The Senate failed to pass a $2 trillion stimulus package today. Speculation is that the bill will pass sometime in the coming week. But whether or not you believe the country needs an extra $2 trillion injected into the economy, it’s important to understand that these stimulus packages don’t work the way most of us assume they work.
Many people think stimulus means the government is handing out wealth. But really, it’s just the opposite: the government is handing out debt.
When I talk to my friends about the pitfalls of government stimulus, even my good friends (who are semi-motivated to listen out of politeness) glaze over. I might as well be speaking a different language; “Darmok and Jalad at Tanagra.”
Or in this case, “Burning the Reichsmark in the Ruhr.”
Obviously the federal government doesn’t have an extra $2 trillion lying around, so it will be handing out newly printed money. The problem with printing $2 trillion is that nobody saved this money.
If you simply print new money, you’ve produced debt. It’s not wise and it’s not capitalism. The whole point of capitalism (a system based on saved resources) is that you have to save some capital to produce wealth.
Why should we care about this? Because if this latest stimulus passes, we will owe ourselves (as a country) another $2 trillion. And if we don’t pay ourselves back directly, we’ll pay indirectly as our dollars lose value.
The dirty secret of monetary inflation is that each new dollar injected into the economy dilutes the dollars that are already there. Imagine your economy contains 10 dollar bills. You then print a new dollar to inject into the economy as stimulus but there is no extra dollar’s worth of food production or some new invention taking place. That new dollar is worthless and your economy’s 10 dollars worth of wealth are now represented by 11 dollars. As a result, each dollar is now worth about 91 cents.
This is not a sustainable way to “stimulate” an economy. Eventually, the economy’s dollars will be worth so little that hyperinflation becomes more and more likely.
In 1923, when Germany from the Ruhr Valley to Weimar experienced hyperinflation, people would order a cup of coffee that would double in price in the time it took the waitress to pour it. The photo below shows a German woman warming her home by burning the worthless, hyperinflated currency. “Burning the Reichsmark in the Ruhr.”