Deficits Don't Matter?
by John Lawrence, July 23, 2020
Part 1
So says Dr. Stephanie Kelton in her new book, "The Deficit Myth." We know that The US Federal Reserve can just print money as they are doing in response to the pandemic. Fed Chairman Jerome Powell says they will print $3.5 trillion by the end of the year. In response to the Great Recession and its aftermath the Fed printed $3.9 trillion. Other central banks around the world have also launched massive money printing programs. CNN reports, "The world's four most powerful central banks have pumped more than $9 trillion into the global economy since the financial crisis in a bid to boost growth, inflation and employment." In response to the pandemic the European Central Bank announced a huge new money printing program aimed at keeping the region's financial system functioning and helping the economy cope. With all this money printing, doesn't this put taxpayers on the hook to pay all this money back. The simple answer is "No."
Kelton is an advocate of Modern Monetary Theory (MMT). She writes:
You've probably already seen MMT's central insights in action. I saw them up close when I worked in the US Senate. Whenever the topic of Social Security comes up, or when someone in Congress wants to put more money into education or health care, there's a lot of talk about how everything must be "paid for" to avoid adding to the federal deficit. But have you noticed this never seems to be a problem when it comes to expanding the defense budget, bailing out banks, or giving huge tax breaks to the wealthiest Americans, even when these measures significantly raise the deficit? As long as the votes are there, the federal government can always fund its priorities. That's how it works. Deficits didn't stop Franklin Delano Roosevelt from implementing the New Deal in the 1930s. [By the way the Reconstruction Finance Corporation which funded the New Deal actually made a profit.] They didn't dissuade John F Kennedy from landing a man on the moon. And they never once stopped Congress from going to war.
Although there are legal structures that need to be worked around, the main fact is that, however much the Federal Government spends, it can just be disappeared onto the Federal Reserve's balance sheet never to be seen again and never having to be paid back. The Fed just gave $1.5 billion to the banks to bail them out in 2008 by means of a few keystrokes on a computer keyboard. Congress was not even involved in this transaction. Under President Obama Congress authorized a $787 billion rescue package called the TARP program. This wasn't nearly enough to avert crises for millions of Americans who lost their homes in the Great Recession which was precipitated by a mortgage crisis. The Home Affordable Modification Program (HAMP) was supposed to help homeowners with their mortgages. Although the banks were bailed out, HAMP was a colossal failure at bailing out home mortgage holders. Even the money appropriated was not all spent. The Brookings Institution reported: "HAMP provided important relief, but it was restricted by the fact that it was a voluntary program. The program lived under the constant threat that, if it was too much trouble for the banks, then they could walk away. As a result, while providing important assistance to many homeowners, HAMP fell substantially short of its goals."
So how comes the Fed can just print money which is not added to the national debt while Congress has to appropriate money which is added to the national debt? The answer has to do with the fact that the US dollar is a "fiat" currency. A fiat currency is a currency that isn't backed by gold or any other precious metal. In 1971 President Nixon took the US off the gold standard. Prior to that anyone with dollars could exchange them for a certain amount of gold. Gold was worth $35 an ounce at that time so anyone with dollars could demand gold for them and the US was obligated to fulfill that transaction. As it turned out some foreign governments were demanding payment in gold which exceeded or soon would exceed America's gold reserves. Therefore, Nixon proclaimed that the US would no longer exchange dollars for gold. The value of the dollar would "float" and be worth a dollar just because the US government said it was. At the same time Nixon made a deal with the Saudis that they would sell oil only for dollars. This made every oil importing country have a need for dollars and establshed the dollar as the world's reserve currency.
Because the dollar could no longer be exchanged for gold, this freed up the Federal Reserve to just print dollars whenever it wanted. That's how come it can print trillions of dollars first to bail out the banks in 2008 and now to bail out the whole economy in the current pandemic. That's how come the US can run trillion dollar annual deficits ad infinitum. So if the Fed can just print dollars, why hasn't it printed a huge amount of them and given them to the poor or built infrastructure or used them for any other constructive purpose? The answer is that flooding the economy with dollars could lead to inflation. The threat of inflation is a concern that limits the Fed's printing presses from working full time. What the Fed spends its money on though is basically determined by political considerations. If the party in power wants the Fed to bail out the banks to give tax breaks to the rich and not give money to the poor, that's what the Fed will do. There are also some arcane laws and regulations about what the Fed can and cannot do which can always be changed by Congress.
Part 2
In the past the Fed has been restricted as to the kinds of bailouts it could provide. Now with recent Special Purpose Vehicles (SPVs) authorized by Congress, it can even bail out bicycle shops. The good news is that any money the Federal Reserve prints is not added to the national debt. The better news is that, even money authorized by Congress, that theoretically adds to the national debt, can be swallowed by the Federal Reserve because the Federal Reserve will buy any Treasuries left over from auctions. So if China or any other nation or individual investor doesn't want to buy any more US debt, the Fed will buy it and deep six it never to be seen again. Are you getting the feeling that the US can never go broke? You're right! Even better the US never has to pay off its debts because the Fed can just print more money to pay Treasuries which come due.
Kelton writes:
The real crises that we're facing have nothing to do with the federal deficit or entitlements. The fact that 21 percent of all children in the United States live in poverty - that's a crisis. The fact that our infrastructure is graded at a D+ is a crisis. The fact that inequality today stands at levels last seen during America's Gilded Age is a crisis. The fact that the typical American worker has seen virtually no real wage growth since the 1970s is a crisis. The fact that forty-four million Americans are saddled with $1.7 trillion in student loan debt is a crisis. And the fact that we ultimately won't be able to "afford" anything at all if we end up exacerbating climate change and destroying the life on this planet is perhaps the biggest crisis of all.
These are real crises. The national deficit is not a crisis.
So what is the solution? It's not a question any more of capitalism versus socialism. Even China is a capitalist country in terms of its economy. It's a question of what version of capitalism can be the most successful - successful in terms of filling the needs of most of its people, successful in diminishing inequality, successful in terms of generating the goods and services needed and wanted by people in the 21st century, successful in taking care of the environment and the earth, successful in terms of creating a healthy and well educated citizenry. Arguably, China has a better formula for capitalism that does the US. It has taken 800,000 people out of poverty in 40 years. It is building infrastructure not only in China whose infrastructure is light years ahead of the outdated US infrastructure but all over the world with its Belt and Road Initiative (BRI).
How is China able to do this? Their secret is the fact that the renminbi is a fiat currency just like the American dollar, just like the euro. As such the Chinese are able to print whatever yuan are necessary to employ its labor force at full capacity and employ them doing constructive activities within and without China. The US by comparison does not "direct" its private sector. If the US private sector wants to make money creating garbage which sells, garbage which is profitable, it will do that. If the private sector wants to install robots and/or do its manufacturing in countries where labor is cheaper leaving millions unemployed, it will do that. If there is no political will to modernize infrastructure, infrastructure in the US will be left to rust and wear out. The genius of the BRI is that it keeps China's labor force at full employment by exporting some of them to build infrastructure in other countries. This not only improves the economic situation in those countries, it adds to Chinese GDP because those workers return to buy Chinese products. This policy of building infrastructure inside and outside China evidently does not produce inflation in the Chinese currency. That's an important thing to note. Similarly, the Fed discovered that printing $1.5 trillion in 2008 to bail out the banks did not increase inflation either.
Meanwhile, the US spends $1 trillion a year on its military when it could have spent much less to meet its actual defense needs. The US does not need to spend $1.5 trillion on its F-35 fighter jet program in order to fight a few terrorists that have nothing more than primitive weapons like Improvised Explosive Devices (IEDs).The US economy leaves 500,000 people languishing in homelessness, many more - especially people of color - with a negative net worth, in other words in perpetual debt, with an economy that prints money to give tax breaks to the rich while cutting health and education programs and more. The undirected form of US capitalism allows the Fed to print money for frivolous and destructive purposes. In contrast China's directed form of capitalism has in a few short years demonstrated that it is more effective not only in increasing the wealth and consumption of the average Chinese citizen, but in winning friends and satisfying needs outside China including even US allies which are turning away from the US and towards China as a role model. Not to mention their more effective response to the coronavirus. Reactionary forces in the US, meanwhile, are trying to gin up a cold war against China and sanctioning even our allies who want to do business with China. While we warmonger, China is producing goods and services that the rest of the world wants.
