The intellectuals are laying the groundwork.
That is, they’re digging the foundations for an extraordinary structure — a tower of debt higher than any ever seen in world history.
The primary architect? Paul Krugman? Jerome Powell? Joseph Stiglitz?
Nope. Not an architect at all…but a politician.
It’s none other than Alexandria Ocasio-Cortez (AOC), the ambitious young representative of New York’s 14th district, who has the shovel in her hands.
She may be the youngest woman ever elected to Congress, but she wasn’t born yesterday. And she may not know any more about economics than Donald J Trump. But she knows a winning trend when she sees one.
And circa 2019, debt is becoming more popular than internet hook-ups.
Our dear readers generally approve when we poke fun at liberals like Ms Ocasio-Cortez. But they hate it when we talk smack about the president. Many see the contest in Washington as a fight between good and evil. And they know what side they’re on!
We predict, however, that AOC and DJT will soon be on the same side. Beyond good and evil. Just dumb.
Both are already ‘low-interest kind of people.’ And when the going gets tough, both will come to love Modern Monetary Theory, MMT…and $2-trillion federal deficits.
One of our dicta here at the Diary: People come to think what they have to think when they have to think it. Markets make opinions, in other words, not the other way around.
And markets are running into trouble. The trends that were so felicitous for so long — falling interest rates and rising stock prices — have now stalled, or even reversed.
The private sector faces a recession. Wall Street sees a bear market coming. In Washington, tax receipts will fall…as costs continue to rise.
How to keep the jig up? The politicians — left, right, and centre — will come to see: debt isn’t so bad!
What were those previous generations thinking, they will wonder? Scrimping and saving, balancing budgets, making trade-offs — and for what? The silly duffers didn’t know any better.
The intellectual drift in favour of more government debt was put forward this week in the pages of the ‘pink paper,’ the Financial Times:
‘A government can issue debt to pay for whatever it likes. It can pay to fight a war, to lower taxes for a preferred group, to soften the sharp edges of a recession. The United States has, in fact, issued debt to pay for all of these things. American politicians say that public debt crowds out private investment, that it’s unsustainable and will turn the country into Argentina. Or Greece. Or now, Venezuela. But regardless of what they say, what American politicians do is vote for more debt.’
The FT is right about that. Year in, year out…boom or bust…Democrat or Republican — they voted for more debt. Modern Monetary Theory is at least realistic about it.
Noting that politicians are not shy about going into debt — without any horrible consequences; not recently, at any rate — the MMTers fantasize about a world in which government can get as much money as it pleases. Debt shouldn’t be a limitation.
A government issues money, they reason. Why does it have to borrow at all?
This seemed like such a breath of fresh monetary air that many economists and politicians practically hyperventilated. Here was a theory that seemed to validate a widespread practice — spending more than you earn. It was the feds’ money to begin with; why shouldn’t they spend as much as they want?
Ms AOC is often posed the question directly. She favours free universities, free healthcare, free this, free that — ‘How can we afford it?’ ask sceptics.
But she’s ready with the MMT answer: ‘How do we pay for anything?’
‘We’ don’t pay for anything. The feds pay…with resources that — one way or another — they’ve squeezed out of us. In theory, it doesn’t matter how they get it. Debt. Taxes. Inflation. Take your pick.
What really counts is the total amount of resources the feds take. The more they squander, the less is left for real output and growth. And the practical advantage of debt over inflation (just printing money) is that it limits the take.
Borrowed money has a cost. The more the feds borrow, the higher interest rates go. Then, the economy slumps…tax revenues decline…and the feds are worse off than ever.
Then, of course, the feds finagle a fix, getting the central bank — the Fed — to buy up their debt, so interest rates don’t go up. This ends up being very close to a pure MMT or Chartalist system, where the feds are, in effect, printing the money to pay for their quack programs.
But the central insight of MMT is deeply flawed. It confuses the feds’ ‘money’ with real money.
MMT admits that their spending is limited only by the resources available in the real world. But that is why we have real money in the first place — to make sure the limits are respected.
Fake money only works for as long as it mimics real money; that is, only so long as it respects the limits of real resources. After all, a car is not a car because the feds say it’s a car; it’s a car because it takes you where you want to go.
And as soon as the feds’ money stops taking you where you want to go — like Zim dollars in Zimbabwe in 2006 or bolívars in Venezuela today — MMT falls apart. The feds could ‘print’ all they wanted; it wouldn’t buy them a ham sandwich.
Fortunately, the US dollar still has some miles left on it. But with politicians like AOC and DJT at the wheel, it’s just a matter of time before the limits come off…and it ends up in a ditch.