What $31 Trillion Looks Like Through the MMT Lens
You may have heard that the US debt just reached its highest level in history. THIRTY ONE TRILLION DOLLARS! “Run for the caves!”, as someone at CBO once joked in a meeting I attended in 2015.
The New York Times marked the occasion with this article yesterday, and CNN ran a full segment talking about what it all (supposedly) means for everyday Americans early this morning. (I’m having trouble finding a link to the latter, but I watched it live.)
In both cases (and in countless other places), we’re told a grim story about how wrecked America’s finances are, and how something must be done to douse the flames of the “fiscal fire” before our “nation’s fiscal woes” get even “worse.”
The Times article opens with this dinger of a passage:
America’s gross national debt exceeded $31 trillion for the first time on Tuesday, a grim financial milestone that arrived just as the nation’s long-term fiscal picture has darkened amid rising interest rates.
Believe it or not, it goes downhill from there.
I have been battling against debt and deficit scaremongering for more than two decades. Here’s what I wrote back in February, when the total supply of US Treasuries—aka “the national debt”— surpassed $30 trillion. Please look at what I wrote then. You can also watch the presidential lecture I delivered at Stony Brook University back in 2018. If you watch that lecture, you’ll see what “government debt” and “fiscal deficits” look like when you view them through the lens of MMT.
And if you can make it though the paywall—I’m told that Googling the title of the article works—then you can read what I wrote in the Financial Times in the early months of the pandemic.
But I want to push you to go even further. I want to encourage you to go beyond understanding how government finance works in the context of the monetary system as it exists and operates today. I want you to think about whether the current practices and institutional arrangements are serving us well. Especially since the current setup gives rise to so much misunderstanding and unwarranted fear.
I want you to think about the key role that US Treasuries play (as collateral) in the global financial system. I want you to consider whether it makes sense to force any particular quantity of Treasuries onto the market—matching every fiscal deficit with an equivalent-sized sale of government bonds (as governments currently do). Why, if investors are holding all of the Treasuries (or gilts, or JGBs, etc.) they desire, insist on plying them with more? And if there aren’t enough to meet the needs of the private sector, why not offer to supply more (at desired maturities) on-demand, at some fixed price?
If these questions intrigue you, and you’re up for the challenge, check out this presentation by MMT economist Scott Fullwiler (he begins at the 32:35:00 mark). Scott does an excellent job explaining not only how things work now, but how the system might be improved.
You’ll also hear Scott explain that if the central bank “starts to increase interest rates to slow the economy down, you’re going to get more government spending on debt service and so you could speed up the economy when you want to slow it down.” A topic for another day.
Deficit hawks need to answer 3 lines of inquiry. 1) Do your own US dollars free and clear (in the form of treasury bonds, CD's or cash stuffed in your mattress)? If so, where did those dollars come from? 2) What would happen if the US gov't embarked on a 10 year program to eliminate the "national debt" by running annual $3 trillion surpluses over the next decade? 3) Why on earth does the Treasury/Federal Reserve sell bonds in the 1st place?
Answers: 1) Since "bank money" is created when banks issue loans, and all loans are simultaneously assets and liabilities for both the bank and borrower that sum to zero, the only way you could own this kind of money is if you robbed a bank. US dollars don't grow on trees! But they are created out of thin air by the federal gov't, and when the gov't spends more of these dollars than it collects in taxes, this creates a "deficit." And that's where your dollars come from. Where else could they come from? So be careful what you criticize. Deficits are the source of our FINANCIAL WEALTH.
2) If the gov't started to collect $3 trillion each year of this "thin air" money that you and other deficit hawks mistakenly rail against, by year 3 of this program you would have to sell your living room furniture to pay your taxes. Treating our accumulated deficits as if it's a "debt" is idiotic and a massively destructive way to think about things. Paying down our accumulated deficits only serves to make us poorer.
3) Warren Mosler pointed out almost 30 years ago that the Fed doesn't sell bonds to "borrow" money (it's an absurd concept that the gov't would ever have to borrow money it can create at will--we're not talking gold doubloons here), but rather to remove excess currency reserves from the banking system to maintain the Fed's target interest rate. If the Fed didn't do this, every bank in the system would be flush with cash and would never have a reason to borrow in the overnight market to settle accounts--and the target interest rate would plunge to zero. But for over a decade now banks can legally offer "Interest On Reserves." As long as these deposits are fully insured by the full faith and surety of the US gov't, what is the practical difference between this system and selling bonds? The Fed will set the interest rate on these IOR's (because it can!), and then bond traders will have to go out and get themselves a real job.
As I understand things, much of this debt is caused by steep reductions in capital gains taxes, corporate taxes, and individual taxes on wealth over the past 40 years. And that much of the pearl clutching over the deficit is about maintaining these tax cuts by distracting people with the size of the deficit. The people screaming loudest never talk about restoring steep progressive taxation based on wealth as a full or partial solution to reduce the deficit. Despite the progressive taxation from roughly the 1930s through the 1970s being part of a mostly deficit-free economy. I'd be curious to hear your thoughts on taxation and re-taxation as it relates to the deficit and MMT.