The Deficit Myth According To MMT – Borrowing & Real Limits

At the center of frustrations with today’s economic policies, one term seems to boil to the top more than any other: Modern Monetary Theory (MMT).

As we covered yesterday, taxes are an indispensable policy tool that cannot be abandoned simply because the government can manufacture its own currency. Most governments routinely spend more than they tax. And they do it, year after year, without creating an inflation problem. In fact, many of the world’s largest economies have been actively trying to get their inflation rates to move higher. So, why not just spend more without worrying about raising taxes? And what’s the point of borrowing your own currency if you can manufacture it yourself? We’ll finish up this series today by answering these questions.

The Role of Borrowing in MMT

It’s not easy to see how it all works. In fact, it’s impossible to disentangle the government’s monetary operations in discrete time. On any given day, there are, literally, millions of moving parts. Throughout the year, the Federal Reserve handles trillions of dollars in US Treasury payments. Each month, millions of households and businesses write checks to Uncle Sam, and those payments clear between commercial banks and the Federal Reserve.

The Treasury, the Federal Reserve, and the primary dealers coordinate about when to auction Treasuries, what mix of maturities to offer, and how many total securities to offer at each auction. The whole thing is like a perfectly choreographed water ballet. A perpetual motion machine, clearing tax payments, federal spending, and borrowing in perfect unison. To the naked eye, it can appear that the government is collecting dollars from taxpayers and bond buyers because it needs those dollars to pay its bills. Viewed this way, the purpose of taxes and bonds is to finance government spending. That’s how Thatcher wanted us to see it, through the lens of a household. MMT looks at what’s happening through the lens of the currency issuer. The government doesn’t need our money. Just as the reason for taxation is not to provide the government with its own currency, the purpose of auctioning US Treasuries—that is, borrowing—isn’t to raise dollars for Uncle Sam. Then why does the government need to borrow? The answer is, it doesn’t. It chooses to offer people a different kind of government money, one that pays a bit of interest.

In other words, US Treasuries are just interest-bearing dollars. To buy some of those interest-bearing dollars from the government, you first need the government’s currency. We might call the former “yellow dollars” and the latter “green dollars.” When the government spends more than it taxes away from us, we say that the government has run a fiscal deficit. That deficit increases the supply of green dollars. For more than a hundred years, the government has chosen to sell US Treasuries in an amount equal to its deficit spending. So, if the government spends $5 trillion but only taxes $4 trillion away, it will sell $1 trillion worth of US Treasuries. What we call government borrowing is nothing more than Uncle Sam allowing people to transform green dollars into interest-bearing yellow dollars. MMT shows why it is a mistake to look at government borrowing through the household lens. If you and I borrow to purchase a home or an automobile, we don’t walk into a bank, hand over a stack of cash to the loan officer, and then ask to borrow that money to buy a house or a car.

The reason we borrow the money is because, well, we don’t have it. Unlike a household, the government spends first, supplying the dollars that can then be used to buy government bonds. it does this to support interest rates, not to fund expenditures.

This is the central thesis behind MMT that we’ve been building to this week: government spending, namely a budget deficit, isn’t to be seen as some desolation of economic principles. Government debt isn’t to be seen as something to lament. The dollars printed, the debt expanded, and the deficit enlarged are all positive results generated from the machinations of the MMT machine. In essence, the more the government spends, the more benefit is transferred to the private sector. The deeper the government’s deficit, the broader the societal benefits. It seems like crazy town, and in many ways, it is based on the conventions we know. But that’s the point: we are living in a new economic era, and would do well to recognize it for what it is, rather than try to filter it through what it is not.

Our Real Limits

Once you internalize the difference between the currency issuer and a currency user, you can begin to see, through a new lens, why so much of our political discourse is broken. Free of the constraints that bound us in a gold-standard world, the US now enjoys the flexibility to operate its budget — not like a household, but in the true service of its people.

Viewed through the lens of MMT, we see that the US government is nothing like a household or a private business. The key difference is simple and inescapable. The government issues the currency (the US dollar), and everyone else—households, private business, state and local governments, and foreigners—merely uses it. This gives Uncle Sam an incredible advantage over the rest of us. Uncle Sam doesn’t need to come up with dollars before he can spend. The rest of us do. Uncle Sam can’t face mounting bills that he can’t afford to pay. The rest of us can. Uncle Sam will never go broke. The rest of us could.

So why not tell Congress to just keep spending until all our problems are solved?

Ah, if only it were that easy. Inflation, the subject of our next chapter, is a real danger. To be clear, MMT is not about removing all limits. It’s not a free lunch. It’s about replacing our current approach, one obsessed with budget outcomes, with one that prioritizes human outcomes while at the same time recognizing and respecting our economy’s real resource constraints.

In other words, MMT redefines what it means to engage in fiscally responsible budgeting.

To paraphrase Democratic political strategist James Carville (who during Bill Clinton’s 1992 presidential campaign famously coined the phrase “It’s the economy, stupid”), MMT points out, “It’s the economy’s real resources, stupid!” The US is a nation rich with real resources — advanced technologies, an educated workforce, factories, machines, fertile soil, and an abundance of natural resources.

As the global economy is refined, as globalism shifts, and as we see the emergence of new economic and technological models, it will be paramount to budget these real resources.