Taking a break from my history reading, I wish to once again wear the hat of the armchair macroeconomist.
This will dive deeper into thoughts that originate from a Hacker News comment thread.
In these discussions, arguments jostle between two extremes — outlandish claims, and not-even-wrong claims. I have been told over and over again that our national debt load is not a problem. When pressed to defend this outlandish claim, I get statements of obvious fact that fails to move the conversation forward.
So a real book should clear this up, right? This is a very recent and politically relevant book.
This book is, effectively, my introduction to MMT. I have not yet read much of it, but I still wish to make this preliminary post because I have, oh, so much to write.
Let me clarify my starting position — a large national debt is bad. Deficits are, in turn, bad because they make the debt larger. Yes, it is possible to run a deficit small enough that debt-to-GDP remains constant, and this would get my “okay”. However, that’s completely disingenuous. The scope of our deficits vastly exceeds sustainable levels, and everyone knows this.
It’s extremely rare for me to start on a book that I find interesting and that I fundamentally disagree with. I usually like to listen to the experts because I agree and want to sharpen my knowledge. Here, there is an expert who seems to be legit, but I clearly disagree with. That’s why it’s important that I document my starting position.
A Problem of Scale
I hold a strong belief, and as such, I should present strong evidence. Here it is.
- Total currency in circulation: $2 Trillion
- Total federal debt held by the public: $21 Trillion
These numbers make it real easy to talk about. One number is bigger than the other. The public debt is the elephant in the room. It is massive, and it constitutes an obligation for the future. Oh, and it’s growing uncontrollably.
I know that the fractional reserve system complicates the $2 Trillion number somewhat. Maybe the more relevant number is the monetary base, which might be $5 Trillion. Anyway, I don’t think this is more relevant, and even if it were, the overall point is mostly unchanged.
Deficit spending means that we fund programs by increasing the debt. Could we cover any useful fraction of our deficit by printing new money? It doesn’t look like it to me. Why do we issue treasuries, if not for the lack of demand for ordinary old dollars?
Yet, in my so-far novice understanding it sounds like MMT is proposing something similar. Surely, every single person out there saying that our debt is not a problem is equating the ability to print money with the ability to make the debt a non-issue. I don’t get that argument whatsoever (a polite way of saying I disagree).
Those holding the $21 Trillion in bonds will not be content to convert to pure cash. They are expecting a return, and if T-bills become unavailable, they will seek out some other low-risk but minimally yielding asset. There are financial products from the private market which will approximate this behavior, and surely, T-bills are closer in nature to these bonds/derivatives than to pure cash.
Rephrasing: if we use cash to fix the debt, then there will be insufficient demand for that cash. Inflation would happen. Not just a little, we would have to devalue our currency several times to fix the problem of the national debt. This may be acceptable over several decades (I’m not an inflation hawk), but we’re still running those deficits in the meantime.
This problem of scale is such a blocker for me that I can’t accept any of the precepts of MMT. The problem of the United States in 2020 (and most other developed nation governments) is that there is so much debt that the printing presses cannot buy your way out of the problem.
This is where I’m desperate to be proven wrong.
I will, in advance, accept that some of the $21 Trillion can be converted to pure cash. Say $1 Trillion of it (generous at 50% of the money in circulation). I presume this will leave some slightly grump rich people and bankers in its wake. But that’s not enough.
What does the book argue? I can tell that it argues for paying for some government services by issuing new currency. But how much? Enough to cover the entire deficit? You can’t. I’m reading further and further looking for some extraordinary evidence to get me past my hangup here. So far I have not seen it.
The Economy without Cash
Formally, I am more familiar with modeling a unit cube for fluid dynamics of heat transfer than money flows. I accept that fiat currency is “pretend”, because more can be created trivially in a computer. As such, I do appreciate other ways of looking at the same problem which are not so cash-centric.
People spend a lot of time looking at graphs of equities as measured in dollars. I mean, the price of the S&P 500 over time, for example. You could, just as easily, invert this graph to show the value of dollars relative to equities. Doing so, you would find that cash constantly hemorrhages relative value, with the occasional sharp rally. In other words, if you are holding cash, you are the sucker at the table.
Any time you deal with values over time, it would be better to separate out the effect of inflation from other effects. In the case of the S&P 500, the “other” effect is return on capital. A typical expectation is 4% return on capital + 2% inflation =6% overall return.
Let me take this moment to state my long-held belief that capital gains tax is stupid. We should, instead, tax gains adjusted to a CPI metric (any one will do, I honestly don’t care) as ordinary income. I have espoused this viewpoint many times, and to my shock and horror, have rarely found reluctant agreement, and never found strong and dedicated agreement (my expectation).
The book offers many instructive mental experiments similar to this thought process (although much more far-reaching). It feels a little hard to get through the politically-charged parts to get to the macroeconomic zen.
Writing down some quotes as I go, here is the first big one that drops:
Reality: for evidence of over-spending, look to inflation
This already feels disappointing, because I can take any budget-hawk politician and reword their opposition to new spending because of “deficits” into an argument about “inflation”. We all know this is exactly what would happen if we ever embraced the idea of issuing currency to cover a budget shortfall.
Demand for yellow dollars
I instantly resonate with this claim — Treasuries are another form of cash, it’s just cash for rich people. It’s better cash than ordinary cash.
Cash is, by definition, sub-inflation. It loses value over time. Treasuries might gain or lose value. In an after-tax analysis, I personally tend to ballpark an estimate that they have nearly exactly tread water for the last decade or two, and can be expected to for the coming decade. It depends on the maturity, but close enough.
We fund deficit spending by issuing new treasuries, which increases the total debt. Here, I must admit what I desperately want to know. Why does it seem like demand for treasuries is infinite? If anyone could answer that for me, it would be a huge leap forward in my understanding. The way the last 3 decades have played out, it seems that no matter how small or large the debt is, there is always a willing buyer for treasuries at a very low rate.
It’s not that I believe there’s default risk. I just think the low yields make it a poor choice to park large sums of money, and I fail to see how rich people and banks would not also make the same evaluation.
Agreement Points
While my disagreement still exists, I haven’t finished this book yet so I am genuinely excited about the unanticipated ways in which it might change my mind.
In other areas, there is quite a lot of foundation building with other concepts that are very familiar to me. I can just start listing…
The Federal Reserve’s dual mandate is an abdication of responsibility by Congress. Government spending (on real things) is needed as a part of the equation to keep full employment. The tools to control the inter-bank lending rate look like voodoo to me. I’m sure half of that is due to my lack of understanding. The other half is probably that they’re under-equipped and over-committed.
I would also echo the point that after the 2008 financial crisis, government as a whole was not in stimulus mode at all. Federal government did stimulus wile more local government cut back. There was an insufficient transfer of funds from federal to state to cover the shortfall, but on-balance the total government spending did not surge (which is what macroeconomics says is necessary). So when someone tries to ask why the stimulus did not work great, stop them at the implicit assumption.
I also believe that inflation is too low, and has been for a long time. I also believe that this is an easy problem to solve. Just print more money. You don’t need a new science to do this. You can keep the current framework and just make the money machine go brrrrr. It’s kind of ridiculous that the people in charge undershoot their targets for a decade. Cautiousness is an excuse that holds water for… 2 years? After that, get someone new who is willing to make it rain like Keynes intended.
Also, every little bit of this is completely partisan, and that is why we cannot have nice things. It doesn’t matter if it should have been non-partisan when the academics drafted it. You don’t get to make that choice. Lots of things were non-partisan until some politician made the decision to politicize it.
