Monday, February 25, 2019

Robert Samuelson column — Are Dems proposing economic policies or pipedreams?

Of course, there is another choice: more deficit spending. Last week, I tried to educate myself on so-called “modern monetary theory.” Embraced by some Democrats, its central thesis seems to be that deficits are not nearly as dangerous as we’ve been led to believe. Here’s the case for that view, as best I can determine.

“The biggest mistake we make is thinking of the federal government as a household” that has to repay its debt, says Stephanie Kelton, an economist at Stony Brook University and an adviser in 2016 to Sanders.
The United States won’t default on its government debts, because it can always create more dollars — through the Federal Reserve — to honor U.S. Treasury bonds and bills, she says. She rejects the argument that the Fed might generate inflation by flooding the economy with too much money. To prevent that, inflationary pressures can be offset through higher taxes and interest rates, as occurs today.
The obsession with controlling government deficits hinders us in stabilizing the economy and promoting maximum employment, she contends. This may or may not be good economics, but it’s certainly expedient. No one likes to raise taxes and cut spending, and that may explain why benign neglect of deficits is now going mainstream.…
What’s missing from this picture is old-fashioned prudence.
Bond vigilantes.


Konrad said...

“What’s missing from this picture is old-fashioned prudence. True, the government doesn’t have to default on its debt in a legal sense. But if financial markets worry about the escalating debt, Treasury bonds will lose value. If the fall in confidence is great enough, it might trigger a panic, made worse by the reality that the dollar is the main international currency. Our ever-ascending debt increases our vulnerability to a future crisis, almost certainly, awaits us.”

The so-called “national debt” consists of money that various interests have deposited into Fed savings accounts via the purchase of T-securities. An “escalating national debt” (i.e. increasing deposits) has no effect on people’s confidence in Treasury bonds, -- i.e. on people’s confidence in the Fed deposits.

This clown thinks the US government must borrow in order to pay for federal operations.

His last sentence makes no logical or grammatical sense.

These losers have been slaves for so long that they are terrified by freedom. “The sky is falling!”

Andrew Anderson said...

What is missing is negative yields on US sovereign debt as evidenced by the profits to be made using it for repos and the carry trade.

Negative yields would also reduce the trade deficit by making US sovereign debt less attractive to foreigners who would then buy more US goods and services.