Even before 2002, when former Vice President Cheney famously said “deficits don’t matter”, economists have begged the question of whether deficits actually do matter. Out of that discussion, a new isolationist school of thought has emerged, i.e., Modern Monetary Theory (MMT). It has also been widely popularized by Democratic Rep. Alexandria Ocasio-Cortez of New York. A new book by Stephanie Kelton called the Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy explains this theory in a highly-readable manner, which advocates an economic utopia.
The logic is this: To pay off our national debt of $27 TRILLION, the conventional wisdom is that we must greatly increase taxes or decrease spending. The MMT view is that a simple accounting trick can solve the problem, whereby the Treasury issues that amount of bonds, which are bought by the Federal Reserve, which credits the Treasury’s checking account with $27 TRILLION to payoff the bondholders. If paying off the national debt is a simple accounting trick, why are we so worried about it? If we can always “print” enough dollars to pay any amount of debt, so why not fund all our fantasies. The United States is in the unique position of having our own currency, which is also a “reserve” currency. Why aren’t we taking advantage of that?
Prior to quantitative easing (QE), we used to worry about “bond-vigilantes”. We worried that the Treasury might try to sell bonds, and nobody would buy them, in which case the U.S. would default on older bonds. Now that QE has made the Fed the certain buyer of all Treasury bonds, bond-vigilantes no longer matter. But, currency-vigilantes do still matter.
Foreigners are not stupid. They will see the continuing flood into money supply and realize each dollar is worth less, reflecting inflation. (Kelton says inflation will not be a problem, as the purpose of tax is to control it. When inflation appears, start increasing taxes to cool-off the over-heating economy. Right! Congress cannot even agree on when inflation is appearing, much less react in time to prevent inflation from accelerating.) Whatever the number of dollars that foreigners sell products to you now, they will charge more as the dollar gets increasingly debased. The currency-vigilantes will do well.
Kelton advocates that Congress adopt MMT. My thought is that she deserves a victory lap, as our country is already practicing MMT. We are already addicted to deficits! Maybe we have more time than we realized, before economic collapse, but that time is still finite . . . and so are the deficits.