Unfortunately, it's because the acolytes of MMT already won. The national debt has completely exploded and there's no putting that genie back in the bottle without hyperinflation.
Sheesh! How come anything touching on "what is money" gets goofy immediately?
Most of the world's monetary systems have been run under Monetarist theories for 40-ish years. Theory is now entirely at odds with observed realities. New theories gain ground.
National debts "exploded" a long time ago. Japan's exploded over a generation ago and most of western economies "exploded" 10-15 years ago. Except these explosions aren't explosions. Central banks continue to decree whatever interest rates they want, with no market pushbacks.
The monetarists and goldbugs have been screaming "inflation" constantly for 25+ years. That does not mean that their theory of inflation (national debt) is true. It isn't.
I think it's less that inflation is caused by the national debt, and more that it will be nearly impossible to pay off the debt without massive inflation. Certainly the Fed is in a box with the debt, as it can't raise interest rates without massively increasing US Government debt payments. The only solution seems to be to keep rates low, which results in inflating away the debt.
> ...it will be nearly impossible to pay off the debt without massive inflation
Isn't it the opposite, that it's impossible to pay off the debt without massive deflation? 'Paying off the debt' means reducing the money supply, which means money later is worth than money now. That never ends well.
Well my understanding is "paying off" the national debt amounts to reducing the amount of value that is owed. You could do this in two ways.
Way 1 is what you described, which is directly paying off the debt. This is the path of austerity, high taxes, spending cuts, etc. Agreed that this never ends well.
Way 2 is that you reduce the value of the debt by reducing the value of the currency it is held in. This isn't really an option for most countries, but the US is unique in that it controls the world reserve currency and can directly print the debt away. This would be a far politically easier option as inflation is a complex phenomenon that can't simply be blamed on harsh austerity policies.
It does strike me that they are going to go with option 2. The political conditions for this aren't quite there yet, but you can see it forming with articles like the OP.
> but the US is unique in that it controls the world reserve currency and can directly print the debt away
This doesn't seem like a real option, though. The United States doesn't simply print money, we issue debt to increase the money supply. If we just started literally printing new, unbacked money we'd immediately lose our reserve currency status and it would likely be the end of US global hegemony. Maybe the end of the US, period.
Meanwhile, using our standard practice of issuing debt to pay for it wouldn't work here because that would be exactly counter to the thing we're trying to do: reduce our debt.
No, that's not true. The Federal Reserve does print money, in the form of being able to buy unlimited amounts of securities (Quantitative Easing) as well as being able to arbitrarily increase the amount of money in bank reserves. This is what the Fed has been doing during Covid and many would say this is the direct cause of the high inflation we are seeing now. It's very possible to inflate the currency at a pace that will not result in the complete destruction of the currency.
> The Federal Reserve does print money, in the form of being able to buy unlimited amounts of securities (Quantitative Easing) as well as being able to arbitrarily increase the amount of money in bank reserves
I mean, you're illustrating my point here: QE is when the Federal Reserve buys bonds, which means it's not printing the money out of thin air. It's making money that is backed by debt. Same goes for reserves, that money isn't just dropped out of a helicopter with no strings attached, all that money introduced is backed by a commitment to repay it. So both of these avenues for increasing the money supply introduce corresponding debt. Using this 'printed money' to pay down the national debt would be like using one credit card to pay the balance of another.
>> Same goes for reserves, that money isn't just dropped out of a helicopter with no strings attached, all that money introduced is backed by a commitment to repay it.
This is true. However, the second half of this isn't always intuitive.
Bonds come with a commitment to redeem and pay an interest rate... but both commitments are in USD. Both USD and US bonds are accounts at the federal reserve. An institution holding bonds has an account, where they can buy a bond with a dollar or redeem a bond for a dollar. Their bond account will decrease by a dollar, and their dollar deposit account will increase by a dollar. No one's net position changes.
Imagine if the rules were reversed: the treasury mints coins, deposits them in the Fed and receives bonds which it can spend.
That theory is called “starve the beast” wherein tax hawks seem to believe shrinking the federal budget is simply a matter of cutting taxes and engaging in brinksmanship, despite the fact that their ultimate goal of cutting SS and Medicare has been a political non starter for decades.
Yeah, I don't really get why you would pre-emptively cut taxes in anticipation of future spending cuts. If there's one thing we can bank on in history, it's that governments always get bigger. Spending cuts are just very unlikely to happen.
The thing about MMT, is that it’s not about racking up gigantic debts per se, their thesis is that deficits and debt don’t matter in an absolute sense, but in relation to other monetary factors. Eg. once inflation picks up, then it becomes necessary to cut budget deficits.
