Why Doesn’t the Government Simply Give Households Lots of Money to Stimulate the Economy?

money; via Flickr

Question: One of the most popular suggestions I’ve heard for stimulating the economy is the federal government should give every household one or two million dollars. Would that work or would it create hyperinflation?

Paul Solman: Let’s not be profligate here, so stick to a measly $1 million per household. There are something like 110 million households in the United States. That’s $110 trillion dollars right there, before my wife and I set up independent “households” so we can get $1 million each.

Right now, with its projected budget deficit of about $1 trillion for 2009, the United States already seems to be spooking the investors of the world, who have united in demanding higher interest rates on U.S. debt. The Treasury now has to pay almost 4 percent to borrow money for 10 years (via 10-year bonds) and about 5.5 percent for 30, driving up the cost of mortgages, for example, which threatens to wither the green shoots of recovery. That’s why Obama is talking about “pay-as-you-go” budgeting: It’s a way to assuage America’s creditors.

So, now we distribute $110 trillion dollars to Americans, increasing the deficit a hundred-fold (or, if you prefer, by 11,000 percent). What might happen to interest rates THEN?

You’re right, of course. The reason is the fear of hyperinflation. I won’t lend you a hundred dollars today, to be paid back 10 years from now, at an annual rate of 4 percent if I think the U.S. dollar is going to lose more than 4 percent of its purchasing power every year. Right now, the total U.S. debt is around $10 trillion. There’s another $1 trillion or so in currency. How secure would YOU feel about the purchasing power of the dollar if the total suddenly multiplied by 10?