But only after private wealth is transferred into public debt. It's a closed loop, although some of this debt is used merely to rollover previous debts so that the total public debt gets bigger and bigger and creates a serious financial imbalance at some point. Debt is raised by selling Treasury notes, bills, and bonds for real money (M2). It is not (and by law cannot be) purchased by the Fed with newly created fiat money. Bank loans (new money) are extended to the private sector, not to the US Treasury. The problem is that our debt-as-money money supply ultimately rests on a base of--more debt! In theory, if every outstanding debt could somehow be repaid, the money supply would shrink to zero. Intangible money that started as bank loans would be canceled off the ledger as it was repaid, and the greenbacks (Fed notes, read the print) would ultimately end up back at the Fed.
Even our physical greenbacks are "Federal Reserve NOTES," a debt instrument. It's all loaned into existence, a system first developed in France 300 years ago by the notorious financial speculator John Law and sometimes called the "John Law system." It ended in disaster, but now we are trying it again. Our whole money supply is an upside pyramid of debt which is only sustainable so long as the supply of new debt to service the old debt continues to grow. A Ponzi scheme of debt. This is why the Fed, although it has very few tools to do so, is desperate to prevent deflation.
If deflation started and continued for very long, it would precipitate a debt pyramid implosion. The money supply, most of which does not have even a paper basis, would collapse, and there would not be enough money remaining in the economy to service the huge quantity of existing private and public debt. More defaults would ensue, shrinking the money supply further, etc., etc. Thus, we cannot let private debt stop growing, which means we cannot let the GDP stop growing (at least not for long), which means we can never allow the energy supply (which fuels GDP growth, literally) to stop growing, at least not for more than a short time. We are trapped in an exponential growth model that cannot be allowed to stabilize--ever.
In the 19th century, with a gold-backed currency, the economy would cycle between periods of inflation and deflation (cycles of debt expansion and debt repayment), with prices flat on average. Now we must avoid net debt repayment at any cost--at least in the private sector. The US gov, which is not funded with bank loans, could reduce its debt if it were politically feasible, but that is yet another problem.
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