> A related myth is that the government needs to repay its debt. “Debt” is a misnomer; government debt is just money (or purchasing power) in another form. A $20 bill is a liability of the Fed, which makes it a liability of the federal government. A $20 bill never has to be repaid; it just is. Fundamentally, Treasuries aren’t much different.
A debt-like characteristic is interest. We "owe interest" to those who hold our debt.
Imagine the day when the US will so much in interest that it's budget will be constrained and it can't pay salaries, and it will never pay back the principal
No, the market sets the interest rate. The government issues bonds to fund the government, and they have to offer an interest rate high enough to get buyers for all of the bonds they are selling.
This gets to crux of the matter — market power. Some countries have greater power than ‘the market’ due to their military reach or trade. The US is an extreme example — international trade is largely conducted in their currency and they will and have used their hegemonic military power to maintain that. The USD interest rate is set fundamentally by the Fed. Even other sovereign states with less geopolitical power can also maintain their interest rates by their central banks voting what rate to set them at. The market effect, for them, tends to be the foreign exchange rate of their currency will vary to offset the change in interest rate. That will have some market related limits and is why many countries tend to follow the US Fed’s interest rate decisions. To address the technical aspect of ‘finding borrowers’ the central banks of their own currency tend to be the borrower of last resort and this is why the market moves to the rate that the Fed sets — because the values of existing debt will move
And who sets the Fed’s function? The construction of the market — these very constraints are ideological economic constructions not physics. The government can implement price controls, or tax excess money out of the system. They can introduce a modicum of supply side planning similar to oil reserves to isolate from global market shocks. The fundamentals are that the Fed sets interest rates based on human political considerations — there is no natural law at work here but it’s useful from a politically ideological rhetorical perspective to convince people that there is one-true-way. But the key point here is that the Fed chooses what interest rate that it pays. It can also mint a coin to pay off any outstanding balance. It’s an accounting exercise. The fundamental driving force behind the current accounting mechanism is to place artificial limits on the size of the US government’s involvement in solving US domestic problems
Right, so the point still stands. The Fed is granted the power to literally set the interest rate the US government pays on its debt. Laws that are created through human political means, not natural physical laws. The challenge is that there’s been such a dumbing down of political economic understanding that people have premised their understanding on ‘markets’ being some kind of divine natural law of the universe which blinds debate, arguably intentionally, away from what is possible to what satisfies vested interests
You’ve highlighted my point about the dumbing down of political economic debate. There’s very literal difference between “market is fundamental natural law of the universe” and any other belief that’s grounded purely in ideology. They have a role to play in resource allocation, yes, but the idea that resources are allocated optimally through blind belief is a poor substitute for critical thought about how they are and can be harnessed, and what effect that has on the real world. One that exists outside of a bunch of bits in a database. It also allows the folks who do have influence over the laws that govern markets the ability to lean on the scales to their own favour
> The Federal Open Markets Committee sets the federal funds rate—also known as the federal funds target rate or the fed funds rate—to guide overnight lending among U.S. banks.
Why does the interest rate end up being close/near/the same as the overnight lending rate the Fed sets? Because why would anybody want any kind of risk when you can get XYZ interest rate risk free overnight short term?
It's interesting to me how visceral of a reaction the ideas that underpin this article create in so many different individuals' comments I've read in threads like this, despite economics and monetary policy typically being so boring.
One of the fascinating threads to pull within it is the origin of debt and credit creation. It raises some fun questions (some of which are just more random offshoots related to my interests than monetary policy or economic theory):
1) Did all private wealth held in USD originate as monetized federal debt at one point?
2) If banking systems didn't have access to fraction reserve systems, would they be effective tools for debt/wealth creation?
3) Is debt creation the same was wealth creation? How can labor and commodities even be effectively monetized without fluid systems of debt creation?
4) If the lowly game of poker was once used as way to build ad-hoc credit and wealth, before more sophisticated financial systems were more commonplace, how rigidly should we look at debt creation at all, federal or otherwise? Perhaps more gamified and ad-hoc systems would create a higher baseline of wealth globally? [1]
We know what will happen if it is repaid, because Andrew Jackson paid off the debt in 1835. The result was arguably the worst recessions the US has ever experienced.
Given a sample size of one, its pretty hard to be certain that its correlation, either. Even if it was relevant, which its not, because in 1835 the US was on the silver standard, not US-issued fiat.
Agreed, the effects would be much worse today, both because of the fiat currency and the larger debt. Try and imagine what taking $32T out of circulation would do to the economy.
It depends on how the repayments were made. You could cute spending and/or raise taxes to run a surplus - which would depress the economy, or simply print money.
Einstein had zero samples when he asserted special relativity. Now im not saying evidence is worthless. I am saying that demanding evidence and sample sizes isnt and shouldn't be a bludgeon you use to win an argument or discredit a plausible logic.
Government debt doesn't need to be repaid, as long as exporters can swap their real assets with nominal currency USD. Sitting on such a luxury, one can preach to the world that 'govt debt doesn't need to repaid'. Go and ask all countries who can't borrow money in their national currencies, and instead have to borrow in USD.
Underneath that high-level hand-waving there’s still a pretty simple concept. If I buy T—Bonds, I bloody well expect them to be cashed at maturity. Otherwise, who’d buy them? And I am under no obligation to buy goods and services from the US for the dollars received.
Does interest need to get paid? Yes. It is true that gov debt is not like household debt, but it isn’t an infinite lever. Those interest payments can get really steep.
The comments on The Famous Article are interesting, capturing the spectrum from "Spot on!" to "MMT is bollocks."
I fall into the latter camp. I think the tidal musical chairs is going to halt the sound, see the tide gonout, and expose copious corpulent cabooses in the buff.
Krugman seems to be fully in line with the policy positions typically associated with policy advocates associated with MMT, his disagreement with MMT is that given the theory's position (he has shifted over time between characterizing this as an apparent and a clear position) on the limitations of traditional monetary, a strict application of MMT would actually come to a more conservative policy recommendation on government fiscal policy because MMT denies (or seems to deny) that traditional monetary policy can backstop fiscal policy if the monetary effects of such policy aren't what is intended. He agrees with MMT (both theorists and most of the MMT-influenced policy activists) that the only real constraints on fiscal policy are monetary effects (the positions most MMT critics take issue with), but disagrees with (what he sees as the position of) MMT theorists on traditional monetary policy being ineffective at its monetary goals. I'm not familiar with the source work in MMT to know if the position he takes issue with is actually the position of MMT theorists, but I'm familiar enough with the less academic policy advocates associated with the MMT movement that I've always considered their advocacy to be in line with orthodox Keynesianism more than even most policy advocates who rhetorically are Keynesian, because the latter tend to -- despite embracing the positions which clearly make it out to be a false constraint -- adhere rather strongly to the preference that the government play-act as if the finite public purse (the "fisc") were a real thing outside of the domain of monetary policy, though they'll embrace things like countercyclical deficits, whereas MMT-influenced advocates tend to embrace that a fiat currency budget doesn't have a fisc and is constrained only by the monetary effects of the money it creates by spending and destroys by taxing.
But these MMT-influenced advocates don't generally advocate around the view of the uselessness of traditional monetary policy as currently entrusted to the Fed that Krugman takes issue with; they tend to prefer using traditional fiscal policy within its monetary constraints more actively for the purposes of traditional monetary policy because its easier to fine-tune the distributional impacts within the aggregate target, not because the Fed controlling rates doesn't work for macro-level monetary functions. So, in a sense, academic MMT may be a different thing that policy-world MMT, with the latter being mostly Keynsianism without fiscal policy cosplaying a commodity money constraint in a fiat money system.
> So, in a sense, academic MMT may be a different thing that policy-world MMT, with the latter being mostly Keynsianism without fiscal policy cosplaying a commodity money constraint in a fiat money system.
Herb Sutter: "The difference between theory and practice is greater in practice than in theory."
As someone "indoctrinated" with capitalism, your take on modern/policy MMT which is more of a blend than the older academic visions aligns with my understanding and advocacy.
Please don't fulminate or post shallow-indignant comments to HN. We're looking for posts that teach us something, not denunciations.
If you want to make your point more thoughtfully and substantively, that would of course be fine, but please share interesting information rather than resorting to internet putdowns.
Has any state that has eschewed these myths and run their monetary policy accordingly? If so, how is it going for them? Seems like a recipe for inflation, but what do I know.
> Has any state that has eschewed these myths and run their monetary policy accordingly?
Essentially all of them that make their own decisions? Especially "government debt needs to be repaid". Running perpetually increasing nominal debt balances is fairly normal.
The myths are much more common (in incoherent, shifting, inconsistent combinations) in public political discourse about government policy than in actual policy, except policy directed by externally-imposed constraints from (mostly) the IMF.
I don’t see why anyone would trust future payments in the dollar. It’s not backed by anything but trust. Sure, you’ll get your social security at $5k/month in 30 years, but the money will be worth toilet paper. Sure, your army pension will be there, the raw $$ amount, also worthless.
It's backed by the ability of the US government (and military) to ensure that the US is operating. As long as the US maintains a world hegemony, it's a safe bet. If it loses a series of engagements (not a single theater of economic interest), it's time to hop on to another currency. Ofc, that's just how I see it.
That increase was due to the covid stimulus checks. That isn't the new rate of money supply growth. In fact, the money supply has been decreasing lately. As i understand it (not an expert) the social security surplus (money not yet sent out to recipients) is invested in treasury bonds, so should inflate at the same rate as the dollar.
I think institutions took advantage of low interest rates, borrowed lots of money, and now will borrow/invest with much higher return for next many years.
> That isn't the new rate of money supply growth
I don't think there was so large scaled increase in the past ever.
I've been working on the M2 money supply. The total stimulus was in the range of 5T. Pre stimulus the M2 was at 15T, and today it is 21T. M1 is not a good metric for tracking the 'printing' of money.
To me, it seems there are two sides to your point, one about trust, and the other about dollar value in context to growing federal debt. As for the trust, I think part of where things go beyond trust comes from a sort of self-reinforcing economic strength.
When the average monthly expenses for an American household add up to about $5,500, certain industries (like transportation (16.8 percent of those expenses), or food (12.8 percent) will always view the American economy as a leading market to operate in. At a macro level, it would seem that many businesses making this similar judgement call would create a dynamic that goes beyond trust.
Regarding the buying power of pensions point, I believe there are cost of living adjustment laws for buying power which require Army or Social Security pensions to react to USD's changing buying power over time.
The existence of a rule doesn't mean the thing will happen.
(There's no reason for government policy to eschew abundance, so I'm not particularly worried for the future, but that is because of the dynamics of the situation, not the laws that are in place)
A debt-like characteristic is interest. We "owe interest" to those who hold our debt.
https://www.marketplace.org/2023/05/26/who-does-the-u-s-owe-...
> As of July 2023 it costs $726 billion to maintain the debt, which is 14% of the total federal spending.
https://fiscaldata.treasury.gov/americas-finance-guide/natio....