Who’s Afraid Of Red Ink? COVID Crisis Spawns Bull Market In Deficit Fearmongering
Earlier this month, the "nonpartisan" Committee for a Responsible Federal Budget warned that measures enacted to provide relief to Americans amid the coronavirus epidemic will push the country's debt and deficits to "never-before-seen levels", both in absolute terms and as a percentage of GDP.
Now, I know what you're thinking. Or, at least, I know what you should be thinking. You should be thinking something along the lines of "Who cares?"
That is, "Who cares about the deficit when 22 million
Thank you! A tour de force from someone who has been there.
White collar job loss is happening (I believe this is underreported), so let’s see what everyone thinks about deficits/money printing as this segment of the workforce is furloughed/terminated.
Even Kelton admits there is a level of spend that would be inflationary to a monetary sovereign. To say “who cares about the deficit” is just as amorphous as saying the sky is falling; since neither you, nor Kelton, nor CRFB know where the inflationary switch is as you point out.
It doesn’t matter until it does.
Part of the “need” to suppress inflation can be explained by the age old debate over whether to protect lenders (the wealthy in many cases) or the “common man.” The Cross of Gold speech for instance.
The post-2009 dicrediting of “austerity” as a cure was the first signal that things are changing. add in the rise of populism (Bojo, Trump, Bolsonaro, Abe, Modi etc)., perhaps the balance or power has shifted to “the common man.”
Any of these leaders of the “common man” live on $800 a week. No common men in that group, just rich people pandering for votes. All of them are amoral at best.
And there you have it, another line from the playbook: “It doesn’t matter until it does”. I wish you knew how many times I wrote those six words while wittingly penning hawkish deficit commentary for public consumption.
What’s your position then? It doesn’t matter period? Kelton disagrees with you.
Did I say that? I did not. And trust me when I tell you that I am fully apprised of Stephanie’s position on this.
If your position is not it doesn’t matter period or it doesn’t matter till it does, what is your position?
It matters right now?
The statement “a monetary sovereign does not need to tax or borrow in order to spend” is not clear to me.
A monetary sovereign does need to tax or borrow in order to spend. It either taxes or issues bonds or prints money. And printing money is issuing debt (borrowing), since the monetary base is part of the Liabilities side of the Central Bank balance sheet and the Central Bank is part of the Consolidated Public sector.
I am not sure I am interpreting Mrs. Kelton correctly. If I am she is plainly wrong. Being a Latin American that lived many years under 300% per year inflation and has seen inflation at 3% per day for brief periods I have some practical knowledge of this subject.
Somehow there is still trust on the U.S. dollar and people hold it just like some people collect baseball cards. It helps that other major currencies are in even worse shape. But this bubble will stop sooner or later.
I have a thought and please correct me if I’m wrong, Mr. H. It seems the majority of goods that go into the US inflation calculus are not produced in the US but elsewhere, mostly imported from developing countries. What we have here, thanks to plunging oil prices and global monetary stimulus, commodity prices have tanked, thereby affecting income flows to these countries, which are siting on a record amount of USD-denominated debts. They need USD and Fed is the only agent with surplus to provide. That said, the more serious the situation is for EM, the more deflation comes to the US, and the more USD needed to avert that scenario. So I think the appropriate position to have here is it doesn’t matter as long as the developing countries need it. And as long as the USD remains as the most powerful world’s reserve currency, EM always need it.
@therealheisenberg It’s all about trust, which is why it is vitally important that such fictions are maintained.
This is purely an Economic/Political based set of scenarios….I appreciate the fact that it is unusually oversimplified leaving little room for alternative interpretations…(very uncharacteristic)..
There are ,however a lot more ingredients in this kettle of soup that has been cooked……that make oversimplification questionable.. The ‘ glacial pace ‘ of change in the trajectory of the status as the Worlds Reserve Currency (stole that glacial pace part ) is paramount in my thinking here because unexpected events are like Corona Virus ( an unexpected as well as untraceable phenomenon ) that can occur for unknown reasons… I try to never take any conclusion for granted that seems too obvious as there are lots of moving parts out there that lead to an element called SURPRISE…..
This does not even begin to consider the impact upon the Social Security and Medicare Trust funds, which money printing alone cannot shore up. ISTEA (“Ice-T”) is funded almost exclusively by gasoline taxes. I don’t suspect it will be flush with cash anytime soon for an infrastructure spending spree. State and municipal trusts are generally even more stressed. Cutting benefits would be economically disastrous and politically suicidal. Whither the money for the trusts with the federal annual operating budget which was primary negative BEFORE the pandemic? And let’s not forget state budgets whose shortfalls were papered over by creative accounting and wishful thinking BEFORE the pandemic. The money printing and inefficient allocation of it has just begun as has the pain for large swaths of the populace.
The inability for monetary policy to produce significant inflationary pressure suggests that monetary transmission is not a particularly efficient tool for sparking demand –a point the Fed itself has made repeatedly over the years. Fiscal policy would be more helpful, but the 2017 tax cut, tariffs (and pulling out of TPP) all constrain the possibilities for a fiscal multiplier due to a debt burden assumed during a period of sustained growth.
This system is descending toward some level that could qualify as monetary chaos… Unexpected events can take place when the logical trajectory of theories like the one Kelton postulates are finally tested by unexpected events….Status of the US as sole Reserve Currency is not a given even as it seems likely for the near future. Lots of unaccounted for moving parts in the World situation today…
It is being said wryly that we are all MMTers now. This is their prescription for a deflationary event. The test would be a sudden inflationary event. Fiscal side of that might be unsavory. Spending is easier than raising taxes.
The fact is that despite all this spending and monetary ease (money printing) we are most likely facing deflation. That is how powerful the forces of deflation are in our situation. If you pinned most policymakers to the wall, right now they would get on their knees and pray for some inflation. In this particular case it would mean economic policy had won. Sadly, that is not the case, and it is plain to see the market reflect a sub 1% 10 year and oil and other industrial commodity prices in the basement. If we were facing inflation and the economy was soaking up the spare capacity including the reserve army of the unemployed, Jerome Powell could raise short rates, shrink the balance sheet etc. after a short period. The federal government could raise taxes etc. Right now that is far from the case.
Scarcity produces inflation. Oil is persistent. Wheat is not.
We have not left the gold standard for very long. The Spanish Empire had very “low cost money minting” for a good number of years.