Basically, the liberal left believes that the federal debt doesn’t matter, hence they could care less if their spending increases go on forever. All they want is to remain in power as long as possible. They love their gravy-train life within the Washington bubble. A chance to get wealthy and powerful.
But as the years go on, and the debt piles on, there will come a day when it does matter, and it will matter greatly. The end-point could be cataclysmic. Fortunately, we aren’t there yet, or even close, but why should we tempt fate by ignoring the warnings? The current course of running up the debt eventually will cause rising interest rates and runaway inflation. Then, the value of our dollar will collapse, and the economy will tank. Like in the 1930s Great Depression, but worse. Yet we have in our country a growing number of the electorate who don’t believe debt is a problem. And for them, there is an unending supply of politicians eager to fulfill their wishes. Currently, these politicians are putting up arguments for free health care, free college, and free things ad nauseam and placing their wants and desires on the altar of an illusion headed for our destruction.
Of course, there will always be politicians willing to say anything to get elected. And for those already elected, no matter how wise they may have been in the past, with time they all become corrupted. (Thomas Jefferson)
Washington set the precedent of an eight-year term, which became an amendment to the Constitution following President Franklin Roosevelt’s four elections. Why not limits terms for the Congress? Unfortunately, once elected, life for them gets too easy. Wealth and power are too intoxicating and once addicted, they just won’t change. Until we the people amend our Constitution, this won’t happen. Constitutional amendments can begin either in the Congress or start in state legislatures. People, put pressure on your state legislatures to demand Constitutional amendments; term limits for Congress, and mandatory balancing of the federal budget.
What amazes me beyond belief is that today, in addition to many in the Congress unconcerned with the federal debt, there is a large body of academics who also profess that government debt doesn’t matter. It’s the same crowd that fervently believes in Keynesian theory, and they have a name for their belief. They call it Modern Monetary Theory, abbreviated to MMT. To this group, government debt is not a problem. We find this group in the left wing of the democratic party. They believe that all government problems can be solved by printing money; to end unemployment, to give out free this and that, and yet keep inflation under control. That, in spite of the hyperinflation following MMT-like policies in Weimar Germany, Zimbabwe and Venezuela. This is truly insane.
These academics and left-leaning politicians cite the WW II experience where the country ran budget deficits of 20% of GDP without inflation but they fail to mention the need to use rationing, wage and price controls, and financial repression. More relevant to today is the experience of the 2008 monetary crisis. The government budget deficit ballooned. First, two wars caused buildup of federal debt, followed by President Obama’s spending, but instead of setting off hyperinflation, we got deflation and falling interest rates. Bank reserves expanded by 100 times, yet Americans stopped spending as interest rates fell and the economy shrank. It was the worst financial calamity since the Great Depression. We came to call it the Great Recession.
Why didn’t the Obama plan set off rising inflation? Inflation, as Milton Friedman put it, occurs when too much money is chasing too few goods. The MMT-economists reject this explanation. They argue that inflation is caused by “bottlenecks” in specific sectors. Hence, they point to health care, housing, and education. Their solution to inflation is more government regulation of economic activity. They believe it is unnecessary to raise taxes to cover huge government spending, but instead, want more regulation of big business for the public purpose. Here is one example; they promote the big Green New Deal with tighter environmental regulation that will cause decreasing employment in the polluting industries, to be offset by higher spending in alternative-energy projects with lower-paid employees.
Now, here is what really happened with monetary policy as a result of the 2008 Great Recession. The Fed and the Obama administration embraced “monetary stimulation.” They spent dollars they didn’t have. Since injecting new money into the economy increases the money supply which causes inflation, the Fed and its chairman Ben Bernanke came up with “quantitative easing” and the Federal Reserve bought up vast quantities of Treasuries and mortgage-backed securities from banks while injecting cash into the economy by building infrastructure projects, reducing taxes for the lower brackets and extending unemployment benefits. Then the Fed used its muscle and a tax-payer subsidy to keep most of the money locked up in excess-reserve bank accounts so it wouldn’t get loose and cause runaway inflation. The Fed prevented the inflation that would be expected, but the economy didn’t get much stimulation from the money locked up, because banks had less money to loan out, and a big portion of our money grows by banks’ lending to businesses and consumers. Instead of “stimulation,” we got eight years of meager growth, wage stagnation, and a shrinking labor force. What the Fed mainly “accomplished” with a zero-bound interest rate was to starve savers and pension funds of adequate returns, driving them into higher risks, and to give government nearly free credit, which Congress grasped eagerly to balloon the national debt.
While the Fed has the power to create money, money doesn’t have inherent value. It is simply a measure of exchange and a measure of value, and often not a stable one; especially since politicians broke its final ties to gold in 1971. Eight years after 1971, inflation soared into double digits. Now the Fed shoots for 2% inflation. A currency inflating at 2% loses half its value in a generation. This can hardly be called stable money.
Today the Fed is trying to unwind all the money they added to their balance sheet. It is proving to be difficult. Meantime, while we are enjoying prosperity, the left-leaning politicians seeing that we didn’t get significant inflation from the Obama years of massive spending, now believe that the debt doesn’t matter, and they spend and spend, and the debt piles on; $22.8 trillion now (2019). The annual budget deficit today is $900 billion. It will surpass $1 trillion by 2022. The federal debt is currently 78% of GDP. By 2028, it is projected to be 100% of GDP and still rising.
The Fed today has never had less control over interest rates in its 105-year history. As long as the Fed maintains its bloated balance sheet and the banking system holds massive excess reserves, it will have to resort to new methods to hold interest rates above or below market rates as needed, and this is not only improbable but dangerous.
The real danger of tolerating rising inflation is its close cousin of extreme speculation and risk-taking that comes with artificially low interest rates. It is in effect standing by while bubbles and excesses threaten the markets. The Fed should stop encouraging speculation and concentrate on price stability and prudent oversight of the financial system. The Fed influences interest rates but has little control over them. Let’s stop our obsession with the Fed and direct more attention to Congress and the president.
For those wishing for more detail, I paraphrase from John Greenwood and Steven H. Hanke, Wall Street Journal, 6-5-19:
Today, a craze to circulate among the chattering classes, is a theory of fuzzy, post-Keynesian theory that has caught on in anti-austerity circles, called MMT (Modern Monetary Theory), better called Magical Monetary Theory, Japan went down this road starting in 2008 with deficit spending when its government deficit was 2% of GDP. The government deficit exploded, and today the Japanese debt has risen from 60% of GDP to 235%. Economic growth in Japan today is at 0.9%, and they are trapped in deflation. Understanding Japan and other economies require classical monetary theory, not MMT nostrums. Japans economic growth 1974-84 was a golden period with generally stable broad-money growth, steady real GDP growth, and low inflation. Then monetary policy was derailed by the 1985 Plaza Accord and the 1987 Louvre Accord. The bank of Japan dropped monetary targets and began to focus on interest-rate targets. The result was Japan’s disastrous bubble from 1987-90, followed by a so-called lost decade, which has turned into a lost generation. But, interest rates follow inflation; they don’t precede it. That is why economies experience high rates of inflation, like Argentina and Turkey, while Japan and the Eurozone have low or negative rates. The circle can only be broken by increasing broad-money growth. The best way to do that would be for the central bank to purchase securities from nonbank institutions such as insurance companies and pension funds, creating new deposits. Instead, most of Japan’s securities purchases currently come from banks leaving banks with less money to lend out, and their broad money growth remains anemic.
In the U.S. from 1971-82, money-supply growth averaged 11.6% per year, and government debt was only 40.1% of GDP. Today the U.S. faces the opposite. Broad-money growth averages 4.5% a year while federal, state, and local debt is more than 100% of GDP.
MMT advocates would have you believe that government can run deficits without limit as long as financed with securities denominated in their own currency—at least until inflation takes off. What they fail to understand is that budget deficits have nothing to do with inflation, unless they are financed by rapid broad-money growth. Money dominates economic trends, and classical monetary theory tells us why. Beware of those peddling MMT snake oil.