President Trump on Friday signed into law the largest rescue measure in history, a $2-trillion economic relief package to get money to many Americans as well as hospitals, businesses, and state and local governments struggling with the pandemic. Los Angeles Times March 27, 2020.
The central idea of MMT [Modern Monetary Theory] is that governments with a fiat currency system can and should print (or create with a few keystrokes in today’s digital age) as much money as they need to spend because they cannot go broke or be insolvent unless a political decision to do so is taken.
Traditional thinking says such spending would be fiscally irresponsible as the debt would balloon and inflation would skyrocket.
But according to MMT, a large government debt isn’t the precursor to collapse we have been led to believe it is, countries like the U.S. can sustain much greater deficits without cause for concern, and in fact a small deficit or surplus can be extremely harmful and cause a recession since deficit spending is what builds people’s savings. By Deborah D’Souza in Investopedia, updated May 6, 2020.
After intense wrangling, the heads of government in the European Union agreed to a €750B stimulus package. The negotiations were even more tricky than usual, though the outcome was hailed as a breakthrough. It is the first time the EU as a block will issue bonds on a huge scale to back stimulus, spreading the fiscal risk among all member countries. The Economist July 25th 2020.
The Green New Deal is all about spending huge amounts of money. Money is needed to both fight Climate Change and provide new, good, union-wage-scale jobs to currently underpaid workers. The question is where is that money going to come from. The most obvious answers are Taxes and other programs, such as Military Spending. Neither of those will be easy although using military contractors to build some of the Green New Deal infrastructure might keep their lobbyists from trying to squelch the Green New Deal spending. Another way to get money is to borrow it. However, there is a major problem with the government borrowing lots of money, in the conventional thinking, government debt, especially huge government debt, is considered one of the cardinal sins.
For years, almost my entire adult life, we’ve been told that that a large National Debt, by its self, is a problem. For as long as I remember, one of Washington’s most reliable rituals is the Republicans cutting taxes when they are in power and the Democrats raising some of the taxes again but mostly cutting programs when they come into power because everybody agrees we have to reduce the National Debt.
Modern Monetary Theory, better known as MMT, disagrees. MMT says that a large National Debt is not a problem if it is not inflationary. They point out that Japan has been running a huge National Debt for years without inflation. They also point out that with all the increase in the money supply during the Obama Administration, conventical economics says that we should have rampant inflation by now, but we haven’t. We haven’t even had any inflation with the additional Debt brought on by Trump’s massive tax cuts for the wealthy. Actually, because we haven’t any inflation and a little inflation is considered good, to induce inflation, the Federal Reserve has even dropped the interest rate to a hyper-low 1/4 of a percent.
I think the first time I heard of Modern Monetary Theory was when AOC said it “‘absolutely’ needs to be ‘a larger part of our conversation'” in an interview with Business Insider. She was referring to the financing required for the Green New Deal whose core premise is that we need to react to the Climate Crisis in the same way we reacted to World War II because the threat is comparable. That was back before she became Representative Ocasio Cortez, before she became a household name as AOC, when people still called her “Sandy the Bartender” – some in awe but most in a derogatory way – and MMT seemed sort of nutty. Then I found out that AOC had a degree in International Relations, with a minor in Economics, from Boston University, and she had graduated with Honors and I thought I had better bring myself up to date.
While governments – to quote Business Insider – that control their own currency can spend freely, as they can always create more money to pay off debts in their own currency, may seem nutty, it is based on reality and was the basis for the Federal Reserve one trillion dollar bailout of the 2008 financial crisis. When then then Chairman of the Federal Reserve, Ben Bernanke, was asked where the one trillion came from, he said: “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing. Well, effectively. And we need to do that, because our economy is very weak and inflation is very low.”
We have an astounding number of national problems right now and assuming that the Democrats get into power in 2020, they will want to spend a huge amount of money to solve – or try to solve, or (if you are a pessimist) pretend to solve – them. The easiest way to raise this money is to create it either by borrowing or printing. It turns out, that it is also just good economics.