Ted Cruz on Wednesday said he doesn’t think Congress is going to pass another stimulus bill.
He blamed Democrats. The same Democrats who, if they controlled both chambers, would have spent an additional $3.5 trillion months ago. Those Democrats. Those are the people holding up the spending, Cruz would have the public believe.
Unfortunately, some low- and middle-income GOP voters will buy that. Only not with money. Because they don’t have any. Which is what Democrats have spent the last three months trying to explain to people like Ted Cruz.
Anyway, it underscores the extent to which the idea of limitless spending facilitated by the Fed is still anathema to many lawmakers. Sure, the current bout of Beltway bickering is part pre-election posturing. And, yes, the bold action undertaken earlier this year suggests that, when faced with a generational economic calamity, even budget hawks will loosen the purse strings if for no other reason than to avoid backlash from constituents.
But deep-seated misconceptions about deficits and debt are as difficult to overturn as beliefs in deities — facts are wholly insufficient in the face of religious zeal.
That, perhaps more than anything else, explains why the scary rhetoric about the inflationary consequences of the current monetary-fiscal policy conjuncture are probably overstated. For every Democratic firebrand willing to openly embrace the tenets of Modern Monetary Theory as a policy framework that should operate outside of exigent circumstances, there are (at least) a dozen lawmakers who would never embrace the idea of direct, overt debt monetization.
This underscores why the Fed’s shift to average inflation targeting may ultimately fall flat.
“The Fed’s policy review has been conducted in a more glass-box manner for the past 18 months, and it is unlikely to involve measures any stronger than outcome-based forward guidance”, JPMorgan wrote, in a note out earlier this week. “With no hikes priced until early 2026 anyway, the stimulus value of this policy shift seems small”, the bank added.
When Jerome Powell unveiled average inflation targeting late last month, Stephanie Kelton offered a simple assessment. “So now we sit back and wait to see if Congress delivers”, she remarked.
For their part, JPMorgan has doubts. The Fed’s new policy regime shift “has limited potency over the next year or two unless paired with loose fiscal policy”, the bank said, adding that, “Biden’s fiscal platform doesn’t read like a manifesto on Modern Monetary Theory either in its magnitude or its components”.
No, it surely does not. And, as regular readers are acutely aware, that is a point I have made forcefully time and again in these pages in the months since Joe managed to pull off a come-from-behind win in the primaries.
A related point that pervades virtually every economic discussion in these pages is my steadfast contention that the only way to break the cycle wherein loose monetary policy does very little for the real economy (read: for everyday people) while simultaneously levitating financial assets (thereby exacerbating inequality), is to ensure that ongoing central bank accommodation is accompanied by an equally persistent fiscal impulse.
Without that pairing, we are doomed to a fate of slow growth, lackluster inflation, and ever-expanding asset prices. Have a look at one additional chart from JPMorgan (below).
As the bank writes, “without ongoing fiscal thrust, perhaps the Fed’s success in generating higher inflation might only be visible in asset prices, given how periods of low real rates often foster broadly expensive markets”.
Yes, “perhaps”…
Can I get an AMEN?!
I frequently have email discussions with a fiscally conservative friend who is worried that MMT would be the worst thing we could possibly do and lead to runaway inflation and government dependence (yes, it is possible to have civil disagreements with someone without hating each other). As H said, it’s to the point of religious zeal. While I can appreciate the criticism of the Fed’s policy over the last couple decades, we are where we are and the reality is that the Fed can’t just pull the plug on their current policy without devastating consequences. No politician is going to countenance a depression on their watch just to return the market to its “natural state”, whatever that may be.
Is MMT without risk? Of course not, but as Kelton and H keep saying, the alternative is we keep going down an unsustainable path of wealth inequality and low growth. The devil we know isn’t always the best option.
I should add that MMT is the closest thing to actually explaining our current circumstances. I try to get across the point that MMT is the best descriptor of how our fiscal and monetary policy actually works, so let’s at least recognize that and then we can have discussions about what the policy should follow based on recognition of that point. I think it’s important to distinguish between the theory and policy prescription.
We need another generation further along from the gold window it seems. The phrase hard currency has finally gone out of vogue. Dalio was last months Chicken Little but fails to recognize some of the flaws in his own arguments.
Blaise Pascal says it best: “There is no such thing as the truth, we can only deliver the best available evidence and calculate a probability.”
Flaws abound with each position. MMT has us raise taxes and interest rates if inflation does heat up.
The Republicans conveniently hate taxes but do not address at all the ramification of interest rates.
“Debt is bad” is a simple mantra. You can make a child understand that. But good is often enemy of the best.
It seems to me we are barreling headlong into repeating some of our greatest historical mistakes. Both parties, but especially the GOP, remain indoctrinated by austerity economics and “fiscal conservative” grandstanding, including “nothing will fundamentally change” Biden. When they finally wake up, if they wake up, it may very well be too late. Despite the US being a supposedly educated country, few remember that FDR was actually worried when he came to power in 1932 that he might be the last US president if his economic policies didn’t work. Economist Irving Fisher also said as much a year later in his “Debt-Deflation Theory of Great Depressions”, a short essay that could not be more of the moment in 2020. Everyone today would be remiss not to remember the following passage from that work (notice he’s not talking about the FED, but about the executive and legislature i.e. fiscal policy):
“Those who imagine that Roosevelt’s avowed reflation is not the cause of our recovery but that we had “reached the bottom anyway” are very much mistaken… Had no “artificial respiration” been applied, we would soon have seen general bankruptcies of the mortgage guarantee companies, savings banks, life insurance companies, railways, municipalities, and states. By that time the Federal Government would probably have become unable to pay its bills without resort to the printing press, which would itself have been a very belated and unfortunate case of artificial respiration. If even then our rulers should still have insisted on “leaving recovery to nature” and should still have refused to inflate in any way, should vainly have tried to balance the budget and discharge more government employees, to raise taxes, to float, or try to float, more loans, they would soon have ceased to be our rulers. For we would have insolvency of our national government itself, and probably some form of political revolution without waiting for the next legal election. The mid-west farmers had already begun to defy the law.”
The law and order party is trying to order some disorder by starving families. Break ins and robberies for food will be shameful but inevitable. It would bolster the law and order platform. Until it goes too far. Mitch is playing poker with peoples existence. He knows the history of his chamber so ignorance does not apply. His whole aim in life was and is to be where he is.