President Biden and his team have announced that about $1.9 trillion of additional money is needed due to the problems caused by the current pandemic.  That is about 9% of the size of the entire US economy — anyway you think about it, that is a big deal. The benefits of that are fairly well articulated by the administration, but because many on the right seem to think that this is too big, we need to analyze the arguments against it.

One argument is that as our nation spends more money, we accumulate a debt which must be “paid off” someday. That is not the case:

1. When we spend money, we give people dollars. Those dollars are notes, stating that the Federal Reserve (the central bank of the United State of America, which for practical purposes, represents the United States of America) owes money. You, or someone from China, or anyone can indeed take a twenty dollar bill to the Fed, and ask to be paid off. They will give you a choice of 4 five dollar bills, or 2 ten dollar bills. There is no other underlying thing that you can demand. So there is no sense that someone can demand that any or all of the national debt be paid off. (The borrowings by the Treasury, are essentially the same thing as money, except that they will be transformed into regular dollars on some specific date in the future.)
2. The United States of America is NOT run exactly like your household. You take in dollars from your pay or from earnings on your investment, or from gifts from your parents, etc. You can spend your dollars or save them. If you don’t have enough, you can use your credit cards up to your limit, but you can’t create dollars out of thin air. The Federal Reserve, on the other hand, can create dollars out of nothing. And in fact, the number of dollars in existence (the total value of all of the paper currency, plus everyone’s checking account balances, plus a few other similar things that are collectively called M1) has risen from around four trillion dollars to around seven trillion dollars in the last year. Do you feel like you have 75% more wealth than you did last year? Actually some people (rich investors who own parts of businesses) do, but that is another story.
3. Of course, if many trillions of dollars are created, they will decline in value: If the government gives everyone a billion dollars, you may lose interest in working for $15 per hour, or $30 per hour, or $30 thousand per hour. This is what many people are arguing: that if the government spends too much money responding to the covid crisis, we’ll have out of control inflation.

But for inflation to reach that point, the government would have to create a lot more than $7 trillion. In fact, it would require somewhere around 300 million trillions of dollars. 

At the current rate of increase, we will have that much in around fifty thousand years. We are not close to having the kind of inflation that scares people (like the Weimar Republic, in the 1920s). As a society we’ve started to recognize that deficit fearmongering is unnecessary and bad, but we can’t let it be replaced by inflation fearmongering.

In fact, some people BENEFIT from inflation. You might be one of those people. Do you own a house? Perhaps with a mortgage? Inflation makes prices go up for all kinds of everyday things: gasoline, milk, shoes.  But also wages, and houses.

If inflation rises, say from the 2% or so that we have been experiencing to 6% or so, then you might think you are more-or-less equally as well off as you were before as long as your wages go up by about the same amount as the prices of things that you buy.

Not so.

If you are a rich guy, and you have invested in conservative investments, like government bonds, the interest you earn will not go up at all, and your bonds will decline in price. You could be a lot worse off.

On the other hand, if you work for a living and you reside in a house that you bought with a mortgage, you could be a lot better off.

Say you saved up $80,000, and you bought a $400,000 house.  You might have a mortgage payment of around $1,000 per month.

• Your mortgage payment does not go up with inflation. So you could see an expense that is equal to a quarter of your pay stay the same while your pay goes up.
• You are leveraged in your house investment. Even though you only invested $80 thousand in my example, the entire $400 thousand house rises in value. Six percent is $24 thousand, which is a huge return on the $80 thousand investment.

Similarly, if you’re in debt, the size of that debt doesn’t increase with inflation. It stays the same. But because your wages are likely increasing with inflation, your ability to pay that debt increases.

That is why traditionally, family farmers and wage earning homeowners supported policies that would lead to more inflation — Wall Street bankers and retired investors have been for policies that lead to less inflation.

This isn’t to say that all levels of inflation are good. A relatively stable dollar value is an essential part of the American economy’s stability. But there’s no reason for us to cripple our economy just to avoid a few percentage points of inflation that may actually benefit a significant number of Americans.