No, they are not borrowing from our grandchildren, they are just moving wealth around today.
The issuance of the treasury debt that allows the U.S. government to operate at a deficit requires the immediate transfer of wealth today, using dollars as the vehicle of wealth transfer. While it is clear who is receiving the wealth (the U.S. Treasury), it is not clear where the borrowed wealth came from.
Consider a simple, closed economy that consists of a single bank and one thousand people, with each person holding $1,000 in their respective bank accounts. 1000 x $1,000 = $1,000,000. There is no cash, so this one million dollars represents the whole money supply for this simplified economy.
Consider what happens when the bank creates credit and issues a loan by adding $10,000 to one person’s bank account, a simple edit to the bank’s ledger.
The money supply is now $1,010,000, a 1% expansion. About 1% of the money supply is held in the recently increased account that now holds $11,000, while the remaining 99% of the money supply remains in the other accounts.
While the issuance of this loan did increase the money supply, it did not increase the net wealth of the society. But dollars are fungible, so the newly created dollars are identical to the previous dollars, meaning that each dollar must stores the same amount of wealth. Which implies that the recently increased bank account now holds about 1% of the society’s wealth.
Note that wealth is not money, and money is not wealth. Money is used to store and transfer wealth, but it is not wealth.
The act of issuing this loan using fungible currency means that $10 worth of wealth was quietly confiscated from each of the other 999 accounts and consolidated as $10,000 worth of wealth into the newly created account.
With each dollar now storing about 1% less wealth than before, thanks to the 1% expansion of the money supply.
The issuance of debt, whether by a bank or the Federal Reserve, is accomplished by the expansion of the money supply, an opaque many-to-one transfer of wealth.
Money is not being borrowed from the future, wealth is just being shuffled around today, with the bank or the government deciding who is the recipient of this quietly confiscated wealth.
This invisible reallocation of wealth is not necessarily a bad idea, in fact, any modern economy relies on banks to optically allocate excess wealth in this manner.
The problem arises if this reallocation of wealth becomes excessive. By issuing this $10,000 loan, the other 999 people have $10 less to spend. One person making more decisions pertaining to the optimum allocation of wealth, everyone else making less.
Is this a good idea?
How many wealth eggs should be placed in a single basket?