I am not going to spend a whole lot of time arguing as to why printing up 12 trillion dollars in freshly minted currency in order to pay off all of our bonds would cause insane inflation.
Because once you accept that bonds are basically as good as cash you'll realize why your arguments make no sense.
However, if its as easy as you say then why can't the .gov make the entire world rich? If every country that has a fiat currency did what you suggest then we could all loan each other money, print up some new money, pay each other off and we would all have a fuckton of new money.
I never said the gov't can't cause inflation, I'm saying that deficits don't concern me when capacity utilization is low and inflation is low.
Bonds are not necessarily guaranteed new cash in the system at some future date.
Yes, they are. The government can always pay back the bonds in cash as the government is never cash constrained (they do, after all, create it). I'm including the Fed as part of the gov't because realistically, they are.
The cash was already infused into the system when we borrowed the money and spent it.
The US gov't doesn't borrow money. Imagine this, if you created the currency used in your neighborhood, and had the power to tax your neighbors, why would you need to borrow your IOU from your neighbor to give an IOU to your other neighbor?
http://www.youtube.com/watch?v=4J0j5VwnD7I&feature=related
We must then remove that amount of money, plus interest, to pay it back at some point which transfers the cash back to the original holder. In real simple terms, we are borrowing someone elses saved productivity and guaranteeing to pay them back with our future productivity. If there is no value or productivity behind a dollar then it is quite literally worthless.
The government doesn't need to remove money to pay it back to the original holder. There is nothing stopping the government from crediting the holder's account with money it just created. This is why government bonds are nearly risk free, the government CAN ALWAYS pay you back. The reason this doesn't necessarily effect inflation is because the holder knows this as well. The market knows that the treasuries that exist are as good as cash. If the government dropped billions of dollars from a helicopter tomorrow, cash would be just as worthless as most treasuries.
Don't get me wrong, you are correct on some points but your conclusion is way off. If you are correct then we wouldn't be spending a ton of money on interest payments every year.
There is a reason. The interest paid on treasuries helps to set interest rates throughout the entire market precisely because treasuries have a baseline risk (they will always be convertible into cash at some point). Other interest rates can then be set upon the interest rates of treasuries plus some risk premium. This is how the government tries to manipulate interest rates.
We need to be clear on this. There is no inherent reason the government has to borrow money to spend it. If the government spends enough money that inflation becomes an issue, it can tax excess from the market.