National debt clocks seem to go in and out of style with the political fortunes of Republicans. When they are in power, the bond vigilantes are at bay, clocks get put away, and tax cuts and wars blow up the deficit with hardly a finger-wag. But when tables turn, watch out! The debt becomes a national emergency, and think of the children, who will have to pay it all back!
After a few cycles of this nonsense, many have realized the mythical nature of the whole construct, first and foremost the school of MMT economics. Conventional conceptions of the debt are significantly out of date. For one thing, no one is going to have to pay this debt back. It is continually rolled over, and if we attempted to pay it back out of a fiscal surpluses, it would be disastrous, contracting the economy for lack of net spending from the government, which is the source of money for net economic expansion. (Ignoring the banking sector for the moment.)
Back when our money was not made and managed by the government, but rather based on some commodity like gold or silver, the Federal government was as constrained as anyone else- to match spending with income. It had two choices to pull money out of the larger economy for its own needs- taxation or borrowing. Taxes tend to be broad-based and quite unpopular. Borrowing, via bonds, (which were, in a way, the original fiat money), on the other hand, targets quite specifically those who have money to spare - the rich - so is politically efficient. But borrowing also indebts the state to the ongoing interest payments, which may temporarily come from further borrowing, but must ultimately come from taxation (or increased inflation, if the government can influence the monetary system and wishes to abuse its credit). Thus we had war bonds during the Civil War and the World Wars of the last century.
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| A bond, issued 1936 |
Now we are in a slightly different world, that of fiat money, where the federal government runs the monetary system completely and explicitly, with the power of printing money, but also the duty of controlling inflation. There is no more scarcity of gold, or scarcity of money, for that matter. It is an elastic system, under conscious control. Now the government creates money via its spending, and that money is meant to supply the expansion of the whole system- our economic growth, our hunger for imports and the matching hunger of foreigners for dollars, our savings needs, etc. Yet we still have a statutory requirement to match net spending (over taxation) with bond issuance- thus the growing national debt. (again, ignoring the banking sector for the moment). That statutory requirement is a relic of the old system and should be scrapped.
Not only that, but we should also end the re-issuance of debt, gradually exchanging it, as it comes due, for regular dollars instead. That way, we could save the hundreds of billions of dollars ($389 billion in 2019) we give to rich people and foreign countries in interest payments on their bond holdings. $30 billion alone goes to China, to reward them for the currency manipulation they engaged in back in the 2000's to take our manufacturing jobs. That is quite a deal! In this way, we could retire the national debt, not by paying it down through higher taxes, but simply by converting it to dollars, which we can create with a keystroke, just as we created the bonds in the first place.
The idea that our practice of bond issuance prevents inflation, by draining dollars from the economy, is problematic in terms of scale. Bonds are hardly a frozen form of money. For individual holders, our debt functions as the equivalent of money. They are savers, and holding dollars or bonds makes relatively little difference- they are not going to go on spending binges over the loss of 3% interest. On the other hand, on the macro-economic scale, the swap of dollars for debt would change the complexion of savings, since this rentier class will still seek income. They will seek to invest this money productively, and if safe government bonds are not available, they will tend to invest in the real economy, such as loans, real estate, companies, etc. This may drive some inflation, so we would have to be on our guard. But it would also drive real investment, which would be a good thing, and would drive down interest rates, also a good thing, especially in view of the troublesomely high rate of interest over time recorded by Thomas Piketty. The implementation would be controllable- if inflation appeared as a result, the program could be slowed down or reversed at any time. Perhaps we should start with a mere trillion dollars exchanged per year.
To get a picture of the overall scale, the US has about $100 trillion of overall wealth, of which about 20% is Federal bonds. But about a third of those bonds are held in the government, such as the Social Security accounting fiction of a "trust fund". And as noted above, the Fed owns about 10% of the debt in addition. So the remaining amount is, in the larger scheme of things, not enormous, and while monetizing it will alter investment practices, is unlikely to be catastrophic.
In conventional economic terms, this proposal would dramatically alter the money supply and bond markets, moving the LM curve (in the IS/LM model) right-wards, increasing output, decreasing interest rates, and causing inflation. The Fed spends much of its time managing the Federal bond market, selling and buying bonds in its efforts to control short term interest rates. After the 2008 crisis, the Fed accumulated $2-3 trillion, about a tenth of all bonds outstanding. It was accused of monetizing the debt by buying so much, lowering interest rates and pumping dollars into the system instead. But inflation stayed very low. We are in a somewhat more normal regime now, but over the last decade, the Fed has never attained its inflation target, so in those terms, one can say that, instead of trying to raise interest rates by selling bonds, as they have been doing over the last year, they should just continue monetizing the debt, until it is all gone, then send those bonds to the shredder.
Are there other ways to manage interest rates and inflation? This is where MMT has some problems, and fails to (to my knowledge) truly grapple with control of the monetary system. Suppose the pool of Federal bonds were 1/10 the size it is now or less, which would be much more manageable in fiscal terms. The Fed might own most of them at any one time, but might not have, in its view, the firepower, or the depth of a market to trade in, to affect interest rates across the board. It might need to trade in corporate bonds instead, which might not be the worst thing. Perhaps it should be using other tools, however, as its ultimate aim is to regulate lending and inflation, towards which control of interest rates is only a (blunt) mechanism. It is lending by banks that creates money in the private system, leading to speculative bubbles, inflation, and contractions and depressions. This money is much more labile (in the form of loans/credit that are subject to being paid back or called in, among other risks) than that coming from government spending. Thus the need for close regulation.
In China, for instance, the state owns the big banks, and can direct their lending explicity. No need to mess with the putatively free interest rate market. Similarly, the Fed regulates the banks, and could, for example, raise underwriting standards or capital requirements in boom times, lowering them in slack times. Another approach, of course, is using the government's fiscal policy. By spending more or less, or altering taxation, (such as changing the withholding rates), the Federal government can easily (if such spending alterations are easy) affect the inflation rate, which is after all the point of the interest rate control policy. In this way, interest rates can generally be kept low, bond issuance be ended, and the value of the money be kept stable. Ironically, despite MMT getting the rap of advocating fiscal profligacy, the real consequence of MMT is that the government would have to be even more disciplined and conscious in its monetary policies, (yet also more democratic), than the current system of leaving all the hard choices to a technocratic Fed, while spending more or less blindly, in policy terms (until a crisis hits, and even then, still shooting in the dark).
Getting back the debt reduction plan, would such a program contribute to the global savings glut? Yes, by discontinuing what is clearly the premier safe investment world-wide. But that is just too bad- we will benefit far more by cleaning up our books and saving ourselves the interest being paid out than we lose. At one stroke, we would free our political discourse from this charade of fiscal probity, free our government of the payment of hundreds of billions in interest- an enormous and seemingly endless stream of subsidies to the rich, and increase domestic investment.
- A contrary view on MMT.
- On the history of debt instruments.
- Baltimore- another kind of student loan.
- Impeachment, yes.
- An online ad tax?
- The academic life.. manuscript hostage negotiations.
- Remember when Republicans complained about executive overreach?
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