Sunday Sermon: The Canard of Insolvency and the Bankruptcy of Leadership

Bill Mitchell smacks down some silliness from Peggy Noonan about the supposed looming insolvency of the U.S. (italics mine):

She [Noonan] should hang her head in shame for providing further myths that will certainly agitate all the ignorant – uneducated (despite long lists of credentials) – and high blood pressure conservative types who get wound up every day about their claims the US is facing impending bankruptcy. Leave them alone Peggy. Let them have a day off so they can calm down.
What does being bankrupt or almost bankrupt – on paper or anywhere else mean when you are talking about a nation that issues its own currency and can credit any bank account it likes for any amount it likes at any time that it likes? Answer: it is blathering nonsense.

It is true that you don’t have a foreign policy that requires a vast mobilisation of real resources to back it if you have run out of those real resources. But if there are companies around who can find the materials necessary to build the tanks, guns, rockets etc and offer them for sale then the American government will always be able to purchase them.
It might be that the economy eventually achieves full employment – although that looks a distant goal under current policy – and such purchases (of military equipment etc) would have to involve hard trade-offs to ensure that the real resources used in making the weapons etc are not desired elsewhere. If there was competition for these real resources then inflation can occur.
So if the US government found itself in that position then it might have to raise taxes and cut spending in other areas if it wanted a non-inflationary environment in which to purchase its weapons of death. But it can always fund the purchases. How?
Credit: Bank account of military equipment provider
Debit: Some account in the Federal Reserve system.
That would do it.

And this canard of insolvency is then used by Noonan to claim that the U.S. is losing its position of leadership (in many ways, we already lost it, but I digress), even though she has no idea what leadership means:

Noonan claims “We cannot lead, or even be an example, without money” – but leadership is not about having money. The US government doesn’t “have money” but it can spend it whenever it likes.
Leadership is about insight, judgement, courage, empathy etc … all human values. The mandate that leadership leads to can always be “funded” by the US federal government. Leadership is about knowing where to use the power that comes with the currency monopoly to advance the welfare of the nation.
The vast array of real resources that have been deployed by the US military have not advanced the welfare of the US citizens. The money that deployed those resources should have deployed them in creating jobs and revitalising decaying urban environments, and increasing access to first-class health care for the poor and all those sorts of things. But they are all political choices and operationally the US government can exercise whatever political choice it wants. The constraints are thus all political and/or human (lack of leadership qualities).
It is an outright lie to say that the nation is “without money”.

That’s the key thing: the decision not to solve the employment deficit is a political one. We are not on the gold standard, and thus, currency should never be limiting. People, resources, industrial capacity, all these things can be limiting; we simply might not have enough stuff. But if all we need is money, that’s not a problem–with a fiat currency, we can ‘dig up’ as much ‘gold’ as we like. As Paul Krugman noted, our current policies exist to preserve the wealth of the creditor class:

Consciously or not, policymakers are catering almost exclusively to the interests of rentiers – those who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense….
While the ostensible reasons for inflicting pain keep changing, however, the policy prescriptions of the Pain Caucus all have one thing in common: They protect the interests of creditors, no matter the cost. Deficit spending could put the unemployed to work – but it might hurt the interests of existing bondholders. More aggressive action by the Fed could help boost us out of this slump – in fact, even Republican economists have argued that a bit of inflation might be exactly what the doctor ordered – but deflation, not inflation, serves the interests of creditors. And, of course, there’s fierce opposition to anything smacking of debt relief.

Too often the budget is treated as some kind of physical immutable entity, but it’s not. We can spend what we need to spend to accomplish our goals, and likewise we can and should tax what we need to tax to accomplish the goals of inflation reduction and reduction of income equality.
And we shouldn’t let deficit shibboleths get in the way.

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15 Responses to Sunday Sermon: The Canard of Insolvency and the Bankruptcy of Leadership

  1. Scott M. says:

    Hmmm. If the government can just *print* all the money it needs to spend, why does it need to levy any taxes at all?
    Why didn’t this “print our way to prosperity” trick work for Weimar Germany? Why isn’t it working today for Zimbabwe?
    There seem to be a couple of holes in your interesting little economic thesis, here … :-/

  2. albanaeon says:

    Scott M. You are holding out the hyperinflation card without understanding the actual circumstances that leads to hyperinflation, notably that outside sources or economic catastrophes are necessary. And that hyperinflation is more psychological than a reflection of reality within an economy.
    Frankly, the US has a huge problem with an under or un-utilized productivity (ie unemployment/underemployment) and limited mobility of assets within its consumer class (stagnant middle class incomes), both of which can be attributed to the holding and hording of assets by the rich. Since the rich are showing no inclination of loosening their hold of their assets to solve these problems, a solution lies in the government printing more money and putting into a stimulus targeted at employing the unemployed and getting cash into the hands of the middle class.
    That is the advantage of a non-commodity based currency. It can reflect the actual realities of the economy it is supporting. Right now, the people who have all the money, have a vested interest in limiting the supply of cash since it increases the value of their holding without them having to do a thing. Even though it is hurting the rest of the country. So why don’t you check WHERE your sources and their motivations for why they are screaming for things that benefit only themselves.

  3. Andrew G. says:

    Zimbabwe and Weimar Germany had real (as opposed to nominal) economies which were fundamentally broken: Zimbabwe because it had crippled its own agricultural sector; Weimar Germany because it was forced to expend production on paying reparations, and then had its major industrial district occupied.
    Nothing in the current Western economic crisis is anything even remotely like those two examples (or any of the other classic hyperinflation cases either).

  4. Juice says:

    What happened in Argentina?

  5. Andrew G. says:

    Argentina pegged its currency to the US$, and took on external debt also in US$, thus completely sacrificing its currency sovereignty. Unsurprisingly, it eventually had to default on the loans and float the currency.
    A country that issues its own currency, does not peg it to anything, and borrows only in its own currency can never be forced to default.
    (for other examples of countries crippling themselves by giving up control of their own currency, see: Eurozone)

  6. Neil Craig says:

    Of course the American government can print infinite values of money. Doesn’t mean anybody will accept it. See the history of 1920s Germany, Zimbabwe or indeed 2011 Greece.
    As for “outside sources or economic catastrophes are necessary” – fortunately the US does not rule the world and places like China ARE outside and their willingness to accept dollars is pretty important right now. As for economic catastrophe – look around.

  7. Andrew G. says:

    Broken record? We already covered Weimar Germany, Zimbabwe and Greece. Can’t you answer the responses above rather than just wave the recycled strawmen?
    All sorts of people have holdings of US$-denominated debt. Those people are entitled to repayment in US$ and nothing else; they can’t refuse to accept it.
    China’s willingness to buy more US$ debt is actually of no significance whatsoever; China’s desire to maintain a trade surplus to the US is much more significant, since imports are a net benefit to the US economy.

  8. Neil Craig says:

    But China’s willingness to export and be paid in dollars depends on China thinking dollars to be worth what they are currently worth. In the short term this policy would greatly reduce the value of the dollar, therby multiplying the cost of anything made abroad, including China – this could be argued as a good thing but the case should be accepted and argued on that basis. The long term effect of printing money would indeed be the hyper-inflation mentioned which would make running a free economy incredibly difficult . In the US that long term effect would happen faster than elsewhere because the US has the advantage of being the world reserve currency – when all the other countries accepted the US was going to destabilise the dollar they would dump their own massive reserves, depressing the value even faster.
    The punch line is that kiting cheques is not a successful long term strategy.

  9. Andrew G. says:

    China doesn’t actually care very much what dollars are worth. It has a trade policy that favours exports because it keeps the population employed without requiring a substantial increase in domestic demand. One way they control this policy is by regulating the renminbi exchange rate; the US has been complaining for years that this exchange rate does not reflect the true value of the dollar but instead favours Chinese exports to the US. (Why they complain about something which is a huge net benefit to the US is another question…)
    As for your predictions of hyper-inflation, there is neither a historical nor a rational basis for them. Historically, “printing money” in the sense you view as hyper-inflationary has been an effect of major economic dislocation rather than a cause of it; rationally, MMT pays considerable attention to the question of how the value of money is maintained in a fiat-currency environment.

  10. Neil Craig says:

    Whether something is a cause or an effect or, more often, part of a feedback cycle & thys both, is not easy to be certain about.
    Hyper-inflation is inevitable if government simply prints more money forever. Countries which are not already in economic meltdown tend to stop such printing when it becomes obvious that the only direction for inflation is up. This is why they don’t reach hyper-inflation but stopping hurts more than not starting would.
    Zimbabwe may be the example you ask for of a country which, while run badly, was not in collapse before inflation got out of control.

  11. Andrew G. says:

    Whether Zimbabwe was in collapse or not probably depends on whether you consider inflation to be a worse problem than starvation. “Run badly” is rather an understatement; the government was corrupt at all levels, it was trying to fund an army without having an adequate tax base to support it, it had crippled much of its primary production, and so on and so on. There is simply no comparison between it and a first-world economy, and pretending that there is in order to stoke hyperinflation fears is basically a lie.

    Hyper-inflation is inevitable if government simply prints more money forever.

    Depends how much money it “prints” and what its external balance of trade is.
    (I’ll grant you that printing more money is a necessary condition for hyperinflation; it’s simply not a sufficient one.)
    A country with a long-term balance of trade (current account) deficit will also have a long-term public-sector deficit, since the external balance is the sum of the public and private sector balances, and the private sector can not be in deficit indefinitely. Likewise if the trade deficit is zero but the private sector is expected to be in surplus (net saving) then the public sector will remain in deficit. Only a country which has enough exports to satisfy the desire for net savings in its private sector can have a public-sector balance or surplus for more than a short period. (This paragraph is not a matter of theory but of accounting identities.)
    In the MMT view, any public-sector deficit counts as net creation of money (government spending creates money, taxation destroys it, and government “borrowing” does neither, other than in requiring the government to spend money on the interest payments). Furthermore, the MMT view is that government spending is inflationary if (and only if) it competes for resources with the private sector.
    The only question therefore is whether issuing government bonds in the amount of the budget deficit has any negative effects on inflation. If you want to assert that it does, you need better reasoning than has so far been presented.

  12. Neil Craig says:

    There can ALWAYS be comparisons. The rich countries do not run by that much different rules. 50 years ago the per capita income in Zimbabwe and Singapore we similar (actually Zimbabwe was slightly ahead).The latter is certainly now a developed country. We should emulate the habits of the successes not failures.

  13. Wow says:

    I found this amusing:
    “There is simply no comparison between it and a first-world economy, and pretending that there is in order to stoke hyperinflation fears is basically a lie.”
    When it was followed by this:
    “it was trying to fund an army without having an adequate tax base to support it, it had crippled much of its primary production, and so on and so on.”.
    That last one does rather sound like a first world superpower we all know to me.

  14. Andrew G. says:

    Have you looked at Singapore’s debt-to-GBP ratio?

  15. Andrew G. says:

    [ s/GBP/GDP/ naturally ]
    Just to clarify, I mention this not because I think a high debt-to-GDP ratio is bad; I think it’s meaningless. But it’s a figure often pointed to by deficit-terrorists.

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