The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
It commonly is believed large federal deficits cause inflation. Examples often are given of Germany, China, Brazil, Italy and other nations that experienced hyperinflation.
So it might be useful to see what the experience in America has been. Here’s a graph created by the St. Louis Federal Reserve. The blue line is deficit growth. The red line is inflation.
In the past 50 years at least, deficit growth has not been associated with inflation.
Inflation is more closely related to special factors than to deficits; such things as oil shortages, wars and weather are the main culprits.
I do not suggest the government should create an unlimited amount of money, though it has the power to do so. In 1979, gross federal debt was $800 billion. In 2009 it reached $12 trillion, a 1400% increase in 30 years.
During that period, GPD rose 440% (annual rate of 5.5%) with acceptable inflation throughout. The same 1400% increase would put the debt at $180 trillion in 2039, a mean deficit of $5+ trillion.
This calculates to a 9.5% annual debt increase for the past 30 years. Repeating that growth rate would put the 2010 deficit at about $1.14 trillion, and the 2011 deficit at about $1.25 trillion.
The deficit for year 2039 would be about $15.8 trillion. I know of no reason why the results would not be the same as they have been in the past 30 years.
However, increasing the debt growth rate above 9.5% might show even better results. In the 10 year period, 1980 – 1989, federal debt grew 210%, from $900 billion to $2.8 trillion (a 12% annual debt increase), while GDP grew .96% from $2.8 trillion to $5.5 trillion (a 7% annual increase).
During that same period, inflation fell from 14.5% in 1980 to 5.2% in 1989.
In summary, large deficits have led to GDP growth, while not causing unacceptable levels of inflation. Those are the bare bones.
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