The Deficit Debate Is About to Be Settled
April 28, 2021 | BY Our Partners at Equinum Wealth Management
“Money doesn’t grow on trees,” roared Papa Bear in The Berenstain Bears’ Trouble with Money.
Though ‘cancel culture’ may not have criticized the Berenstain Bears for their gender stereotypes, they ought to call them out them for their misconception about finances. Because apparently, money does grow on trees.
As of now, the total cost of stimulating the COVID-stricken economy stands at $3.4 trillion, according to the Committee for a Responsible Federal Budget. This includes monies spent on PPP loans, direct stimulus checks and other government spending programs. (And that’s on top of the $2.9 trillion that the Federal Reserve spent on their own asset purchasing, including junk debt.)
Now, Congress is debating a $2 trillion infrastructure bill proposed by President Biden which includes things like roads, airports, railways, a guaranteed job program…you know, ‘infrastructure.’ (We’re not implying that these things aren’t crucial, but calling them ‘infrastructure’ is simply inaccurate.)
If you’re wondering, ‘Well who’s gonna pay for all this?’ you’re not alone. (Don’t wonder too loudly though, or you’ll be met with a ‘you don’t care about the poor!’)
Defining the financial role of the Federal Government has always been a debate among economists. But this debate has taken a backseat to a new debate, which we’re about to explore. And that is: Does national debt even matter?
What started out as a fringe belief in the minds of a few economists has started to creep into the progressive wings of our liberal lawmakers. This is known on the Street as MMT, or Modern Monetary Theory.
Economists who buy into MMT argue that a country that prints its own currency has little to worry about its debt. The crux of MMT is that national debt isn’t actually bad, since it’s basically another way for the government to pour money into the private sector. See, when a government enacts a spending program, it prints and circulates more money into the economy. So yes, the government is taking on debt, but it can always print more money to cover it. MMT says that the national debt deficit should be upped to the point where a country has full employment, because the deficit will be made up for by the output from the employees. (The only thing a money-printing country should worry about, argues MMT, is inflation.)
Remember the old Keynesian view on monetary policy? The one where economist John Maynard Keynes argued that in an economic downturn, the government could stimulate demand by paying people to dig holes in the ground, and paying others to fill them back up? His point was that we should inject money into the economy from the top – through government programs – and to let the money just keep circulating downwards.
Well, MMT takes the Keynesian view to a whole new level.
According to MMT economists, the purpose of taxes is not to serve as federal income for the government to cover its expenses. Rather, its purpose is to solve income inequality and limit inflation by taking money from the rich.
Is it a coincidence that the lawmakers that have embraced MMT are the ones who want to institute programs like The Green New Deal or Medicaid For All? You can’t blame the sceptics for believing that this is just a convenient way to answer the “who’s going to pay for it?” question.
Hold tight, ladies and gents. The debate about MMT is about to get settled. If sending out stimulus checks to 85% of the country and dishing out trillions on various random programs doesn’t cause the degradation of the dollar with hyper-inflation, then don’t we all need to agree that MMT wins?
Whether it’s the U.S. dollar or our traditional economy textbooks, something’s about to become worthless. We’ll just need to wait and see which one.