In an attempt to cleanse themselves of the effects of massive debt accumulation – which would be higher prices – democrats including House Speaker Nancy Pelosi and President Biden himself have been parroting a new narrative that government spending does not cause higher prices; i.e. inflation. Going off of traditional economic definitions, inflation is the expansion of the currency supply. Higher prices are often a symptom of an expansion of the currency supply. The currency supply increase occurs when government increases the debt by such a large amount that they require the central bank to make up the difference.
The government receives currency (in digital form) by issuing government bonds which many see as a financial investment. An individual, business, or other government can purchase government bonds which pay an interest rate to the investor. The government treasury department trades a bond to the buyer for their currency, with which the treasury can now use to pay for the many salaried workers who the government employees. When there aren’t enough buyers of bonds that will allow the treasury department to provide all of the payments that government has promised, the government turns to the Federal Reserve to make the remaining purchases. The Federal Reserve gets the currency to purchase the bonds by creating it out of thin air. This new currency creation is inflation, and as stated inflation usually leads to higher prices.
Since the covid pandemic began in 2020 the Federal Reserve balance sheet – which is mainly the amount of government bonds that they possess – has doubled from $4 trillion to $8 trillion. That $4 trillion increase can largely be attribute to the two massive stimulus packages that government has passed through congress in the name of a national emergency. First during the Trump administration just weeks after the shutdowns began in 2020, and then one during the Biden administration shortly after he became president. It reminds me of the 2008-2009 financial disaster when an outgoing George W. Bush passed a “rescue package” before leaving office, only to have an incoming Barack Obama due the same as soon as he entered office. Both parties need to eat, and those not in government are the ones that do the feeding.
The increase of $4 trillion of currency by the Federal Reserve went directly to the Treasury department who has given some of the money to the public in the form of stimulus checks, but has kept a far greater amount for themselves in the form of government expansion and government contracts to their favorite private companies. When government chooses who gets revenues you can be shore that plenty of waste is left behind in the process in the form of broker kick-back fees and inflated salaries to those in the government family. This is important because the one caveat to Pelosi’s comment that government spending is reducing national debt would be if the increased debt was being invested and spent so wisely that in time it was increasing national output which in turn was leading to so much extra tax revenues that the debt was actually being reduced. This wouldn’t happen immediately, but more importantly it is not going to happen at all because the money isn’t being spent wisely and never is when government is in charge of it and handing it out to their preferred people. The free market is much more qualified to make decisions how investment money is spent to provide a better economy for the country.
Getting back to basics, government spending causes an increase in the national debt. The national debt can be viewed as a national credit card with a very high balance. When the government decides to increase spending by increasing the size and scope of government through advertised rescue packages or bail-out funds, they are increasing the credit card balance. If government didn’t increase spending, or even reduced spending, then the national debt would grow at a slower pace. There is no way in which government spending reduces the national debt. Pelosi’s comment is either a deliberate lie or she is very confused on simple economic principles. My guess is both.