In recent months Congress and the Federal Reserve have been “printing” trillions of dollars in response to the coronavirus pandemic. That old saying of “a billion here, a billion there, and pretty soon you’re talking about real money” now needs a “t” in front of it. With numbers this large it’s reasonable to assume all that money sloshing around the economy would eventually cause inflation. It could even be unaffordable and somehow wrong, depending on your choice of commentary.
It’s in this context that I recently read The Deficit Myth, by Stephanie Kelton, as part of a book club for financial planners (sounds like a real barn burner, right?). The book had been in progress for some time but was published right as the pandemic was revving up in March. The timing was a lucky coincidence for the author because the topic, Modern Monetary Theory, speaks to just about everything we’re hearing these days related to government spending, deficits, the debt, and the affordability of large amounts of economic stimulus.
MMT, as it’s known, is a big topic and I’ll only touch on some of it in this post. It has also been politicized in some circles for reasons that will become obvious the more you learn about it. As you’d correctly assume, I don’t get political in these posts so none of what I write below should be misconstrued as such.
Probably the most interesting thing to me about MMT as a concept is that it’s, as the name implies, an attempt to modernize the way we think about money at the federal government level. The U.S. has been completely off the gold standard since the 1970’s but most of our elected officials still think of our currency and federal spending in relatively archaic terms, according to MMT economists. It’s the way I learned it originally as well.
The old thinking is intuitive and frames federal government spending in the same way we think of spending within our own household. We bring in a fixed amount of income, spend most of it, and hopefully get to save a little at the end of the day. If we need to spend more than we earn, we borrow. We’re forced into a series of transactions because we can’t simply print our own money, we have to earn it. The government, on the other hand, can print all it needs. It doesn’t have to earn or even borrow (although it still does, but that’s a larger part of MMT that I’ll skip this week). In the words of the author, households and even the state of California, for example, are users of the currency. The government is an issuer, creating the currency with the sole authority to make more. It’s for this reason the government can’t run out of money the way our household can. It can run perpetual deficits. Important programs can always be funded. The important realization here is that financial decisions at the federal level aren’t technically constrained by a budget the way our household is. It’s constrained by politics. Now, MMT isn’t a blank check for every government program on everyone’s wish list. Instead, it could (and should, I think) allow flexibility when it comes to spending on fundamental programs like Social Security.
MMT’s thinking on inflation is helpful too. The idea is that so long as there’s excess capacity within our economy, federal spending can be absorbed without creating excess inflation. When the pandemic hit and much of our economy ground to a halt a major financial hole was created, perhaps at least $10 trillion deep. Then Congress authorized a historic $2 trillion via the CARES Act in March on top of other programs, and the Federal Reserve pumped trillions more into the financial system. All that money partially backfilled the hole and, hopefully, will ultimately have kept it from going deeper. Assuming this to be the case, the seemingly ridiculous sums of money being printed lately shouldn’t lead to a spike in inflation. At least not anytime soon.
As simple and perhaps obvious as MMT might sound, it presents a profound shift in how we think about federal government spending. These shifts are vitally important in these unprecedented times. We’re amid an economic recovery that could be long and bumpy. Conversations about further stimulus are likely to get amped up even more as we near the election, so having a general idea about the MMT framework is helpful when wading through all the political rhetoric around spending.
The book was an eye-opener for me, and I highly recommend it to you. If you’re one of my ongoing clients, let me know if you’re interested and I’ll send you a gift card from Copperfield’s or some other local bookstore so you can pick up a copy.
Have questions? Ask me. I can help.
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