The US money supply as measured by cash in circulation and demand deposits (checking accounts) is currently about $1.4 trillion. If this year’s budget deficit is monetized, the money supply doubles. If next year’s budget deficit is monetized, the money supply would have tripled in two years. Inflation would explode. The combination of high unemployment and high inflation would be devastating.
In contrast, protecting depositors is not inflationary. It merely prevents monetary contraction.
If the Obama administration can think about socializing health care as a single-payer system, it should be able to think about socializing the banking system. Currently, Medicare is paid for by taxpayers, Medicare beneficiaries, healthy retirees, and doctors. Beneficiaries have to pay substantial premiums for supplemental coverage whether ill or healthy, and doctors are paid a pittance from the schedule of fixed prices. The insurers are the ones who make money, not the medical service providers. The single-payer system would shrink costs by the amount of the health insurance industry’s profits and the enormous paperwork and enforcement compliance costs.
When the production of goods and services for the domestic market is moved offshore, Americans lose income and the economy loses GDP. When the goods and services produced offshore return to be sold to Americans, they constitute imports that widen the trade deficit.
The US finances its trade deficit by turning over to foreigners ownership of existing US assets and their future income streams, which, of course, increases the flow of income away from Americans.
The claim, expressed by Obama at his press conference, that retraining programs are the solution to manufacturing and IT unemployment caused by offshoring is also ridiculous. For a decade the only source of American job growth has been domestic services that cannot be offshored, such as hospital orderlies, barbers, waitresses and bartenders. Retraining is simply a government subsidy to educational institutions, a subsidy that insures their continued support for offshoring.
The enormous trade deficit that has been created by the pursuit of short-term corporate profits can only be closed in two ways. One is to stop the offshoring and to bring home the offshored production. Possibly, this could be done by replacing the corporate income tax with a tax based on whether value added to a company’s output occurs domestically or abroad.
The other way the trade deficit can be closed is by the inability of Americans to pay for imports. If debt monetization wrecks the dollar and drives up import prices, Americans will have to learn to live with less imported energy and manufactured goods. American annual consumption would shrink by the amount of the trade deficit.
The Bush/Obama approach to the crisis in the financial sector is to monetize existing debt and to accumulate massive new debt that will likely also require monetization. The monetization threatens inflation, high interest rates, and depreciation of the US dollar and loss of its reserve currency role. The accumulation of new public debt implies larger annual interest payments that could make future deficit reduction problematic. Clearly, the Obama administration needs to broaden its perception of the predicament to which financial deregulation and offshoring have brought the US economy.