If There’s An Economic Silver Lining In This Crisis, It’s The Exorcism Of The Deficit Demon

“It is important to put this on the table: This virus may become just another endemic virus in our communities”, WHO executive director Mike Ryan said, during an online briefing Wednesday.

In case that wasn’t clear enough, he drove home the point: “This virus may never go away”.

With each passing day, market participants and society more generally are coming around to the idea that the pandemic and the coordinated global policy response necessitated by the economic collapse it precipitated, have altered the course of human history.

That’s somewhat circular. Every event – large, small and in-between – alters the course of history to some extent. History is, after all, just a chronological series of events. So, perhaps it would be more accurate to say that COVID-19 accelerated society down several roads on which we were already driving.

Some of those roads lead to dark places. For example, the de-globalization push which found expression in the resurgence of populist politics in western democracies, will almost surely speed up as political opportunists exploit the epidemic, citing the coronavirus to support the contention that interdependence, open borders and a sense of shared destiny can backfire to disastrous effect. This is unfortunate, as de-globalization actually represents an effort to roll back the clock. Driving faster down that road is thus more accurately described as mashing the pedal to the metal with the car in reverse.

But some of the roads we were already on (and are now traveling faster down as a result of the virus), may lead to a better future, assuming we can steer clear of known potholes and keep the car between the lines, as it were.

As the crisis wears on (and really, it hasn’t been going on all that long, despite how tedious it feels due to mobility restrictions), more and more regular people are beginning to wake up to the reality of how fiscal and monetary stimulus really work in modern, advanced economies. It’s now apparent to most intelligent Americans, for example, that nobody is “paying for” the trillions upon trillions Congress is spending to provide virus relief to individuals, small businesses and families.

It’s also apparent (albeit still beyond the grasp of many everyday people) that the Fed can backstop and otherwise support any market that needs backstopping and supporting. All that’s required is a liberal interpretation of the central bank’s emergency powers and a thumbs up from the Treasury secretary.

This is a potentially earth-shattering development, assuming enough Americans take the time to appreciate what it means in terms of opening the door to policies with the potential to benefit regular people.

If Congress can spend trillions without paying for it, then what stops elected representatives from green-lighting massive public works projects? What keeps lawmakers from putting the jobless to work building bridges, tunnels and roads? More to the point: If not ostensible limits on spending, what is it that is holding America back from lifting the vast majority of the poor out of poverty, providing health care for the masses, funding a college education for everybody who wants one, and just generally promoting a better life for all Americans?

Yes, the front page of the financial section is plastered with headlines about the deficit and the national debt, but it’s surely occurred to anyone intelligent enough to pick up a paper (or read one online) that we did not wait to spend the money until we received funds from would be “lenders of dollars” (to paraphrase Lloyd Blankfein’s misguided tweet about America’s borrowing “needs”).

It’s also likely dawned on large swaths of the voting public that the Fed can effectively decide what the US pays to borrow. If that somehow wasn’t obvious, Donald Trump has brought it to voters’ attention with incessant tweets singing the praises of low (or even negative) rates, for the explicit purpose of reducing the cost of debt to zero.

Even now, debt servicing costs comprise just a tiny fraction of the ballooning deficit (see the figure). Besides, the Fed is absorbing much of the stimulus anyway. The arm’s-length arrangement that puts a primary dealer between the Fed and the direct monetization of government spending is, at best, a distraction aimed at obscuring the true nature of central bank bond-buying. At worst, the middleman is a beneficiary whose presence is totally superfluous other than as a facilitator of a system that effectively keeps regular people from enjoying the benefits of monetary policy accommodation.

Once the Fed embarks on yield-curve control later this year (which they will), the only thing standing in the way of the public putting the last couple of pieces of the puzzle together will be intellectual laziness or deficit doomsaying from any Republicans brave enough to rebuke Trump in an election year. One assumes that will be a small group, especially given the poor optics associated with holding up stimulus aimed at providing pandemic relief.

It’s true that there are limits to how much money we can spend without offsets. Eventually, inflation expectations will rise, and a self-fulfilling prophecy will be set in motion. As true as that is, it’s also true that nobody knows what the limit actually is – not really, anyway. There are plenty of people willing to venture a guess (usually by referencing the rate of economic expansion), but nobody knows for sure.

What we do know is that inflation can be tamed. Paul Volcker proved as much. Of course, “one” is a small sample size, and it’s possible that the next time America witnesses “big league” inflation (to use a Trumpism), it can’t be brought under control even with draconian measures. But it’s important to note that a hyper-inflationary outcome has a lot working against it between well-known structural factors and, at present, a demand shock the likes of which hasn’t been witnessed since the Great Depression.

Many attempts have been made recently to discern a “silver lining” in the crisis. An article that ran in these pages last week asserted that no such silver lining exists.

While that’s probably true as it relates the current economic reality – defined as it is by joblessness on a scale never witnessed and a coming economic contraction in the second quarter so anomalous as to elude language’s capacity to describe it in stark enough terms – there may be a longer-term silver lining.

That silver lining: That citizens in advanced economies which issue reserve currencies begin to demand answers from their elected officials as to why more isn’t being done to promote full employment in the absence of inflation.

Read more: As US Gears Up To Borrow $3 Trillion In 3 Months, Here’s The Truth On Government Spending

64 thoughts on “If There’s An Economic Silver Lining In This Crisis, It’s The Exorcism Of The Deficit Demon

  1. I’m sorry, I just don’t buy it. The argument — “If Congress can spend trillions without paying for it, then what stops elected representatives from green-lighting massive public works projects?” — is tautological at its core. The only reason Congress can spend trillions without paying for it is that the U.S. dollar is the world’s reserve currency. But if we keep spending trillions without paying for it, it won’t be for much longer. Ask the folks in Greece, Italy, Argentina, or Venezuela (to name a few).

    1. Greece and Italy spend Euros, so they need to convince the ECB (and Angela Merkel). Argentina and Venezuela demonstrate that there is a limit to the amount of “free” money that can be spent.

      1. But that’s my point. If you don’t print a reserve currency or even your own currency, then you are not going to be spending trillions of “free” money without consequences. In fact, sooner or later, the consequences will be dire.

        1. You’re talking in circles. Again: Your comment above suggests you don’t understand from a fundamental perspective. Let me put it to you this way: If you type the words “Greece” and “Italy” while arguing this subject, it demonstrates to people like me that your understanding of it is so rudimentary that you can’t be reasoned with. Your initial comment disqualifies you from the discussion.

          I’m sorry, and I’m not trying to be abrasive. But even an economist who doesn’t agree with me on this would tell you the exact same thing. You clearly don’t understand it well. Again, apologies, but I’m just being honest with you.

          1. While I don’t understand why I don’t understand, I also don’t understand why that is.

            But I can tell I’m in good company here, so I let it stand at that.

          2. I get the Greece/Italy point, US has its own currency. Exorbitant privilege ect. What will bother some is the idea that there is effectively “a free lunch” because YCC or dis-inflationary dynamics. Don’t you have to have a lot of confidence in extrapolating out current circumstances into the future – aka more of the same–to go down this route?

      1. Right. My point is that if the U.S. runs multi-trillion deficits for five, ten, fifteen years — because we can — we shouldn’t be surprised if we wake up one morning and discover the greenback is not the world’s reserve currency. I know, Japan. But outside of the world’s financial capitals, who actually gives a rat’s fart about the yen?

    2. Do Greece, Italy, Argentina or Venezuela maintain a global navy and massive army capable of assuring the safety of international trade routes? People forget why the US gets to be the reserve currency, why people actually have faith in it. You buy dollars and use dollars because if you decide not to America takes its toys and goes home. People may get pissed off at American Militarism but at the same time it provides a level of stability globally that no other country or block of countries can provide, not china, not the EU and certainly not Russia.

  2. Putting the masses to work on massive public work projects won’t be like the 1930’s. Today they would use massive machines run by highly skilled operators. The masses would only be in the way.

  3. I will admit that I have been slow to realize just how flexible Fiat currency can be. Mr H, some may think you are throwing all caution to the wind. I would have 2 years ago. Currently, with all major currencies creating money/debt
    in tandem it becomes relative and equitable. In some stable future inflation will probably become relative to exchange rates. If nations are trading less it is less important. We may find tariffs as a normal part a monetary toolbox. The raising taxes to cool inflation will be a hard sell.
    But yes, perhaps we may finally break free of the gold mentality that most of us had indoctrinated into us during our economic educations. If this whole shitshow falls apart now we will be going to war to get the other guys gold but we will call it something else. The history of the human race has been;My god is better than your god and he said I should kill you and have your stuff.
    Dalio has shown that war is usually what ruins the fiat relation, not debt. Mr Dalio just does not see it that way.

  4. So right now we have: a massive increase in the money supply; a few industries crippled on the supply side; and people hoarding meat. That may seem insignificant, but if you add a few more industries to the supply deficit and keep stimulus flowing, you have a perfect recipe for hyperinflation and a potential loss of monetary sovereignty. Unfortunately, if the virus situation is abated quickly, you end up with unneeded stimulus and inflation, but if it lasts too long, you increase the chance of supply side problems and hoarding, also resulting in inflation. The consequences need to be considered in terms of years, not months.

    1. The idea of the US “losing monetary sovereignty” is literal nonsense. It literally does not make any sense. It is a gibberish statement.

      As for the rest of this, I’ve discussed it at length here in about a dozen meat articles over the past two weeks. I’m sure you’ve seen or read them.

      1. Yes, I’ve read them all. That’s why I’m concerned. Americans will hoard (something more valuable than toilet paper) if they have money (they do) and think they can get more for it later. It’s starts with non-perishables when inflation is moderate, then non-perishables when it gets extreme. The comment about sovereignty has more to do with an international response to a perceived policy misstep and a better alternative to a currency that lacks proper inflation controls. That’s never happened before, but neither has money printing on this scale before. As unprecedented measures are implemented, the risk of misstepping on inflation control rises dramatically.

    2. By the way I agree with you whole heartedly to the extent that the US maintains monetary sovereignty, but that is my long term concern.

    3. I’d like to direct attention to the current issue of The Economist May 9. The extended Special Report in this issue titled “Parallel Universe” deals directly with the question international banking and of the dollar as the world’s reserve currency and the efforts to move away from it.
      The contention is that geopolitics and technology are setting the stage for the world to pull away from the dollar, and the covid-19 pandemic is precipitating it. Efforts are underway.

      Since one of the primary drivers of currency value is FAITH, as in “full faith and credit blah blah”, we should be cautious in selecting our leadership. Trump has weaponized the dollar and has all the stability of a rabid dog.
      It doesn’t take a lot to see that when there is a rabid dog in the neighborhood, people will move away from it.

      The sheer scope of the global financial plumbing geared toward using the dollar presents a limit to how quickly it will be dismantled, along with the question of who/what currency would replace it. There is not a currency or government right now with the ability or desire to be the replacement, but the tide is turning.

  5. “Full faith and credit” and as long as everyone keeps the faith (and there is nothing like the coercive force of being the world’s reserve currency to impress the perils of apostasy upon the properly formed hearts and minds) and the Fed can keep a lid on spreads, which it has shown itself fully capable of doing, there is no reason why multi-trillion dollar deficits for massive infrastructure projects that could raise the productive capacity of the country are not only possible but sensible. There are plenty of bridges to fix, water treatment and sewer systems to update, etc etc that could improve the lives and economic prospects of everyday Americans.

  6. Thank you for explaining this at the level and detail you did. I am concerned about ‘unintended or unknown consequences’ . Do we have any real world examples to show what if anything should be avoided? Is this the path Japan has been on? If so what avoids economic stagnation caused by central control over the economy as the government picks winners and losers?

    1. Restrictive immigration policies that leads to a Japanese like demographic death spiral might be something to be avoided, concentration of wealth another –really don’t want to end up like Ancient Sparta perhaps the most extreme example of a society that restricted citizenship and allowed wealth (in the form of land distribution) to concentrate so that it slowly spiraled down the drain to political irrelevance —at least in the real world.

      1. Thank you. I understand the deleterious effects of the two things you reference. I am guessing you are saying that to maintain a balanced approach to MMT then, to use an analogy, we need to be sure our garden is otherwise well tended?

  7. The decline of the USD as the world’s reserve currency is already happening.

    The USD continues to be the primary reserve currency due to the size of US economy and the strength of our financial system- but our position is slipping. Over 60% of foreign bank reserves are in USD ( but this was 70% in 2000).

    It seems unlikely, but not impossible, that the rest of the world would willingly choose another currency to “hold” over USD if they could only choose one currency. However, as China and Germany continue to expand their trading relationship and China continues with “Belt and Road”, they may continue to require or force transactions to be denominated in their currencies, or a basket of currencies. As a result, the status of the USD will continue to be diminished.

    If US is not aware and protective of the USD ( and the economy and financial system backing our currency) and/or USA is relatively more irresponsible than Germany is with the Euro ( Deutsche Mark) – there will be a tipping point when USD is no longer the “king”.

    1. Yes. And it doesn’t have to happen collectively or with a “hive mind”. It just takes one country at a time negotiating their debt in some other currency (yes, even crypto). The US might agree to such arrangement if, for example, the Greenback is rapidly depreciating against another first world currency that is perceived as more stable. It would just be looked at as an “arbitrage opportunity” at the time. Make that a habit, and you have a big problem on your hands.

      I have, in an inherited stamp collection, a stamp from the “Dreiches Reich” of Germany, the printed face value of which is 20 BILLION Marks. How’s that for a policy misstep?

      1. I have dozens of those stamps, acquired as a child, and have always let them serve as reminders of the perils of inflation. The Germans invented social security and set the arbitrary age of 65 as the magic date for receiving state benefits (life expectancy was ,65, btw). Imagine your joy at getting that nice pension, only to soon see a time when you couldn’t buy a stamp with one year’s benefit.

  8. There is absolutely no reason a single person should go to sleep hungry in the country. Looking beyond these short term meat supply issues, if you “beef” up demand for food, farmers raise more cows, packers increase capacity. If anything prices might fall long term as players gain scale.

    It’s immoral for reserve currency issuing countries not to implement MMT policies. The entire world benefits, especially emerging markets with dollar denominated debt.

    I do wonder what the impact of de globalization will have on reserve currencies

  9. The real cost, given our current fiscal and monetary relationship, is in the wealth gap. The larger the deficit the lower rates need to go.

    Since the fed has expressed extreme reluctance on negative rates one can assume they’ll fill the gap with QE(ternity) to the political and economic detriment of the 99%.

    1. As someone who gets his news “online”, I admittedly wonder why it is considered obscene to suggest spending trillions on infrastructure projects and/or “lift all boats”.

      1. Personally I think they should print trillions of US dollars and just buy gold, then, when the dollar crashes and gold soars…..sell the gold and pay off the debt……easy!

      2. My guess is because Republicans want infrastructure projects to be either public/private ventures or entirely private so that someone can profit from it then contribute to their campaign coffers. This is really sad.

  10. Again, this is nothing except a bet that having reserve currency status is a thing of value that can be tapped, like a silver mine. It is a bet that the opportunity cost of switching away from the dollar and SWIFT and a Wall Street centered finance system and the Treasury as the world’s premier risk-free asset from which all other assets are valued is high enough that the United States government can freely print money to pay for public programs. And in the short term, it will work, just like the Bretton Woods dollar worked, until America printed money and eventually defaulted when France wanted their surpluses redeemed in gold. But when the imbalances pile up, countries will not tolerate subsidizing American largesse and they will move to something else. SDRs? A crypto currency? The Remenibi? Who knows. But oil, interstate trade, and the pipes of the world’s economy will not be financed with a purposely debased currency for the sake of one country’s politics.

  11. The whole point of having money is to allocate sparse resources a) efficiently and b) in a way that everyone agrees. I don’t expect the government to spend money (i.e. allocate resources) efficiently, so printing money should cause total economic productivity to decline, and is (to a first approximation) not necessarily good for the economy. Higher order approximations may offset this completely. I’m also not sure everyone using dollars will be happy with the US using their position as reserve currency issuer by allocating more resources to the US than they did before.

    You seem very strongly against the “myth” that the US has to somehow “pay back” their debts. But it’s a useful myth. In a very real sense, by lending money to the government, other entities are currently giving resources to the government that they expect back. In this very real sense, I expect them them to be unhappy with giving the US government resources and not getting any back. Of course the money to resources connection is an illusion, but the resources being allocated are not. If the US just prints money to pay back debt, you can think of it as a “soft” default on its debt when expressed in terms of resources. Thinking on a longer timeframe (say 50 years) it isn’t clear that this is a smart thing to do.

  12. I am skeptical of the value of MMT. The side effects and long term subversion of “full faith and credit” are very real possibilities plus their are echoes of the neighborhood children’s screed “But mom everyone’s doing it. . .” that has not really been accounted for. I tend to think of MMT like frequent flier miles –when Reagan deregulated the airline industry carriers began to hand them out like candy to defend routes and retain their regular customer base. At some point (the Economist ran an article on this decades ago) airlines realized that there was a vast supply of miles that far outstripped their ability to honor them in reality. And so blackout dates, use fees and expiration dates appeared. A crude analogy but instructive on a basic level. But I do think MMT a genie best kept in the bottle –though a day may come when we have no other alternatives.

    The Fed appreciates that in the long term its extraordinary measures carry side-effects that will gnaw away at smooth market functions and will eventually have to be addressed. The moral hazard problems embedded in the various facilities and QE are real and ultimately will raise transaction costs and so undermine the smooth functioning of markets. Free riding, which is clearly to be seen in the corporate bond market, is tolerable in short term but very corrosive over a longer horizon.

    What is missing here is POSITIVE fiscal stimulus -not just tax cuts with fantasy multiplier effects that, even if the exist, are mitigated by the wealth inequality created by them . There was a need for a robust fiscal stimulus in the wake of the GR in 08 and there is even a greater need for it now. For Jerome Powell of all people and in his capacity as Fed Chair tell Congress explicitly that you need to spend money and lots of it is perhaps the greatest indicator of how grave the situation. Goldman this morning was clamoring again for negative rates –and all of them are running to the Fed as if it were a doting mother so that they do not have to ask their stern father, Congress, for what the American people need or to put it another way they do not want to bite the tax cutting hand that feeds in the GOP for help from the Democrats who may actually ask for some of their profits in return —pure greed, even at a time like this –is what is driving markets to demand negative rates whose benefits are dubious at best.

    1. You say you are skeptical of MMT yet call for POSITIVE fiscal stimulus. Why are the two not compatible? The calls for MMT from the left have primarily been for universal healthcare and education. And if it’s not included already, I’d throw in infrastructure spending. What could be more “positive” and productive for our society than healthcare, education, and quality infrastructure?
      Currently these first two enormous costs have become ridiculous in the extreme, and our infrastructure is a joke for the richest country on the planet.
      These are the points of H’s amazing article. It’s this type of spending that would truly make America great again and are nowhere to be found from the Republicans. Their spending plans have to make the rich richer.

      Did I misunderstand something in your comment?

      1. I am skeptical because I believe there is more to money than its credit facet. MMT is updated Chartalism, which does not consider money as a commodity, which it is, as a measure of wealth, a store of value or at the end of the day a medium of exchange –it is ultimately merely a credit instrument. That may be useful in credit markets but no so much when it comes to honoring tangible claims like pension obligations like Medicare, Social Security, government worker retirements. The reality is that just as we have never taxed sufficiently in this Republic (and you could make the argument that it is in America’s DNA since a refusal to carry the costs of policing the Great Lakes Ohio, Tennessee and Mississippi Valleys was a catalyst for the Revolution) which would mean that it would just be money printing and then you really are playing with the “Full Faith and Credit” of US currency whether it is reserve or not. I just do not believe that there would be any serious commitment to taxation necessary to maintain the credibility of dollar as “legal tender for all debts public and private.”

        1. Now I’m really confused. In your comment from yesterday, above, you state “multi-trillion dollar deficits for massive infrastructure projects that could raise the productive capacity of the country are not only possible but sensible.”
          The MMT advocates are including investments in healthcare and education in another element of productive capacity – people.
          You also say above that this country has never really taxed enough. Our current healthcare and education costs are already massive taxes on society, just paid to corporations who profit rather than the govt. (As someone who has to pay $24,000 in HC prems and deductibles for health insurance before I get a dime of insurance, yes, I feel heavily taxed)

          Since we’re probably running out of room on this thread I may just have to remain confused by your comments.

          1. Because you are financing in a traditional way –issuing bonds and paying interest. MMT proposes to eliminating that “charade” –it is a fundamentally different way of financing deficit spending. You do not seem to appreciate the significance of that difference. I am more in line with Summers or Krugman

  13. We are in the middle of the experiment…..and so far, we aren’t seeing any of the negative consequences that have been predicted…….and we already know which actions to take if those negative consequences do pop up. We are making our on rules……how about we make some of them benefit the 99%?

  14. I agree and there is little to add except the practice of throwing Dollars at every problem has created a positive reinforcement loop.. Whereas I disagree with H …on the entire MMT scenario he is correct in one aspect and that is the “glacial Pace ” projected by the data at this point..I would add ,however that personal experiences have been such that in these long duration projects like (de-dollarization ) all the eggs sometimes hatch at the same time… The Political leadership in this Country has cast an aggressive tone and it is questionable if the bite is as strong as the Bark… None the less the adversarial relationship will be met with the same prevailing attitude so this serves as an catalyst ….(for change).

  15. As a US citizen with children, I am very concerned about the long term impact of massive money printing on our country’s position in the world, on the free market and the opportunity for our children to live freely and have the opportunity to be self-sufficient ( even if there are periods when they barely scrape by) in a free market, democratic society. The American dream!!
    Any money printing should be thoroughly debated and approved by Congress ( elected by the citizens) and not done by unelected, appointed officials.
    This should not occur through the back door or without considerable discussion- including the long term impacts.
    I do not believe that our citizens will starve unless we print trillions right now. How about a balanced approach that looks at immediate problems and long term implications. If MMT is the only viable solution, then that will become self evident.

  16. There is no such thing as a free lunch

    What prevents increases in money supply from following the law of diminishing marginal returns

    A dollar printed in times of deflation contains seignorage value that would have gone to the holders of cash instead

    Have you read the Dalio chapters that you posted?

    1. Definitely agree that there is more room for deficit spending than republicans like us to believe. All I’m saying is there’s a limit to everything, except potentially the eventual size of the universe.

    2. To answer this rather bizarre question, yes, I have read every word of everything that’s ever been posted to Heisenberg Report. Why in god’s name would I post something I haven’t read? How would I know whether it’s any good?

      1. And further, if you’re reading websites which don’t present a diversity of opinions, or if you’re reading people who can’t (or refuse) to argue both sides of a given point, then you aren’t reading anything that’s worth reading. I frequently play devil’s advocate to myself (see one of the posts on China and Trump from Wednesday, for example) to make sure readers aren’t just getting 18 straight hours of the same message. Obviously, I have a strong opinion on this particular subject and, yes, it happens to align with Stephanie Kelton, but you should note that this site’s entire brand was initially built on articles marveling at how distorted the world has become, distortions that include the monetization of government deficits. The point being: I can argue both sides of this coin the same way I can argue both sides of any coin. It’s a gift of mine.

        1. Haha I appreciate the response wholeheartedly – the diversity and freshness of thought of your writing is what I enjoy most.

          On the topic of Kelton’s writings though – the power to create new supply of a reserve currency at levels allowed by MMT is a powerful ability to have & if responsibly used, could solve many problems this country faces. On the other hand though, I find it hard to believe that our government, especially in its current state, is remotely competent enough to wield this power wisely – potentially with the exception of the Federal Reserve if it’s able to maintain the quality of its decision making.

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