“It’s Just Made Up Money”

Kevin Drum has excised another section of the now-famous leaked fundraiser video, and this time the GOP challenger is holding forth on quantitative easing and other subjects. Drum picks on Romney’s specific claim that the government is buying three-quarters of US treasury debt, but there’s something in this quotation that’s more fundamentally off:

We’re living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who’s loaning us the trillion? The Chinese aren’t loaning us anymore. The Russians aren’t loaning it to us anymore. So who’s giving us the trillion? And the answer is we’re just making it up. The Federal Reserve is just taking it and saying, “Here, we’re giving it.” It’s just made up money, and this does not augur well for our economic future.

The problem here is that Romney’s “fantasy” world, in which the government “makes up” money, is just a roughly accurate description of fiat money.  And if you’re rooting around in the text of Obama’s American Recovery and Reinvestment Act for the dastardly provision that created this new “feeyat” money thing, don’t waste your time—it’s been around for a long, long time.  If you’re interested in the actual history of money, as opposed to the “we used to have real money before January 2009″ version, this working paper gives a nice rundown of the anthropological and historical material and lays out the economic policy upshot.

Whether it’s buying three-quarters of new treasury debt or a tiny fraction, the Fed is always using “made up money.”  And in theory (which is to say, aside from the various legal obstacles placed in its way), the Fed can buy as much US treasury debt as it wants, because it can never exhaust its ability to “make up” more money.  Don’t believe me?  Ask Alan Greenspan:

To the extent that there’s a real policy limit to this, it’s not that the Fed will somehow run out of money, but that at some point, when the economy is closer to running at full capacity, buying US debt to keep interest rates low could lead to inflation.  But inflation, for now and the near future, just isn’t a significant problem.  (On the contrary, the current challenge is to figure out how to get more of it.)

There are plenty of things to worry about in our current economic situation.  Unemployment would be pretty close to the top of the list.  Fiat money should not be.