You can feel the ground shifting. The pandemic forced the issue.
Around this time last year, the veil was lifted on the charade that says advanced economies with sufficient monetary sovereignty are budget constrained. It’s now clear to many everyday people in developed markets that their governments do not, in fact, have to “fund” fiscal spending up front.
Of course, this has always been a fiction, and a periodically pernicious one at that. The notion that funding, for example, college tuition, infrastructure and healthcare is “too expensive” is just a useful diversion when politicians need to “explain” why they can’t pursue an agenda they don’t care for or, perhaps more to the point, agendas they believe might upset the existing order or otherwise irritate special interests.
The fact is, there isn’t anything priced in dollars that the US can’t “afford.” And because everything is priced in dollars domestically, and most everything can be priced in dollars globally, the US can “afford” to buy anything it wants. And no, the government doesn’t need to tax you or borrow to do it.
Those are the facts. Everything else is fiction.
This is all familiar to regular readers, but I imagine the lesson will be lost once the urgency of the pandemic fades. So, I’ll reiterate it, with a twist. Everything below is meant to appeal to a wider audience, so those of you steeped in the debate will need to forgive any repetitiveness.
Infinity + $100 billion
I often lament the extent to which a self-evidently false narrative has, over the years, become synonymous with common sense.
The government, the story goes, needs to balance its books. Running large deficits is irresponsible. Too much debt is a one-way ticket to bankruptcy.
That all sounds like common sense, but when you’re talking about a currency-issuing monetary sovereign which counts itself part of the developed world, it’s the furthest thing from intuitive. Rather, it’s manifestly counterintuitive.
Forget about inflation for a minute. We’ll get to that shortly, but before we do, we need to run through the basics, which the vast majority of the public doesn’t understand. Indeed, it’s apparent that, due to decades upon decades of indoctrination, many market participants, politicians and nominally intelligent individuals don’t understand the basics either.
You can’t properly “borrow” a sum that’s denominated in a currency that you, and you alone, have the authority to issue. The US has access to a limitless supply of US dollars by virtue of having a monopoly on their legal issuance. Ask yourself this: What does it even mean for the US to “borrow,” say, $100 billion? Or for Britain to “borrow” £50 billion?
The “supply” of US dollars to the US government is infinite. Nobody on Earth can print a real dollar except the US government. And the US government isn’t constrained in how many of those dollars it can print. No sky-dwelling, bearded Zeus handed down any stone tablets chiseled with divine dictates setting upper limits on the issuance of currency. And because money itself is just as imaginary as our bearded Zeus, there are no natural laws governing or otherwise constraining its issuance either.
Does it make sense to say that the US can “borrow” $100 billion? No. On multiple levels, no.
This is circular, so there’s no “logical” place to start. Given that, I’ll just pick a point on the self-referential merry-go-round and go from there.
First, what is the outcome of that transaction? How many dollars does the US have if it “borrows” $100 billion? What do you get when you add $100 billion to infinity? What’s on the other side of the equals sign here:
Now come the corollaries.
The notion that the US can “owe” dollars is nonsensical. The US can have an obligation to distribute dollars, but it can’t “owe” them, where “owe” entails indebtedness. The US is not “in debt,” or at least not if the obligation is payable in dollars, which all obligations generally are.
If you have an infinite supply of something, the only way you can “owe” it, is if you choose not to make a distribution from your limitless supply. For example, there are only two ways I can “owe” a debt denominated in my own saliva: I have a case of dry mouth or I refuse to spit in your hand, preferring to wait until some future date.
Treasurys, then, aren’t “debt.” They’re interest-bearing dollars.
At this point, even the casual reader will understand why the debate about the “interest cost” of America’s “debt” burden is no debate at all. It’s just people speaking gibberish at one another. Interest payments are denominated in dollars. The US has infinite dollars. A “cost” is not a “cost” if payment can be rendered in something that you can conjure at will.
In short, the US has no “debt” and there is no interest “owed.” Period. To say otherwise is to traffic in self-referential nonsense.
Americans aren’t smart enough for hyperinflation
Now, let’s turn to inflation, the hot-button issue of the day according to the financial media.
You’ve probably heard some version of the argument that historically, societies which issue currency at a rate that exceeds economic output doomed themselves to hyperinflation. There are two things worth noting about that.
- We don’t know whether it’s true. We simply can’t make sweeping, definitive claims about what has and hasn’t “always” been the case for every society throughout human history. We don’t even know, for example, whether monogamy is a naturally occurring predilection or a totally contrived state of affairs that in fact runs counter to our ingrained inclinations. Society tends to prefer the former characterization, but the high incidence of infidelity seems to argue in favor of the latter.
- The complexity of the global economy and the opacity of the financial system make it extraordinarily difficult for everyday people to come to any kind of economic conclusions, let alone form a consensus that could trigger runaway inflation. Sure, supply/demand imbalances, bad policy and perverse incentives can drive up prices for things like lumber, healthcare and college tuition, but none of that has anything whatever to do with Americans reading history, doing math and collectively determining that a green piece of paper which never had any inherent value in the first place, is somehow more worthless now than it always was.
Speaking to that second point, the figure (below) makes sense to analysts, economists and readers like yourself, but let’s do a thought experiment.
If you could somehow assemble 1,000 people in an auditorium, each typifying Americans’ general interest in, and knowledge of, the US economy, how many of those archetypal, “average” citizens would be able to decipher and otherwise explain what the chart shows?
Even if you kept all of the text on the visual and left the legend intact, it is inconceivable (to me anyway) that more than 100 people out of the 1,000 in the building would come away from that gathering truly concerned about inflation, where “truly” means they would alter their consumption habits going forward and seek out additional information.
Remember, our sample in this thought experiment is 1,000 typical Americans. So, the same people who decided Facebook is a good place to spend lots of time. The same people who, anecdotally, have a difficult time differentiating between “there,” “their” and “they’re.” The same people who famously struggle to identify other countries (any other countries, with the possible exception of Canada) on an unlabeled map.
I doubt seriously that enough of those “average” people are interested in, let alone capable of, conducting the kind of analysis necessary to grasp why the current policy conjuncture “should” be inflationary. That kind of analysis requires far more in the way of study than it did just three decades ago. It’s hard enough to teach two dozen undergraduate students the basics of finance without half of them failing the course. If you attempted to incorporate quantitative easing, negative rates and all the distortions brought about by the post-financial crisis monetary policy regime, nearly every student would almost surely fail. And that’s assuming they didn’t drop the course halfway through after being forced to ponder the idea that someone would pay someone else for the “privilege” of loaning that person money (i.e., negative rates).
Extrapolating from that to a citizenry that is almost totally disinterested in scholarship of any kind and can scarcely be bothered to read a relatively short newspaper article, let alone a book, the notion that runaway inflation is a serious risk in the US seems wildly far-fetched.
The tragic irony of MMT
The irony, of course, is that all of the above is essentially an argument in favor of hyperinflation. That is, if enough average people took the time to read something like this straightforward article, they’d quickly realize that none of this — the dollar, Treasury bonds, British pounds, gilts, etc. — has any meaning whatsoever. It’s pure fantasy.
But don’t worry. This article is, as of this sentence, 1,497 words long. That means the average person won’t read it. And it would take a mass, across-the-board awakening involving hundreds of millions of people, to shake the psychological scaffolding that gives meaning to the dollar and the international financial system on which it’s based.
This is the tragic, self-defeating irony of Modern Monetary Theory. The same public awakening required to compel lawmakers to abandon myths about the deficit and debt on the way to instituting policies that can change lives, reduce inequality, eradicate food insecurity, establish universal healthcare and bring the environment back from the brink, would likely also lead to a rapid, wholesale loss of faith in the same dollars which, once freed from dogmatic shackles, could have saved the world.