Debating debt

I still worry about the mounting national debt. But a reader named Jimbo has argued (in comments, here) that my fears are groundless, because the rules in a fiat currency system are fundamentally different from the rules under a gold standard. This point of view is called Modern Monetary Theory. I would like to believe MMT, because then I could stop worrying.

Today I came across a brief explanation of MMT. It's sufficiently dumbed down that even I could grasp it.

Is MMT correct? I don't know. I lack the economic expertise to pass judgment. Two things make me wary: first, it seems to be promising a free lunch, and second, it appears to serve as a justification for "progressive" policies, i.e., bigger and more intrusive government.

As a pessimist, I'm doubtful of free lunches, and as a conservative, I'm not sold on big government as the solution to all ills.

Still, the MMT people may have a point. Maybe when the US went off the gold standard, the rules of the game changed. Maybe when we obsess about deficits and a balanced budget, we are stuck in an outdated paradigm.

As one commenter at the above-linked site argues,

Being the sovereign provider of a non-convertible floating rate (fx) currency of issue, the US government is not financially constrained. This means that the federal government does not need to tax or borrow to finance its deficit spending. To say that the government will go bankrupt, become insolvent, run out of money or default on its debt is like saying that a scoreboard will run out of points.

Are we scaring ourselves silly for no good reason? Or are the MMT people singing a pollyannish siren song?

Discuss.

Comments

[Roger Knights]

PS: As Reinhart and Rogoff wrote in This Time Is Different,: 'Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang! – confidence collapses, lenders disappear, and a crisis hits.'

Confidence collapses when the emperor's nakedness becomes apparent.

[Michael Prescott]

'Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang! – confidence collapses, lenders disappear, and a crisis hits."

But isn't there a fundamental difference between a government on the one hand and a bank or corporation on the other? The government, if it issues a fiat currency, cannot actually run out of money. And it can adjust interest rates to attract lenders. Also, there's the question of where the lenders are going to go. If they're looking for a safe haven, where are they going to put their money? The yen, the peso, the pound, the euro, the yuan? The dollar still looks safer than any of the above.

[realpc]

The US exists in the world context. There is no guarantee the world will always have confidence in us, just because it did before. Things change, gradually or suddenly.

[dmduncan]

"The government, if it issues a fiat currency, cannot actually run out of money."

A scoreboard may not run out of points, but if a team visiting your gymnasium notices that every time you score you put up 10 times as many points as they get when they score, what will their reaction will be?

[realpc]

I have noticed a pattern in MP's thinking: He tends to believe whatever seems most pleasant, not necessarily what seems most logical. He is at odds with mainstream science about the afterlife, but this is not really because he likes to question mainstream authority. I think it's because he likes the idea of a pleasant afterlife. Similarly, he tries to believe in MMT because it's a reassuring theory.

I have seen this repeated in several of his posts I have read recently, whatever the topic. MP, I suggest that when you evaluate a claim or a theory you turn off the part of your mind that hopes and desires. At least try. Otherwise who is going to take you seriously?

[Michael Prescott]

I don't want you to take me seriously, realpc. Judging by your comments about medicine, I think you're a nut.

[sonic]

Money is only as good as what it can be traded for.
I'm not sure I'm willing to work very hard for a piece of paper that is printed at whim.
The barter system might return yet.

[Michael Prescott]

"A scoreboard may not run out of points, but if a team visiting your gymnasium notices that every time you score you put up 10 times as many points as they get when they score, what will their reaction will be?"

I'm not sure I understand your argument. Other countries are paid for their goods or their loans in dollars, so everybody is getting the same points. In fact, the whole world is basically pegged to the dollar now.

[realpc]

"Judging by your comments about medicine, I think you're a nut."

I think that was because I expressed skepticism about cancer research? Well if you wanted to bother you could easily find out that most of the PR about wonderful progress in cancer treatments is misleading or simply untrue.

Or maybe I made a comment about AIDS treatments? Well if you wanted to find out for yourself would see that it isn't just me, and it isn't just "nuts," who are skeptical about the mainstream AIDS propaganda.

It might take a while, but I'm sure it will come to light eventually. AIDS is now just a chronic disease and patients can live an almost normal life? Well that's what we are told, but it isn't true.

But deciding someone is a "nut," and therefore none of their opinions on any subject could possibly be valid, simply because they are skeptical of some mainstream propaganda does not seem very logical to me.

[realpc]

"the whole world is basically pegged to the dollar now."

And who says it has to be or that it always will be?

[Michael Prescott]

"I think that was because I expressed skepticism about cancer research?"

It was mainly because you claimed that modern medicine hasn't extended the average lifespan (if infant mortality is factored out). This is obviously false. Just look around you. There are more septuagenarians and octagenarians than ever before. Decades ago, the retirement age was set at 65 because most males didn't live to be much older than that. Now they often live for decades after retirement. The "graying of America" (and of the West generally) is a well-known phenomenon.

But yes, it's also your views on cancer and AIDS. Regarding cancer, you claim that anyone who is successfully treated for the disease never "really" had it in the first place. This contention is undisprovable, therefore worthless. As for AIDS, it's self-evident that the death toll from the disease has fallen dramatically in developed countries.

It's not just the content of your opinions that turns me off; it's also your combination of dogmatism, rudeness, and insensitivity to people whose family members have had cancer.

By the way, your claim that my opinions are grounded in excessive optimism would come as a surprise to the many commenters who've chided me for being overly pessimistic. I used to run a series called "Decline of Western Civilization," but gave it up because readers complained that it was too depressing.

I don't know if Modern Monetary Theory is right or wrong, and frankly I lack the expertise to render an informed opinion. (As do you.) What interests me is that there's a way of looking at the deficit that is not apocalyptic. It may or may not be true, but at least it provides an alternative perspective, one that is embraced by some knowledgeable people. We're presently engaged in a large-scale real-world test of the theory; time will tell if its predictions pan out.

[dmduncan]

If the points were backed by gold such that when a team that scores gets paid a portion of gold from the other team, then there's a natural limit to how many points anybody can score and how long the game continues. Not so when they are backed by nothing, and printed to order.

Those limits are extremely valuable. They keep us honest and solve a host of problems that the printing press creates. For one thing, war and meddling in the affairs of other nations is much easier to do when it's funded by the printing press, which in turn leads to enmity abroad towards the USA. And meddling in the affairs of people OUTSIDE of the country is really just the flip side of a coin where the other side is domestic interference.

I had no idea FDR confiscated gold from American citizens and outlawed its ownership, and that only by 1975 was it legal for American citizens to own gold again!

People more learned than I about economics correctly predicted the bubble bursts and are also predicting worse because of Keynesian monetary policy. They don't look at what the Fed does as successful so much as prolonging the inevitable — thereby creating the illusion of success (a success bubble) — while actually making the inevitable worse.

Ron Paul foresaw the housing bubble bursting at least as far back as 2003.

Ben Bernanke did NOT!

They call Ron Paul a radical so as not to take him seriously, but who's really nuts and who's not — the one who gets it right or the one who doesn't see what's under his nose?

We seem to live in a time where craziness is defined by clear perception and the absence of chicanery.

[realpc]

"There are more septuagenarians and octagenarians than ever before. "

You are obviously not someone who ever studied math. There are more people now than ever before.

[realpc]

[ you claim that anyone who is successfully treated for the disease never "really" had it in the first place. ]

What I probably said was that if someone was "cured" of early stage cancer, it is very likely that it never would have progressed to cause disease or death. This is well known and acknowledged by cancer researchers, But the public is still not aware, and most still believe that the presence of cancer cells equals the disease of cancer. It does not.

This is not a nutty conspiracy theory. It is important information that cancer researchers acknowledge.

[realpc]

"you claimed that modern medicine hasn't extended the average lifespan (if infant mortality is factored out)."

What I probably said was that modern medicine has extended the average lifespan mostly because of antibiotics and improved surgical technology, and vaccines which decreased infant mortality. But increases in lifespan are hard to measure because it depends on what society and era you are comparing to. When people lived in crowded filthy cities they died younger. There have probably been many traditional societies where people lived to old age if they survived childhood, where they did not have the environmental pollution and unhealthy lifestyle that we have now.

And it is a myth that we owe our longer lives to recent "advances" by the pharmaceutical companies. And it's a myth that we are healthier.

[realpc]

"As for AIDS, it's self-evident that the death toll from the disease has fallen dramatically in developed countries."

And you are claiming that is because of AZT and the antiretroviral drugs? It can't possibly be for any other reason? Are you aware that there is no experimental evidence showing that the drugs improve the health of AIDS patients?

Medical evidence is not always clear and easy to interpret, and often it is very difficult to interpret. The big drug companies are glad their is so much confusion about their toxic drugs.

[realpc]

"insensitivity to people whose family members have had cancer."

I think the truth about cancer research is important for all of us to know. I don't see any benefit in pretending there are cures or promising new treatments. There aren't.

[Michael Prescott]

What you wrote, realPC, in the thread for "The snake in the garden," is: "Our lives are longer, on average, mainly because infant mortality has been lowered from the normal high level set by nature, to near zero."

Yes, you mentioned antibiotics etc., but the above quote was your conclusion.

Of course the reduction in infant mortality matters, but the simple fact is that people in all age brackets are living longer. Septuagenarians and octagenarians are increasing in numbers - not just increasing in absolute terms, but in relative terms - that is, increasing as a percentage of the total population.

This is partly because people are having fewer children, but it is also because people in developed countries have access to medical care that would have seemed like science-fiction to any previous generation.

Be grateful for what you have, and to the dedicated health professionals who have given it to you. When you spitefully criticize them, you come across as mean-spirited, petty, churlish, and (to me, at least) rather weird.

I don't think anyone is still reading this thread except maybe dmduncan, so I'm going away now. Ciao.

[realpc]

There was nothing spiteful in what I said. You read that into it. I am mainly criticizing the excesses of the giant drug companies, who are taking credit for "longer and healthier lives." We are not healthier. Some of us have been saved by antibiotics, vaccines or modern surgery. It is possible to be glad we have antibiotics and surgery, without worshiping the giant drug companies. A lot of what they are making fortunes by selling is poison.

Most of the increases in lifespan between us and traditional cultures is probably the result of a radical decrease in infant and child mortality. People seldom mention this when making claims for modern medicine.

[sonic]

Of course the government can print money at will. Of course they can borrow and pay back by printing less and less valuable money.
Where I come from people who borrow with no real intention of paying back are called criminal.
And the scoreboard will never run out of points (of course the value of what is to be purchased will not expand as fast as it is possible to print the money- but...)

[Paul]

@MP I was reading it too, mainly out of morbid curiosity admittedly. :)

[Mark Alexander]

Another area sorth investigating, Michael, is the German hyperinflation during the 1920s, where the govt thought it okay to simply print up a lot of money, resulting in a complete economic collapse and opening the door to Hitler's rise to power.

Govts spend money like addicts take Heroin. Judgment and accountability always gives way to the addiction, especially when those in power have ways of protecting themselves from the consequences of their action.

We are in a heap of trouble, because the addicts think the answer is more Heroin in the system.

[Jimbo]

Mark -

Here's a good explanation of the German Hyperinflation, as well as the more recetn Zimbabwe episode:

http://bilbo.economicoutlook.net/blog/?p=3773

[realpc]

"the addicts think the answer is more Heroin in the system."

And addicts are very good at creating elaborate justifications. Such as MMT. When a sophisticated theory devised by experts defies common sense, be skeptical.

[dmduncan]

"I don't think anyone is still reading this thread except maybe dmduncan, so I'm going away now. Ciao."

Hey, you can't just abandon your guests like that! At least give me a plate of hors d'oeuvre to busy myself with...

[Michael Prescott]

Have some Beluga caviar, dmduncan.

Hey, if I'm spending fiat money, I might as well buy the best.