Myths About Quantitative Easing
Some of the money for these government expenditures has come directly from "money printing" by the central bank, also known as "quantitative easing." For over a decade, the Bank of Japan has been engaged in this practice; yet the hyperinflation that deficit hawks said it would trigger has not occurred. To the contrary, as noted by Wolf Richter in a May 9, 2012 article:
[T]he Japanese [are] in fact among the few people in the world enjoying actual price stability, with interchanging periods of minor inflation and minor deflation--as opposed to the 27% inflation per decade that the Fed has conjured up and continues to call, moronically, "price stability."
He cites as evidence the following graph from the Japanese Ministry of Internal Affairs:
Japan Annual Change in CPI by Ministry of Internal Affairs
How is that possible? It all depends on where the money generated by quantitative easing ends up. In Japan, the money borrowed by the government has found its way back into the pockets of the Japanese people in the form of social security and interest on their savings. Money in consumer bank accounts stimulates demand, stimulating the production of goods and services, increasing supply; and when supply and demand rise together, prices remain stable.
Myths About the "Lost Decade"
Japan's finances have long been shrouded in secrecy, perhaps because when the country was more open about printing money and using it to support its industries, it got embroiled in World War II. In his 2008 book In the Jaws of the Dragon , Fingleton suggests that Japan feigned insolvency in the "lost decade" of the 1990s to avoid drawing the ire of protectionist Americans for its booming export trade in automobiles and other products. Belying the weak reported statistics, Japanese exports increased by 73% during that decade, foreign assets increased, and electricity use increased by 30%, a tell-tale indicator of a flourishing industrial sector. By 2006, Japan's exports were three times what they were in 1989.
The Japanese government has maintained the faÃ§ade of complying with international banking regulations by "borrowing" money rather than "printing" it outright. But borrowing money issued by the government's own central bank is the functional equivalent of the government printing it, particularly when the debt is just carried on the books and never paid back.
Implications for the "Fiscal Cliff"
All of this has implications for Americans concerned with an out-of-control national debt. Properly managed and directed, it seems, the debt need be nothing to fear. Like Japan, and unlike Greece and other Eurozone countries, the U.S. is the sovereign issuer of its own currency. If it wished, Congress could fund its budget without resorting to foreign creditors or private banks. It could do this either by issuing the money directly or by borrowing from its own central bank, effectively interest-free, since the Fed rebates its profits to the government after deducting its costs.
A little quantitative easing can be a good thing, if the money winds up with the government and the people rather than simply in the reserve accounts of banks. The national debt can also be a good thing. As Federal Reserve Board Chairman Marriner Eccles testified in hearings before the House Committee on Banking and Currency in 1941, government credit (or debt) "is what our money system is. If there were no debts in our money system, there wouldn't be any money."
Properly directed, the national debt becomes the spending money of the people. It stimulates demand, stimulating productivity. To keep the system stable and sustainable, the money just needs to come from the nation's own government and its own people, and needs to return to the government and people.