Former US president Obama is the first modern Democrat who left huge deficits. He had an excuse. Before Obama, Democrats were often the ones cleaning up the financial mess left by Republicans (eg, Bush tax cuts). Today, both parties believe in the Modern Monetary Theory (MMT), which argues that government budget deficits are solved by printing new money.
Printing new money is usually a recipe for hyperinflation, currency depreciation and/or high interest levels. It’s a last resort when creditors are no longer willing to lend any money, following a lack of trust (eg, repayment). Examples: Brazil, Venezuela, Zimbabwe.
Essentially, the MMT argues that some monetarily sovereign countries are too big to fail (eg, US, UK, Japan, Canada). Moreover, in times of almost zero interest, the MMT feels like “free money”. There are hardly any (budget) consequences of an increase in spending.
An intriguing MMT argument is that taxation only needs to be increased when interest levels rise. In that case, there is no need for austerity measures (ie, curtailing government spending in an effort to control public-sector debt). This MMT argument might actually indeed apply in any country, except for the US where tax hikes are a political sin.
Clearly, printing additional money causes asset price inflation but economists call that kind of inflation a profit (eg, the increase in prices of bonds, houses, shares). The definition of inflation is limited to “changes in the price level of a weighted average market basket of consumer goods and services purchased by households”. For an elaboration on this topic, please see my 2019 blog the inflation conundrum.
The combination of ballooning deficits (eg, multiple trillion dollar corona relief packages) and ongoing tax cuts seems fundamentally unsustainable, even in times of MMT. However, as long as the markets trust that USA will repay its debts, sustainability is not an issue.
Some recent must-read articles suggest that this trust might now be eroding:
– Axios Markets, July 28: The dollar’s global dominance is being challenged;
– Bloomberg, July 28: Goldman Warns the Dollar’s Grip on Global Markets Might Be Over;
– Reuters, 28 July: King dollar’s decline ripples across the globe.
As long as interest levels will remain near zero, the dollar exchange rate will indicate market sentiment about trust in the US $. I still remember the 1985 exchange rate of NLG 1 = US $ 1.70 or EUR 1 = US $ 3.75. Also see this recent article in the Economist: Why zero interest rates might lead to currency volatility.
What Goes Around… Comes Around (2006) by Justin Timberlake
artist, lyrics, video, Wiki-1, Wiki-2
Note: all markings (bold, italic, underlining) by LO unless stated otherwise.
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