The 'Limitless' Capacity of Government to Create Money

In 2007, while working for Procter & Gamble, fashion model Gisele Bündchen, wife of Patriots quarterback Tom Brady, insisted on being paid in euros rather than U.S. dollars.  Since Ms. Bündchen was the highest paid model in the world at the time, playing the demanding diva must have come easily for her.  However, a proper prima donna would have demanded that she be paid in gold rather than some "fiat currency" like the euro or the dollar.

On October 5, the Kansas City Star ran an op-ed by guest commentator Geoff Coventry, which was posted online the night before as "The government isn't a business or household. Democrats should reject 'pay-go.'"  Coventry doesn't approve of Minority Leader Nancy Pelosi's renewed pledge to abide by PAYGO should she again become speaker of the House.  PAYGO is a policy that allows Congress to spend money on new programs only if that spending is offset, either by cutting spending elsewhere or by raising taxes.

PAYGO is a misnomer, as it was designed only to keep the federal deficit from growing; it wasn't designed to balance the budget and eliminate the deficit, which is what "paying as you go" would mean to normal people not corrupted by the D.C. swamp.  If you're running a deficit, you're not paying as you go.

Pelosi's pet policy is more honored in the breach than the observance.  Coventry should know that Pelosi is only flapping her yap in her bid to become speaker again.  She made the same promise to abide by PAYGO back in 2006 and then, after attaining the speakership, ran the nation's first trillion-dollar deficits.

Coventry wants more public "investment."  That might be due to the fact that he is the founder and owner of Tradewind Energy, Inc., which dabbles in solar energy.  Tradewind appears to be the same sort of thing that Obama "invested" in.  Does Coventry think his enterprise should be the recipient of federal loan guarantees, like the defunct Solyndra?

What's interesting about Coventry's essay is his theory of money.  He thinks it entirely unnecessary to hitch Congress to spending restraints because, after all, the government creates money, dontcha know (italics added):

Congress has the power to create dollars.  It never needs to receive back a dollar it previously created before it can create another one.  It has a limitless capacity to deploy the nation's currency in the service of public needs.

Notice the progressive rhetoric: "deploy the nation's currency."  Would that maybe mean spend the people's money?  There are four links in the article to progressive websites, including two articles by Coventry himself at the 501(c)(4) nonprofit Patriotic Millionaires, of which he is a member.

Coventry seems to be a proponent of Modern Monetary Theory, or MMT.  Perhaps he attended the First International Conference of Modern Monetary Theory, a jamboree of economists held right here in Kansas City in 2017.  Perhaps he was converted to MMT by Stephanie Kelton, one of MMT's bigger backers, who until recently was on the economics faculty of UMKC.

The main idea behind MMT concerns nations that have their own fiat currencies – i.e., currencies that aren't backed up by anything tangible, like gold.  MMT posits that such nations can simply "print" money to pay for government programs.  In September, the Cato Institute ran an article by Michael Tanner, who's skeptical:

[MMT is] an idea prominently promulgated by Bernie Sanders's chief economic adviser, Stephanie Kelton, that is now being used to argue that lawmakers shouldn't worry about the size of the national debt.

MMT essentially says that the government's capacity to finance its debt is limitless.  Since the U.S. government is the sole printer of dollars, it faces no binding revenue constraint because more dollars can always be printed.  Therefore, the theory goes, the national debt is mostly a harmful fiction preventing us from having nice things such as "free college" or "free health care."

So, if politicians want to buy votes by giving voters "free stuff," don't worry; just print the money.  (Why didn't anyone think of this before?)  You may have noticed the use of a certain word here that is part of the lexicon of left-wingers and other romantics.  The word is "limitless," as in a limitless capacity to create money.

Anyone with a little familiarity with history knows that creating lots of new money is not without its consequences.  MMT apologists seem not to have noticed what's happening in Venezuela: the Venezuelans have replaced their currency yet again.  In August, they began phasing in the new bolívar soberano to supplant the old bolívar fuerte.  A July headline at Quartz says it all: "With 1,000,000% inflation, Venezuela is slashing five zeroes from its currency."

If "printing" money is so benign, then why not print off $21T and pay off the national debt?  Why not print off a billion dollars for every adult American?  The reason normal folks intuitively grasp those ideas as wacky is because such money creation would mortally devalue the dollar, and prices would skyrocket, as they're doing right now in Venezuela.  But don't fret; your pet will make a tasty fricassee.

If printing up $21T in one fell swoop is unreasonable, then how about the feds merely creating enough money to "pay as you go"?  In other words, from now on, all federal spending would be provided by MMT-style money creation.  This year, the feds would need to create a bit more than $4T, which is quite a bit less inflationary than $21T.  And here's the nifty thing: Congress wouldn't need to tax.  Congress would create whatever money it wants to spend and let the folks keep their money.  There'd be no more federal taxes.

The snag in such a scheme is that taxation is the way MMT proposes to control inflation.  Even Paul Krugman thinks MMT is a recipe for inflation.  Under MMT, Congress would continue to tax to keep inflation at bay, and the amount of money it could create must be something less than total federal spending.  So what amount of money could Congress create each year without bumping into what appears to be limits?

One amount of money Congress might consider creating each year is the difference between revenue from taxes and spending.  We call that difference the "deficit," and it is currently financed by borrowing, primarily through the sale of T-notes.  Under MMT, the deficit could be paid for with newly created money.  The deficit for FY2018 was $779B.  Under MMT, Congress wouldn't have had to borrow that sum, and it's more manageable than $4T.

The idea of paying for the deficit with printed money rather than borrowed money must have occurred to a lot of folks.  The nifty thing about it is that the national debt would be frozen, like a fly in amber.  But isn't this still a dangerous amount of money to create each year and spend into the money supply?  And if inflation kicks up, won't the MMT crew advise hiking taxes?

When they borrow to cover the deficit, the feds take money out of the economy by selling treasury securities and then spend it right back into the economy.  When the securities mature, they create money to pay them back.  But with MMT, the feds create new money and pump it into the economy and then take it out with higher taxes when inflation kicks in.  It seems like "six of one, half a dozen of the other."  Whether they're familiar with the MMT catechism or not, members of Congress have been operating like converts to this economic religion for decades; they just create money a little differently from how the MMT people want it created.  Heresy!

The problem with expanding government spending right now is that America entered a new era of sovereign debt rollover on Oct. 1.  The 10-year treasuries sold during Pelosi's first trillion-dollar deficit are coming due.  With interest rates on the 10-year treasury rising, the market has sagged a bit.  Best to tread lightly.

President Trump has commented on the Fed's recent interest rate hikes.  But the Fed is only trying to stay ahead of inflation.  One action the government could take that might ease the Fed's worries is to start dealing with our budget deficit by spending less.  Trump recently made a move in that direction by instructing his Cabinet to make five-percent spending cuts across most federal departments.  Let's hope it happens and the Fed responds by slowing its interest rate hikes.

The MMT people are Big Government types.  They want to increase the size and scope of the central government.  They want more government spending, a lot more, which should please Nancy Pelosi and the Democrats.  Maybe they'll embrace MMT and fire up the printing presses so they can fund Obamacare for illegal aliens and for the Honduran caravans coming to our border.

Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.

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