Humongous Budget Deficits – Super-liability or Superpower?

Economy, Education / Saturday, August 22nd, 2020

How good is a budget surplus! Not only do we get some of our money back come tax time, but we also feel proud to be the citizens of a responsible country that spends less than it earns. And deficits, well they are a thing of evil, aren’t they. They are a burden that we put on the future generations so we can live today. Much like climate change. Well at least that’s what I thought until I came across Modern Monetary Theory.

Like all things modern, MMT takes the old by its horns and turns it on its head.

Modern Monetary Theory (MMT) – Explained

When we as common citizens think about government debt, we superimpose our views of how we run our households. As responsible adults we make sure that our expenses are less than our earnings. That we take on only so much debt as we can comfortably repay. We’ve all seen or heard of relatives and neighbours who took on too much debt and then sank with it. And we expect that that’s how economies work too.

On the contrary, the most basic premise of MMT is that governments are nothing like households. So the usual rules of live-within-your-means don’t apply to them. That is because governments can print their own money, unlike you and I.

Government debt is mostly denominated in their local currencies, the Aussie Dollar in our case. And if they are ever running out of money when their repayments become due, they can have their central banks fire up the printing presses. And voila, they’ve created money out of nothing. 

So why can’t we just do that and get rid of the ‘eye-watering’ $184 billion deficit that we’re expecting in this Financial Year? Well an MMT supporter would say that you can do just that! 

And what about the problem of runaway inflation that comes hand-in-hand with printing large amounts of money? It seems that that problem only arises if the increased cash in the system leads to an increased demand for goods and services, that supply can’t keep up with.

The government’s spending such as on JobKeeper, JobSeeker and on other grants has been targeted at introducing enough cash in the system such that demand in the economy does not fall too drastically versus pre-covid levels. So inflation really is not a big worry for them, currently it’s deflation.

But if the government has its own money tree, why do they need our taxes? MMT enthusiasts go so far as to argue that governments don’t really need taxes. The only reason they levy them is because they want to create demand for their currencies. We have to pay our taxes in Aussie Dollars so we have to earn some Aussie Dollars too, otherwise we could have just subsisted on Bitcoins or the Barter System or anything else. Also, governments use taxes as a tool to control inflation.

Under MMT, a budget deficit is the superhero leading the pack of smaller superheroes a la Superman or Captain America (depending on whether you like DC or Marvel). Having a deficit means that the government has put more into the economy and in the hands of the everyday consumer to spend and therefore grow the economy. Having a surplus on the other hand means that a government is depriving its citizens of spending dollars.

Does that mean that MMT is the answer to all our economic woes? 

Well, the thing is that no one really knows. MMT is the new-kid-on-the-block as far as economic theories go. No one has first-hand experience of how it would really pan out when followed to the letter. The other big shortcoming of the theory is that it does not apply to all nations, but mostly to the developed ones that issue bonds in their own currencies. An EU country that has to issue bonds in Euros or a developing country that takes on debt denominated in US Dollars can’t really use MMT to make their problems go away. This is precisely the reason that Greece at a debt-to-GDP ratio of 180% is a more worrying problem than Japan which has a ratio of 230%. Greece cannot issue Euros at its whims and fancies to make repayments, but Japan can issue the Yen.

So should Josh Frydenburg stop getting so watery eyed about this deficit and yield to the superpower of MMT? I would say yes. COVID-19 has shaken up Business-As-Usual. Maybe it’s time that Policy-As-Usual was shaken up too.

Amateur economist…

Ms. FieryIce

Leave a Reply

Your email address will not be published. Required fields are marked *