Does Sovereign Debt Matter?

If America ever does have a full-blown “debt crisis,” whereby the weight of the accumulated deficits that Congress has run since 1960 finally come crashing down on us, it might be enough to make more Americans adopt the tragic view of life. That’s because such a dreadful event would have happened despite decades of warnings. Even members of Congress from time to time trot out their dire predictions about debt. Even so, they go right ahead and keep on spending money they must borrow.

However, some say deficits and debt don’t matter if a nation has its own currency. Some who cleave to this position are proponents of Modern Monetary Theory. MMTers think the central government can just create whatever money it needs.

On July 29, in the wake of President Trump’s tweet about Baltimore’s rat infestation, FNC’s The Ingraham Angle featured a talk with Donté Hickman, pastor of Baltimore’s Southern Baptist Church (video, go to the 14:30 point). At the end of the segment Laura asked if the good reverend wanted to throw out the whole free market, to which he replied: “What we need to take a look at, Laura, is Modern Monetary Theory, and reform. We have to get public money over private money.” A quick search of the church’s website revealed no MMT proselytizing, so we’re left to wonder whether the Deity approves of MMT or not.

Although MMT has been getting a lot of press lately (perhaps even from a Baltimore pulpit), the theory has plenty of critics. One critic is David Stockman, Pres. Reagan’s head of OMB. At Contra Corner, Stockman’s website, we read:

MMT's underground popularity derives from its seeming mathematical rigor, its disagreement with the obviously flawed doctrines of standard neo-Keynesian orthodoxy, and its underlying message of hope that the perceived constraints on government deficit spending are an illusion. The MMT proponents tell us that fiat monetary systems have removed the shackles associated with the gold standard, and that our economic recovery is limited only by our failure to understand how modern money and banking work.

Before We the People give leave to the feds to start creating money at the rate the MMTers would like them to, there’s a fundamental issue that more folks need to be clear about -- the methods by which we create electronic money.

One method familiar to a lot of Americans is QE, or quantitative easing, which involves the Federal Reserve creating money. It entails the Fed buying up assets, like Treasury securities. The Fed buys such assets with money it creates “out of thin air.” But QE is what the Fed continually does, only on a much bigger scale. QE is the tool the Fed used during the Great Recession when it created several trillion dollars.

When the feds (not to be confused with “the Fed”) pump money into the economy by sending checks to people and businesses, they’re indirectly creating money when a multiplier effect kicks in. The feds’ checks are deposited in banks, and then a fraction of the deposits are loaned out. Private-sector banks effectively create money when they make loans, which is due to fractional reserve banking. Even if Congress were running a balanced budget, spending by the feds would still result in money creation by commercial/consumer banks. So, the Fed creates money directly through typing, and Congress creates money indirectly through spending.

One star of MMT is one Stephanie Kelton, who was formerly an economic advisor to presidential candidate Bernie Sanders. Debuting in June of 2020 is Kelton’s new book, The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy. Before preordering, check out a lecture Kelton delivered at Stony Brook University in October: “But How Will We Pay for It? Making Public Money Work for Us.” For Kelton, “How will we pay for it?” is a silly question because the federal government can create whatever money it sees fit to.

On February 27 at MarketWatch, Steve Goldstein quoted Federal Reserve Chairman Jerome Powell in a Senate hearing: “The idea that deficits don’t matter for countries that can borrow in their own currency is just wrong.” On March 7, Goldstein quoted Kelton’s response:

“What Chairman Powell is saying when he says, ‘I don’t believe that it’s true that deficits don’t matter,’ well neither do I, deficits do matter. But they don’t matter in the ways we’ve conventionally been thinking about them,” she said.

“The way we usually think about a deficit is that it is evidence of excessive spending. And that’s just wrong, evidence of excessive spending is inflation. So I would argue you don’t have a deficit problem or debt problem unless you have an inflation problem.” …

When asked what country has used MMT, Kelton replied, “the United States.”

Right, because except for Rand Paul and a few others, “we’re all MMTers now.” Congress has been spending borrowed money like Imelda Marcos in a high-end shoe store. But Kelton seems to argue that the Congress should be spending even more than it already is.

One of the snags of MMT is trusting Congress to spend prudently, that members won’t squander pristine new money on crap. But Congress wastes trillions on its idiotic programs. Since the mid-1960s, Congress has spent trillions on the War on Poverty, with little to show for it. Trillions have been spent on higher education and healthcare, and price inflation in those areas outpaces inflation in the rest of the economy. That Congress will spend wisely may be the weakest leg of MMTers grand theory. Of course, if Congress wastes money, well, there’s always more where that came from, because the Fed can still type, right?

Idiotic spending by Congress does a lot more than waste money; it distorts the economy and hurts folks.

Kelton’s “debt problem,” I would venture, comes about when it gets tough to service debt, that is, when interest rates are rising. The U.S. has had low interest rates for the last decade because the demand for our sovereign debt is high, as U.S. treasuries are regarded as safe. So, skittish investors put up with our abysmal interest rates. Contra Kelton, the real problem of sovereign debt may be because the feds rarely pay it off. Instead, they do rollovers. And when a Treasury security is rolled over, it gets a new interest rate. That new rate will be a function of demand. So with rollovers, we’re at the mercy of the market.

A stat or two before you go: The gross federal debt first topped $1 trillion in 1982 and the debt held by the public (the real debt) topped $1T a year later. (To verify, see Table 7.1.) The gross debt is now in excess of $22.3T and the public debt is more than $16.4T. Yet, the MMTers think we’re not spending enough.

Regardless of whether Keynesian, Neo-Keynesian, Austrian, MMTer, or what, economists of all persuasions need to press into their bosoms a bit more modesty about what they “know.” Shortly after the financial crisis of 2008, I wrote about this need in a little article with the auspicious headline “The Limitations of Economics.” It’s not totally idiotic and might even have some relevancy for today.

I cited 1960 in the lead sentence because that was the last year that an all-Democrat Congress ran an “on-budget” surplus. Voters were warned about giving the House majority back to Democrats, and now with Pelosi at the helm, the deficit is headed back up to a trillion again. So regardless of whether we ever have a debt crisis or not, I think I’ll hang on to my tragic view of life, thank you very much.

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

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