crisis, when interest rates had been driven to 0%. This creating of the debt and money is now happening in
amounts that are greater than at any time since World War II.
To be clear, central banks’ “printing money” and giving it out for spending rather than supporting spending with
debt growth is not without its benefits—e.g., money spends like credit, but in practice (rather than in theory) it
doesn’t have to be paid back. In other words, there is nothing wrong with having an increase in money growth
instead of an increase in credit/debt growth, provided that the money is put to productive use. The main risks of
printing money rather than facilitating credit growth are a) market participants will fail to carefully analyze
whether the money is being put to productive use and b) it eliminates the need to have the money paid back. Both
increase the chances that money will be printed too aggressively and not used productively so people will stop
using it as a storehold of wealth and will shift their wealth into other things. Throughout history, when the
outstanding claims on hard money (debt and money certificates) are far greater than there is hard money and goods
and services, a lot of defaults or a lot of printing of money and devaluing have always happened.
History has shown us that we shouldn’t rely on governments to protect us financially. On the contrary, we should
expect most governments to abuse their privileged positions as the creators and users of money and credit for the
same reasons that you might do these abuses if you were in their shoes. That is because no one policy maker owns
the whole cycle. Each one comes in at one or another part of it and does what is in their interest to do at that time
given their circumstances at the time.
Because early in the debt cycle governments are considered trustworthy and they need and want money as much or
more than anyone else, they are typically the biggest borrowers. Later in the cycle, when successive leaders come
in to run the more indebted governments the new government leaders and the new central bankers have to face the
greater challenge of paying back debts when they have less stimulant in the bottle. To make matters worse,
governments also have to bail out debtors whose failures would hurt the system. As a result, they tend to get
themselves into big cash flow jams that are much larger than those of individuals, companies, and most other
entities.
In other words, in virtually all cases the government contributes to the accumulation of debt in its actions and by
becoming a large debtor and, when the debt bubble bursts, bails itself and others out by printing money and
devaluing it. The larger the debt crisis, the more that is true. While undesirable, it is understandable why this
happens. When you can manufacture money and credit and pass it out to everyone to make them happy, it is very
hard to resist the temptation to do so.3 It is a classic financial move. Throughout history, rulers have run up debts
that won’t come due until long after their reign is over, leaving it to their successors to pick up the pieces.
How do governments react when they have debt problems? They do what any practical, heavily indebted entity
with promises to give money that they can print would do. Without exception, they print money and devalue it if
the debt is in their own currency. When central banks print money and buy up debt that puts money into the
financial system and bids up the prices of financial assets (which also widens the wealth gap because it helps those
with the financial assets that are bid up relative to those who don’t have financial assets). It also puts a lot of debt
in the hands of the central bank, which allows the central bank to handle the debts however they see fit. Also their
printing of the money and buying the financial assets (mostly bonds) holds interest rates down, which stimulates
borrowing and buying and encourages those holding these bonds to sell them and encourages the borrowing of
money at low interest rates to invest it in higher-returning assets, which leads to central banks printing more
money and buying more bonds and sometimes other financial assets. That typically does a good job of pushing up
financial asset prices but is relatively inefficient in getting money and credit and buying power into the hands of
those who need it most. That is what happened in 2008 and has happened for most of the time since until just
recently. Then, when the printing of money and the central bank’s buying up of financial assets fails to get money
and credit to where it needs to go, the central government—which can decide what to spend money on—borrows
money from the central bank (which prints it) so it can spend it on what it needs to be spent on. In the US the Fed
announced this plan on April 9, 2020. This approach of printing money to buy debt (called debt monetization) is
vastly more politically palatable as a way of getting money and shifting wealth from those who have it to those
who need it than imposing taxes, which leads taxed people to get angry. That is why in the end central banks
always print money and devalue.
When governments print a lot of money and buy a lot of debt so the amounts of both money and debt increase,
they cheapen money and debt, which essentially taxes those who own it to make it easier for debtors and