On Monday afternoon, in a precursor to Wednesday’s quarterly refunding announcement, Treasury said it will borrow $2.99 trillion in the April-June quarter.
The previous plan was to pay down $56 billion of net marketable debt during the period. In other words, this is a net $3.06 trillion swing versus what was tipped in February.
Obviously, this is a consequence of virus relief spending and is affected by the change in timing for tax payments. “The increase in privately-held net marketable borrowing is primarily driven by the impact of the COVID-19 outbreak, including expenditures from new legislation to assist individuals and businesses, changes to tax receipts including the deferral of individual and business taxes from April — June until July, and an increase in the assumed end-of-June Treasury cash balance”, the statement reads.
The full quarterly refunding details will be out Wednesday morning.
As Congress spends to offset the dramatic hit to the economy from coronavirus containment measures, the deficit is set to explode. And that’s as it should be. Without government spending, the economy would sink into a black hole, never to be heard from again. And that’s just barely hyperbolic.
More than 30 million Americans have lost their jobs over the past six weeks, the unemployment rate is poised to hit a record high with the release of the April jobs report on Friday, and the US economy contracted sharply in the first quarter on the way to what will be the deepest recession on record once Q2 is in the books.
Nobody is concerned about the deficit right now. It would be ludicrous to obsess over figurative red ink at a time when the US economy faces an existential crisis the likes of which hasn’t been seen in a century.
Additionally, it would be political suicide to come out hawkish on government spending in the middle of a (literal) depression during an election year.
Jerome Powell (who has repeatedly stressed that the US is on an unsustainable fiscal path) last week emphasized that this is not the time to worry about such things. When asked about the deficit during a Fox interview late last month, Steve Mnuchin said simply: “We’re at war”.
Read more: Who’s Afraid Of Red Ink? COVID Crisis Spawns Bull Market In Deficit Fearmongering
Even the maddeningly dogmatic Committee for a Responsible Federal Budget admits this is no time to be… well, no time to be responsible about the federal budget.
“Combating this public health crisis and preventing the economy from falling into a depression will require a tremendous amount of resources — and if ever there were a time to borrow those resources from the future, it is now”, CRFB president Maya MacGuineas said last month.
“Now is not the time to worry about near-term deficits”, MacGuineas added, in what I’m sure was a painful concession.
The Fed will likely monetize the entirety of the stimulus, including any “phase four” relief bill.
What’s crucial to remember when you think about all of this, is that you’ve essentially been lied to for decades. None of the hand-wringing over deficits is warranted for the United States, and there’s something fundamentally ridiculous about the way this conversation unfolds in the public sphere.
In short, this is a totally illusory “debate” couched in completely nonsensical, self-referential terms that serve one purpose and one purpose only: To perpetuate the myth that these figures actually matter for the issuer of the world’s reserve currency.
For example, Lloyd Blankfein tweeted the following last month:
In finance, most surprising to me is that despite the trillions the US is adding to our budget deficit and national debt, investors (many foreign) will lend the US a virtually limitless supply of dlrs for .6 pct for 10 years.
— Lloyd Blankfein (@lloydblankfein) April 23, 2020
Can you spot the absurd part of that tweet? If not, let me help. It’s Blankfein suggesting that the US needs to borrow dollars.
While we’ve all been conditioned to think in those terms, I (strongly) encourage you to take a step back and consider whether that assertion actually makes any sense. The idea that the US needs foreign investors to “lend” the country “dollars” isn’t just patently ridiculous – it’s almost nonsensical.
As Stephanie Kelton put it last week in remarks published by the Financial Times, “a currency-issuing government never needs to borrow its own currency”.
Kelton is more diplomatic about it than I am. “This should be obvious, but it is often obscured by the way governments manage their fiscal operations”, she writes.
Unfortunately, what would be common sense to almost everyone were it not for decades of misplaced indoctrination, is instead billed as “radical” (or “magical”) thinking. Indeed, even Bernie Sanders didn’t seem to fully appreciate or embrace the ideas espoused by his own economic advisor. And that may have cost Bernie, too. Because when pressed to explain how he planned to “pay for” his expensive agenda items, he never pulled the ace out of his sleeve, quite possibly because he didn’t know it was up there.
When you ponder the news flow around Treasury’s borrowing to “fund” virus relief and as you’re bombarded with deficit dogma, do yourself a favor and consider it all with the passages excerpted below from Kelton.
Although she’s generous enough to frame this as a debate, I’m ready and willing to say that it is no such thing. Rather, Kelton is just right. Full-stop. And that’s in part attributable to the fact that much of what she says is just a description of reality. It isn’t so much a “theory” as it is empirical analysis.
You are, of course, free to persist in fantasy – but I wouldn’t advise it. And I would gently note that if the myths Americans have been sold about the deficit were allowed to take precedence right now, small business in the country would suffer a veritable death blow, and tens of millions of jobs would be lost quite literally forever.
By Stephanie Kelton (excerpted from a longer post in the Financial Times)
Gone, for now, are concerns about how to “pay for” it all. Instead we are seeing wartime levels of spending, driving deficits – and public debt – to new highs.
France, Spain, the US, and the UK are all projected to end the year with public debt levels of more than 100 per cent of gross domestic product, while Goldman Sachs predicts that Italy’s debt-to-GDP ratio will soar above 160 per cent. In Japan, Prime Minister Shinzo Abe has committed to nearly $1tn in new deficit spending to protect a $5tn economy, a move that will push Japan’s debt ratio well above its record of 237 per cent. With GDP collapsing on a global scale, few countries will escape. In advanced economies, the IMF expects average debt-to-GDP ratios to be above 120 per cent in 2021.
While most see big deficits as a price worth paying to combat the crisis, many worry about a debt overhang in a post-pandemic world. Some fear that investors will grow weary of lending to cash-strapped governments, forcing countries to borrow at higher interest rates. Others worry governments will need to impose painful austerity in the years ahead, requiring the private sector to tighten its belt to pay down public debt.
They should not. While public debt can create problems in certain circumstances, it poses no inherent danger to currency-issuing governments, such as the US, Japan, or the UK. This is not, as some argue, because these countries can currently borrow at very low cost, or because a strong recovery will allow them to grow their way out of debt.
There are three real reasons. First, a currency-issuing government never needs to borrow its own currency. Second, it can always determine the interest rate on bonds it chooses to sell. Third, government bonds help to shore up the private sector’s finances.
The first point should be obvious, but it is often obscured by the way governments manage their fiscal operations. Take Japan, a country with its own sovereign currency. To spend more, Tokyo simply authorizes payments and the Bank of Japan uses the computer to increase the quantity of Yen in the bank account. Being the issuer of a sovereign currency means never having to worry about how you are going to pay your bills. The Japanese government can afford to buy whatever is available for sale in its own currency. True, it can spend too much, fueling inflationary pressure, but it never needs to borrow Yen.
If that is true, why do governments sell bonds whenever they run deficits? Why not just spend without adding to the national debt? It is an important question. Part of the reason is habit. Under a gold standard, governments sold bonds so deficits would not leave too much currency in people’s hands. Borrowing replaced currency (which was convertible into gold) with government bonds which were not. In other words, countries sold bonds to reduce pressure on their gold reserves. But that’s not why they borrow in the modern era.
Today, borrowing is voluntary, at least for countries with sovereign currencies. Sovereign bonds are just an interest-bearing form of government money. The UK, for example, is under no obligation to offer an interest-bearing alternative to its zero-interest currency, nor must it pay market rates when it borrows. As Japan has demonstrated with yield curve control, the interest rate on government bonds is a policy choice.
So today, governments sell bonds to protect something more valuable than gold: a well-guarded secret about the true nature of their fiscal capacities, which, if widely understood, might lead to calls for “overt monetary financing” to pay for public goods. By selling bonds, they maintain the illusion of being financially constrained.
In truth, currency-issuing governments can safely spend without borrowing. The debt overhang that many are worried about can be avoided. That is not to say that there is anything wrong with offering people an interest-bearing alternative to government currency. Bonds are a gift to investors, not a sign of dependency on them. The question we should be debating, then, is how much “interest income” should governments be paying out, and to whom?
In theory this is all understandable …The question is ……What , control mechanism is in place to determine the rate of exchange assuming that all those dollars are in fact intended to be exchanged for goods or services..???? Don’t we have a Buyer /seller relationship in place any longer with our trading partners so as to restore some balance to Existing Relationships ?? Does it come down to who can prevail in an altercation of sorts which would seem almost inevitable…..??
Money can be made without bound but at the end of the day the world’s carrying capacity is not unbounded. That is the assumption neo-chartalists like Kelton presume. Eliminating the debt burden for future generations by government mandated currency redemption does not eliminate the reality that we are pulling consumption forward. The world’s carrying capacity and labor productivity will need to grow at higher and higher rates in order sustain ongoing (over) consumption. By some measures the world’s carrying capacity has begun to decline and increases in labor productivity have hardly increased and certainly not at a rate to permit fewer workers to sustain more dependents which the demography of every developed economy increasingly demands. Eating your grandkids seed corn is never a good idea –even if, as it is today, necessary so that there will be a grandkid who needs to eat.
Has Stephanie Kelton provided a cogent argument of expected outcomes if the US government (in the extreme) stopped collecting revenue and otherwise paid for all its expenditures by printing more currency?
There’s always collecting tariff money from China,,,,
The Treasury should give and the Fed should monetize $1Bn for each person that makes less than $50,000 year. The world would be better off as that money would be spent not invested. Totally free economic boomtime!!!
A while back, during the reign of Empress Ekaterina of Russia, the rouble was having lots of problems. Then, just in case, she built up a beefy military. Everybody then, coincidentally, wanted to help her, and at very reasonable rates. Nice!
I live in a small state printing its own currency. One limit to this eye-opening discussion, that we experience here, is the issue of convertibility when you have a trade deficit. You can play around with your currency all you want until you need, say, an imported medecine. The hospital often runs out of supplies, here for example, as our foreign currency reserve (well, USD really) has been low since the GFC. That’s ultimately why some sovereign have to issue (USD) debt.
It comes back for the US to whether the use of USD for foreign transactions (or the USD as the reserve currency) can continue unconditionally. I see comments above have jumped straight to US military might as the answer to that question… 🙁
Isn’t that the real reason governments still sell bonds and pay interest to foreigners? If US stopped, what currency would China accept if they can’t buy bonds with the excess cash? I shutter to think that many may have already forgotten the lessons of the 20th century. Let’s not forget that US has been carrying the twin deficits for 20 years + (China…). Maybe Ms Kelton and her school of thoughts have discussed this? I haven’t read her except in these pages, thanks Heisenberg.
This is merely a restatement of all the thoughtful comments and concerns here, but I still have to ask
From where does the dollar derive its value?
With evermore dollars out there, at what point does the dollar start to lose its value (inflation)?
Internally, with the masses living close to breakeven, prices can’t increase much or no one could buy anything.
For our foreign trading partners, we’re no longer creating much value by making things – that’s been shipped elsewhere.
Is it our innovation and brain power that the world values? Is it our military? Is it our lofty ideals? Our respect for property laws? The honesty and respect of our government leadership in global affairs? Is this respect now being destroyed? (asking for a friend…)
Has Ms Kelton suggested exactly where the dollar derives its value and at what point that value begins to fall?
My limited knowledge of the history of European sovereign governments tells me that those sovereign treasuries have run dry before, with kings and queens borrowing from the private sector instead of just printing more pounds, francs, and marks.
There is a limit to all this. Where is it?
Something tells me our post-Covid world is going to look quite different.
“Value” is subjective and the source of dollar value is the same as the source of value for large rocks once used by the people of Yap as currency. The value rests in the fact that people accept the value and the ability of the currency to meet the normal functions of a currency such as medium of exchange, standard of value, store of value, etc. If the dollar loses that faith, we will all be SOL so keep the faith, baby.
If Kelton is saying that the opportunity Bernie missed is not explaining to the public that the US can do the whole socialism thing where it fails elsewhere because the world wants Greenbacks and the US has them in unlimited supply, she’s missing the point. If a first world sovereign currency were to become overtly socialist, it would undermine productivity to the point of collapse. Extrapolating this argument, if dollars aren’t “real”, then taxes and income aren’t either. So the motivation to pay down the deficit has much more to do with continuity in productivity than it does the ability to print an unlimited supply of dollars. When things get back to “normal” I think we’ll see calls from overseas for a monetary system that does have a finite supply to even the playing field for everyone else.
A monetary system that has finite supply has proven to be historically disastrous on too many occasions to count. Making economic activity and commerce contingent on some artificially imposed limit (e.g., a gold standard) is the worst kind of madness imaginable.
Also, what I would say to anyone who doubts this assessment is simply this: Go out and short JGBs and see how that works out for you. If all of the billionaire fund managers and buysiders who claim this analysis is incorrect really had any conviction in their shrill warnings, they’d short JGBs. Do you know why they don’t? It’s because that is a widowmaker trade. It can’t work. Because the BoJ says it can’t.
Sorry, I should have been more specific. When I say “finite” this includes Crypto, which is finite but opens the door to infinite divisions of itself.
Yeah, I mean the key point that I want to drive home more than any other is that this dogma about deficits is manifestly nonsensical. Where the discussion goes from there I’ll leave it to others to debate, but when you have people like Blankfein and Gundlach etc., saying what they’re saying in public, it either means 1) they are trolling everybody or 2) they actually don’t understand how stuff works, which is somewhat disconcerting when you consider that in Gundlach’s case, he believes himself to be “the bond king.” If he actually believes what he is saying about deficits, etc., well then the “bond king” doesn’t even understand what a “bond” is.
Great post H. Whether MMT will go from theory to practice seems more likely by the day, so I find debates as to implementing its core principles fascinating but a bit moot, it is going to happen. The Fed printing digital $$ and buying US treasuries to stack on its balance sheet (forever?) while using dealers as intermediaries is just one step removed from what Kelton describes. At some point we’ll do away with the charade of issuing debt to match spending, hopefully at some point as well the spending will result in direct stimulus to economic activity, buying bonds ETFs and MBS increases asset prices, but if the money printed is used to cancel student debt or other forms of helicopter money we might actually see an acceleration in the velocity of money. It is not enough to increase the monetary base, it will not fuel economic activity due to the pervasive deflationary forces in the system. If (or when) that happens, we’ll witness the true test of MMT, will elected officials in the future have the spine to curb real inflation by reducing spending or raising taxes once the genie is out of the box? Call me skeptical
They can curb inflation by raising taxes,etc. At this time all ships of state are flooding to maintain float. We move forward and when the day of inflationary shock hits….. In the near term it will become an exchange rate issue.
In the dimly l it past I recall Fed Chair Paul Volcker reined in the inflation of the early 80’s by raising interest rates to exorbitant levels. You could buy a 30yr Treasury with a coupon of about 15%. I remember my first mortgage carried an interest rate of about 14%
Blankfein is not known to be an idiot.
Neither am I, but if I tell you frogs come from sunflower seeds, then you’d be correct to say I’m mistaken.
But did Blankfein actually claim the the US needed to borrow? My reading of his tweet is merely his voicing surprise that others are willing to lend at low rates.
One thing that comes to mind instantly when reading Kelton’s work is Ray Dalio’s upcoming work, “The Changing World Order”. Referring specifically to Chapter 2 here, which I you posted sometime over the last few weeks. (https://www.principles.com/the-changing-world-order/#chapter2)
A scenario I can’t wrap my head around is as follows:
– If a country’s central bank performs QE, sends cash payments to citizens, and/or purchases government bonds to maintain a certain level of economic activity and certain levels of interest rates, the monetary base will unsurprisingly increase in size.
How do we reconcile the fact that this could result in:
(1) Decrease in relative value of the currency vis-Ã -vis other currencies.
(2) Potential sharp increases in medium-term inflation due to fractional reserve banking -> increase in total credit à la Dalio’s latest work.
At some point interest rates would need to be increased to combat the resulting inflation, right?
Open to having my mind changed. As a previous proponent of Kelton’s ideas, I would like to get past these issues.
On another note, there also exists the issue that a central bank issuing new currency to bring inflation from a potential (-) range to 0% is simply a government collecting seignorage, the value of which would have instead gone to holders of cash instead – is this fair?
M.M.T. is nothing more than a bet that the full faith and credit of the United States government is a tradable commodity just like gold or tally sticks, levered because the dollar is currently the global reserve currency with weak competition. The reliance on the fiat dollar is the exact same as the reliance on the Bretton Woods dollar, and the United States printed money to finance the Vietnam War and Great Society at rates further and further detached from reality. When France wanted to redeem their surpluses into gold instead of dollars, the United States instead defaulted.
The dollar’s current hegemony is even less sustainable than it was in 1944. Countries that peg their currencies to the dollar, or purchase oil in dollars, or do interstate trade in dollars will eventually get sick of financing global wars against terrorism, or Medical For All, or $2,000 a month U.B.I. for Americans, or a border wall with sharks and laser beams. The transaction costs and loss of political sovereignty will be too much and an heretofore unthinkable alternative will be found. Repricing every asset will eventually be less trouble than assuming that Treasurys are riskless.
Either there will be a left-wing redistribution of wealth and we will have horrific inflation, or we will have ever increasing, demand-destroying wealth concentration and the political uncertainty and social unraveling that comes with that. The existence of Japan does not change this outcome.
This comment is very helpful. Before I vaguely understood that “the full faith and credit of the US govt was a tradeable commodity” that made all this possible. “a heretofore unthinkable alternative will be found” – there’s a good scifi novel in there for some economist to write.
Mrs. Kelton surely failed her National Accounting 101 course. She does not realize the monetary base is debt of the consolidated public sector. The statement that a government does not have to borrow in its own currency is true. But not the way she thinks it is. Countries that have dollarized their economies like Panama, the Bahamas and El Salvador indeed do not have to borrow in their own currency. Since they do not have one. But countries that issue currency, like the US, have no choice but to borrow its own currency, since the monetary base is debt (although not in her imagination). Then she goes on about Japan. That is extremely ironic because in Japan the monetary base is the most expensive type of debt issued by the government: the only one that does not have a negative nominal yield. So we have this supreme paradox: money is not debt (in her delirious world view) but it is more expensive to issue this non-debt that to issue “real” debt.
She also does not seem to realize either that Russia defaulted on its domestic, ruble-denominated debt in 1998, while simultaneously keeping current on all payments in foreign exchange denominated debt. That must be difficult for her to explain, except by suggesting that the Russians defaulted just because they did not realize they could just print money. Such dumb fellows! They should have talked to her and she would have explained it to them.
I assume you’re aware that “Mrs. Kelton” is published, and is not exactly someone who hasn’t thought all of this through. So many commenters seem to believe that Stephanie is just some person who showed up on the scene one day with no introduction and no academic credentials. You seem like someone who knows that’s not the case being an academic yourself, but on the off chance you’re not apprised, I would strongly suggest taking an hour or two on Google, Google Scholar and YouTube, or you can just wait for her best-seller which comes out next month. (You can pre-order on Amazon!)
And I’m not trying to be deliberately abrasive to commenters. My point is simply that when someone is making nearly every list when it comes to who represents the wave of the future in money, econ and finance, you’d be remiss not to pay attention and at least consider whether what he (or she, in this case) has to say is important.
That doesn’t mean you have to agree, but you do have to take notice. And forgive me for saying this, but when people say things like “Mrs. Kelton surely failed her National Accounting 101 course”, my response would be: “how many feature articles have you been the subject of lately?” Or “How many people are flooding your e-mail with requests for comments and Op-Eds?” And “How many books do you have coming out next month?” And on and on.
There’s nothing that makes one appear sillier than being condescending towards someone who is quite clearly “winning” (to quote our fearless leader).
I’m more or less with you on the whole thing but that’s also a naked appeal to authority.
If Mrs Kelton is protected by her credentials then Blankfein and the bond king can point out to their successful careers on the capital markets as serious credentials too…
“…since the monetary base is debt (although not in her imagination).”
To whom is this debt owed?
I want to give you a behavioural dimension to think through regarding the SIZE of the PIE:
Forget “money” – money is just a facilitator so we don’t need to go through inefficient barter transactions trading half of your lifetime (workhours) for stuff you need.
With printing money you open the proverbial pandora’s box over the course of time leading to disastrous productivity losses. As soon as the popolus realizes, that actually the gvt. could pay for everything, they will vote the populist, who is promising to pay everyone and for everything with gvt. money + reduce taxes to 0 (at the extreme). There would be a strongly reduced incentive to bear the burden of 40-60 hours workweeks in precarious jobs and many many many (50%)menial whitecollar jobs – and automation is much further away than commonly threatened by McKinsey & Co. Additionally there would be a strongly reduced incentive to innovate, take the chances (and Risks!) of any venture, because WHAT FOR? Why to stay ahead of competition? Gvt. will keep me alive as a Zombie ad infinitum (again at the extreme). Productivy sinks into a black hole.
PRODUCTIVITY is the key aspect. EFFICIENCY, i.e. efficient use of resources. Competition of ideas. Without sufficient incentive there are no efficiency/productivity gains any more and the magic of modern complex societies goes into reverse. Already the US economy (and also the rest of the DM) is dominated by cushy oligopols bec. of constant bail outs/NIRP/ZIRP. Creative destruction stopped after the GFC. No / little incentive to innovate but milking their exisiting product portfolios as long as possible and buying up all arising competitors with cheap money.
Without sufficient productivity gains (which are mostly pocketed by the top 10% anyway) the amount of produced goods / services on offer is shrinking – immediately felt at the bottom 10% (which are getting poorer already every year) creeping constantly up to the bottom 90%. The Top 10% will always be well connected enough to keep their standard of living – at the expense of the bottom.
That’s where MMT (and the implicit unrestrained printing of own currency) has its design flaw – you kill productivity gains, you shrink the pie by taking away the incentive of labouring for a better life / the “american BS dream”. We have not reached the productivity levels AND societal distribution equality yet where we all can lean back on a 10 hr workweek doing conceptual work and let the robots do the menial stuff.
There are countless examples in economic history how a lack of productivity gains worked out, especially (because in fast forward mode) in communist countries. The only point where UBI / “gvt. pays for much/al” will work is when the society as a whole is at least two times as productive as today AND the pie is far more equally shared (meaning expropriations are inevitable / a massive change in definition of property rights / massive redistribution policies). With today’s inequalities in “rich” countries extrapolated I would tend to argue you simply cannot reach this level of productivity because the system will collapse before – the collapse might have already started with exo shock “Covid-19”.
Concluding I would argue:
Before massive MMT / money printing can be conceived, productivity levels need to be raised. Before productivity enhancing policies should be enacted, a massive change in wealth distribution needs to occur first (otherwise the top 10% will continue to reap all the gains and a lifeless economy will be left).
Instead of Printing money to finance Covid effects longterm (bridging is ok), wealth needs to be expropriated for the common good (into a sovereign wealth fund kind of structure). I know it will be done in reverse – when US realizes that they just cannot monetize all gvt. spending. In 5 years from now we will know more.