July 31, 2019

I am not going to name any of them but many conservative writers have recently posted strong criticisms of the Trump/Pelosi spending deal

The spending being envisaged goes far beyond  what taxes will bring in so where is the money coming from?

There are two answers to that:  Borrowing money and simply printing any extra money you need.  But you can't do that! many people will say.  You just can't print money willy nilly!  Sadly, you can -- if you are President of the United States or some other country.  And ever since the gold standard was abolished, all governments have been doing just that.  Normally, however, governments are pretty cautious about how much new money they create. Milton Friedman's recommendation that the money supply should be expanded by no more than 4% p.a. is normally somewhere in the ballpark.

Obama, however, really got the bit between his teeth and created a huge pile of new money.  He was no Friedmanite and if he wanted to spend money on something he spent it.  And the media stayed Shtumm about it.

Now normally, that should have created galloping inflation.  The buying power of the greenback should have dropped sharply.  In Weimar Germany, Zimbabwe and Venezuela that has happened.  Runaway spending shot all prices up to previously unimagined levels, which completely destroyed people's savings.  Even big savings could no longer buy much.  Money that could once have bought a car might now only buy you a cup of coffee.

So why has that not happened in the USA? That's the big question.  Economists have no clear answer to it.  Some of the new money has gone into increased real estate prices and some has gone into historically low interest rates and some has gone into increased reserves held by financial institutions but there must be something more.  But what? And how long will the party go on?  Nobody knows.

But Trump is a qualified economist so he can see clearly what has happened and has decided that he will join the party.  He has decided that Obama must not have all the fun.  So he is in fact set to outspend Obama, which gives all conservative economists severe heartburn.

So is he wrong?  Is he building up a financial disaster for all Americans? Conventional economic theory says he is but actual practice in the Obama era says he isn't.  We are in an era of great gaps between economic theory and economic reality.  But that gap does create an opportunity for "free" infrastructure spending.  Obame spent the "free" money he created on gifts to Iran etc. So big infrastructure spending is at least a lot better than that.  Trump is simply using the time-out from economic orthodoxy on projects which will have lasting value.  He is very canny to have seen the opportunity and seized it.  He should be congratulated, not condemned for his wise spending.




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