Religion & Liberty Online

The moral deficit of inflationary spending

(Image credit: Associated Press)

The Judeo-Christian tradition is against harming the poor and the voiceless (the young in this situation. Thrift, responsibility (ethical and financial), and honesty have been hailed as virtues from time immemorial. With inflationary deficit spending, the government embodies none of these virtues, and does so to our moral and economic deficit.

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Spending! Relief! Infrastructure Investment! Build Back Better!

These are words and sayings that have been bandied about throughout the past year. Anyone with a basic interest in the news cycle is bound to have heard that the federal government has proposed plans to spend trillions of dollars. Whether for stimulus checks, COVID-19 relief, business loans, or infrastructure upgrades, the government has offered to “pay” for it.

The stated goal of this spending is to help people materially in light of the pandemic. However, after massive COVID-19 relief spending, real hourly earnings decreased 0.2% from April to May 2021. If the goal and purpose was to help people financially, then why has all of this spending coincided with a decrease in real earnings?

To make sense of this seeming paradox, we need to ask: where will this money come from, as well as what the end result we be?

The answer? The money will come from excessive deficit spending, and the result will be inflation.

To proceed, we need a better understanding of the nature and effect of deficit spending and inflation.

In Alan Greenspan’s 1966 essay, “Gold and Economic Freedom,” the former head of the Federal Reserve, wrote some incisive statements on deficit spending and its subsequent inflationary effects. What makes the essay so valuable is that it was written by a former critic of deficit spending before he became a central banker (i.e., a deficit spending financier).

Greenspan states that:

Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets.

Greenspan is arguing that, with a gold standard, the government could really only spend what it collected through direct taxation or what it held in the Treasury. That is, the government had to spend money like any normal household. Now, however, without a gold standard, the government sells bonds to the Federal Reserve, which then buys the bonds. Once the Federal Reserve buys the bond, the Treasury can print the monetary value of the bond.

It is important to note that what the government “sells” in the bond is an IOU, which it promises to pay from future tax revenue from future generations. In short, it puts a financial/tax burden upon people who have not consented to this kind of spending.

Too often, the result of this kind of deficit spending, is inflation, which can be considered ‘a form of taxation’ and ‘theft.’ It is a tax because inflationary deficit spending is a way for the government to get revenue, which consumers pay for by higher prices. It is theft, because, through a sleight-of-hand trick, it takes away from the value of your wealth (as held in and expressed by monetary units).

Greenspan puts it this way:

As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

Greenspan went so far as to say that without a gold standard “there is no way to protect savings from confiscation through inflation,” and that “[d]eficit spending is simply a scheme for the confiscation of wealth.”

Moreover, as a tax, it is a flat-regressive tax that disproportionally affects the poor: They have fewer savings and are still paying the same (inflated) prices as middle- and upper-class people. If inflation is at 5% across the board, people with large savings have more money with which they can cover the cost of inflation, whereas a poor family has fewer reserves to draw upon.

The Judeo-Christian tradition is against harming the poor and the voiceless (the young in this situation. Thrift, responsibility (ethical and financial), and honesty have been hailed as virtues from time immemorial. With inflationary deficit spending, the government embodies none of these virtues, and does so to our moral and economic deficit.

Ryan Ferries

Ryan Ferries is a member of the Acton Institute’s 2021 Emerging Leaders class. He is a graduate student at Corban University where he earned a bachelor’s degree in Biblical Studies and a Masters of Divinity. Ryan enjoys reading about Austrian economics, reformed & puritan theology, and ancient Semitic religion. His other interests include progressive rock music and East Asian cinema.