Modern monetary theory or MMT is a popular theory that gives an apparent blank check to the government for printing money, which made it appealing to both the Donald Trump and Joe Biden administrations, as evidenced by the gross national debt exceeding $30 trillion for the first time on Feb. 1, 2022.
The debt skyrocketed during the covid-19 pandemic with bipartisan stimulus packages passed under both administrations to keep U.S. households and businesses afloat.
The national debt was $10.6 trillion when Barack Obama took over on Jan. 20, 2009; $19.9 trillion when Trump took over on Jan. 20, 2017 and $27.8 trillion when Biden took over on January 20, 2021.
“Print more dollars and that will be paid in one minute. Easy.” tweeted ynotamil.
The proposition that trillion-dollar deficits are OK — that the U.S. federal government can and should freely print money to finance massive spending with no concern about debt and deficits — is not universally popular.
Proponents of MMT insist that as long as a government’s debt is denominated in its own currency, there is no limit on monetary borrowing. Public debt is irrelevant and a country’s central bank can always avoid default by printing more money. Such printing, MMT proponents argue, can go on without any inflationary consequences.
Economist Stephanie Kelton wrote about the “deficit myth” — the idea that the federal government has the same financial limitations as an average household — in her book, “The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.”
Kelton served as senior economic adviser for Bernie Sanders’s presidential campaign. She’s a professor of economics at Stony Brook University. MMT posits that, unlike people who run households, the U.S. government can spend and borrow as much as it likes without the risk of going bankrupt.
Money no longer exists “in some scarce physical form—like gold—that the government needs to ‘find’ in order to spend,” Kelton wrote. “It is conjured into existence from a computer keyboard each time the Federal Reserve carries out a payment to the Treasury.”
“In other words, the government’s budget is not the same as your household ledger, because it—unlike average schlubs like you and me—will never go broke,” Emilio Leanza wrote for The Progressive.
Here are three things that could impair the U.S.’s ability to print its way out of debt.
Interest must be paid on the enormous debt
Interest costs alone on the national debt are projected to exceed $5 trillion over the next 10 years and by 2051, they will amount to nearly half of all federal revenue, according to the Peter G. Peterson Foundation, which promotes the reduction of the deficit — the gap between what the U.S. spends and what it .
Even if the enormous debt can readily be refinanced, interest must be paid. Right now, that interest cost as a percentage of gross domestic product is relatively low — about half of what it was at its peak in the early 1990s, The Week reported. But if interest rates rise significantly, that cost could become a mushroom cloud. In that scenario, either federal spending would have to be cut, or taxes would have to rise. Absent that, the government would end up borrowing more just to pay the interest on earlier borrowing, and the hole would get deeper.
Some Twitter users expressed doubt that the U.S. will ever pay back its debt — or that it has to.
“Exorbitant Privilege,” tweeted Gustavo Torres @FutIncorrecto.
“Since we won’t ever be paying that back, you’d think officials would just ‘spend’ money on making America great again. The infrastructure is a good start, healthcare next couldn’t hurt. Or a gun buy back…that couldn’t hurt. Debt of 30 trillion dollars…oh we number one,” tweeted StrangerTings.
“How are you supposed to pay that back? To whom do you owe such astronomical money to? 😂 🤣 do that Abracadabra, poof…money is gone!” tweeted uberstar.
Sustained economic growth isn’t guaranteed
Federal debt as a percentage of GDP reached uncharted territory during the pandemic, but that ratio has been coming down as the economy recovers, despite the debt continuing to grow.
Some economists say that the massive debt load is not unhealthy because the economy is growing, interest rates are low and investors still want to buy U.S. Treasury securities, which help manage financial risk. Those securities let the government borrow money relatively cheaply and use it to invest in the economy.
Policies that can sustain and broaden the economic recovery “in a fiscally neutral manner — through regulatory reform, productive investment offset by tax increases, and an immigration and child welfare agenda that encourages demographic expansion — would improve the debt situation directly by increasing federal receipts and indirectly by spreading the burden of servicing the debt over a larger economy,” Noah Millman wrote for The Week. “The right answer to high debt isn’t austerity. It’s abundance.”
However, deficit concerns are becoming more popular as Republicans look to use government spending and massive debt to argue in the upcoming midterm elections that Democrats are driving the U.S. to bankruptcy. Democratic Sen. Joe Manchin of West Virginia cited “staggering debt” as he helped kill President Joe Biden’s $2 trillion infrastructure and safety net proposal.
“Nobody complains about the deficit when: -We give $8T to the military
-We pass $1.9T in tax cuts
-We give subsidies to Big Oil, Big Banks, and Big Pharma Everybody complains about the deficit when: -We try to help working people Almost as if it’s not about the deficit at all” tweeted former Labor Secretary Robert Reich, a University of California Berkley professor.
Rising interest rates could exacerbate the debt burden
The prospect of higher interest rates to curb inflation could add to the fiscal burden. “Hitting the $30 trillion mark is clearly an important milestone in our dangerous fiscal trajectory,” said Michael A. Peterson, CEO of the Peter G. Peterson Foundation. “For many years before covid, America had an unsustainable structural fiscal path because the programs we’ve designed are not sufficiently funded by the revenue we take in.”
Interest rates have been near zero since the beginning of the pandemic. The Federal Reserve indicated in recent weeks that it could begin increasing interest rates in March. Investors expect as many as five rate increases in 2022 bringing rates to the 1-to-1.25-percent range.
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The Fed also kept long-term interest rates low by buying and holding government-backed debt. Those purchases are set to wrap up in March, and the Fed signaled plans to “significantly” shrink its bond holdings.
The Fed’s big bond holdings might lower longer-term interest rates by as much as 1.5 percentage points — cutting the interest rate on 10-year government debt almost in half, according to a speech by Esther L. George, the president of the Federal Reserve Bank of Kansas City.
The interest on the debt could soon be the fastest-growing part of the federal budget.
“The economy is unpredictable, and we should never take low-interest rates and inflation for granted,” said Brian Riedl, a senior fellow at the conservative Manhattan Institute think tank.