Randy Wray — Brad DeLong to Paul Krugman: Yes Deficits DO Matter in MMT

Randy weighs in.

Economonitor — Great Leap Forward
Brad DeLong to Paul Krugman: Yes Deficits DO Matter in MMT
L. Randall Wray | Professor of Economics, UMKC

One final note. In his piece, Brad Delong summarizes the main contentions of MMT, following Warren Mosler’s exposition. Brad concludes—as we do—that a sovereign currency-issuing nation like the USA cannot be forced into involuntary insolvency as it can always pay all debts as they come due by issuing currency.
So far, so good. However he disagrees with Warren’s claim that the US government cannot face a “financial risk” because if inflation occurs, it is paying with cheaper money. Some claim that is a kind of default—as the real value of the promised interest and principal payments are inflated away.

In my view this argument is confused on two levels—terminology and theory.

Look, if I promise to pay you $10 a year hence, and I deliver to you $10 in 365 days, by no stretch of the language can you claim I defaulted on my promise. If instead I promised to deliver to you a sum of money that would allow you to buy some pre-specified box of commodities, that is a different matter entirely. Occasionally such contracts are written. And a government can offer inflation-indexed bonds. If it then refused to increase its payment to account for inflation, one could rightly call that a default. But nominal contracts are nominal and no court of law in this country (or any other) is going to rule that if I promised $10 and paid $10 that I’ve defaulted when inflation occurred meantime.

And here’s the more important point. Why is only government blamed for “default” when inflation occurs? Almost all of us have outstanding debts; and I suspect that very few readers have inflation-indexed their liabilities. So all of you are “defaulting” all the time on your commitments because you are not compensating lenders for inflation. Indeed, outside the rare case of Japan, it’s not a stretch to argue that all debtors default all the time in the sense that inflation exists everywhere.

Yes, I know that the goldbugs claim that inflation is everywhere and always government’s fault—so these “defaults” are due to government’s propensity to run up inflation in an attempt to deflate away its debt.

But that is silly. The two postwar high inflation periods in the USA (1974, 1979) were largely due to OPEC oil price hikes. You can go through a long-winded round-about geopolitical argument to blame that on Uncle Sam, I suppose. But it was oil, not budget deficits or helicopter money drops that caused inflation. In other words, out in the real world, the nongovernment sector plays a vital role in initiating price increases. So we might as well say that OPEC caused the inflation that led to “defaults” by government and nongovernment that repaid debt in cheaper dollars.

And, by the way, if it were so easy for government to create inflation through Obama-style deficits and Bernanke-style helicopters, why they heck can’t the Japanese get inflation going after a whole generation of desperate attempts to do so?
So kudos to Brad for recognizing that MMT does believe deficits matter, and that one of the ways deficits can matter is in sparking inflation. But let’s not confuse inflation with default.