 billion.
Over the past 20 years, the amount of currency has steadily increased year after year, due partly to quantitative easing programs and partly to the rapid rise of the $100 bill as a world currency. In 1990, there was just a little over $268 billion in currency in circulation, and around 1.4 billion $100 bills floating around. Today there are more than 7 billion Benjamins out there in the world -- $704 billion worth, according to figures from the Federal Reserve. The majority of those are held outside the country, the Fed estimates. The total value of cash currently in circulation, along with money in checking accounts, is just over $1.9 trillion.
Gallery: Bureau of Engraving and Printing in Washington, DC.
The other way the Fed "prints" money is more virtual: The Central Bank buys assets from banks with newly created "electronic money" to add credits to the account balances at those financial institutions. Voila, the banks now have more money, which means more money in circulation. This is also known as quantitative easing.
In either case, Economics 101 says that printing more money is a short-term fix to financial problems, and the downside to doing it is inflation. The more money there is in circulation, the less value a dollar has. And that brings us to current events, where one projection suggests the government will be at least $135 billion short to pay its bills for August if a deal is not reached. Which begs the question: Which is the bigger threat at this juncture, the risk of default or the risk of inflation?
Print more paper money, but manage the inflation, says economist Peter Morici. He is a professor at the University of Maryland's Smith School of Business and former chief economist at the U.S. International Trade Commission. He estimates that it wouldn't take much -- less than $200 billion in new currency -- to tide the government over.
"As the Treasury spent the money, the Fed would sell bonds to remove it from the money supply," Morici told DailyFinance. He wrote on July 5 in the Baltimore Sun:
The Treasury has the power print money to pay its bills. That would create the danger of too much money in the hands of the public and, thus, inflation, but the Federal Reserve has options to neutralize this problem. The Fed holds on its balance sheet about $2.6 trillion in securities, mostly Treasury bonds. As the Treasury prints money to pay its bills, the Fed could sell bonds to the public to keep the amount of money in circulation from rising. How? Remember that the money supply is currency the public holds in its wallets and deposited in checkbooks - but the statutory debt limit applies to Treasury bonds held by the public and the Fed.
In other words, even as the money supply rises, the sale of bonds would offset the currency boost and control inflation. However, inflation hawks, wary of additional quantitative easing, see this fix as a "further mask the underlying problems in the economy and prolong the malaise" according to an editorial in the Orange County Register.
Gallery: Fascinating Facts About U.S. Currency
