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The Republican party is generally claimed to be the party of fiscal responsibility. Note the term "claimed" here; I do not think the record of Republican governance proves this claim at all well, but nonetheless the default expectation seems persistent. When I was younger, this was certainly a selling-point of the party to me, and I voted for Bush II in the hope that he'd get government spending under control. Then 9/11 happened, and he wasted trillions wandering our military through the middle east.
Now the debt is very bad, and people are once more raising the banner of Fiscal Responsibility. Is it in Republicans' interest to enforce "fiscal responsibility", and if so, how? If we were to seriously cut spending and raise taxes, as people claim the fiscal situation demands, this would almost certainly cost us the next election. In the best possible case that I can see, we would be expending our political power to create stable economic conditions for our opponents to then rule. The more likely case would be us expending our political power to ameliorate spending that our opponents increase to gain power for themselves, resulting in a much shakier economy and our complete political irrelevance.
Why not offer the Fiscal Responsibility mantel to the Democrats? The economy is very complicated after all, and they are at this point clearly the party of Expert Opinion: who better to determine and implement the hard-nosed measures necessary to right our economic vessel? When I was younger, the obvious rejoinder would have been that they would do a bad job of it and disaster would result, but it seems to me that we have not done all that much better, and disaster seems likely in any case. If disaster cannot be meaningfully avoided, then why expend limited resources demanded by a serious political conflict on an unfixable resource-sink of a problem? What's the actual plan, here?
I've said this before, but I'm pretty sure a lot of members of congress have learned at least some MMT stuff about banking & government finance accounting. They pretty much all still use the deficit, debt, and fear of large numbers as rhetorical weapons against their opponents when out of power. But we seem to see fewer people than ever signing up for the mistaken sucker play of being in power and actually crashing the economy with austerity. Maybe more senators than house members understand the reality; surely more democrats than republicans have been incentivized; and definitely more congressional aides and rank&file treasury/fed people know how the financial plumbing works compared to elected & appointed officials (but in the US in particular, these types seem to effectively be able to get the word out to stop politicians from wrecking things usually). This time around, Trump even potentially had Elon as a perfect fall guy to take any blame, if Trump actually wanted to cut the deficit (luckily he didn't).
To be economically literate, one would have to know that saying the government deficit should be cut is identical to saying the non-government surplus should be cut. Or that the government's debt is not "our" debt, it's our asset: the government is just a balance sheet entity we made up, which we use to emit IOUs that we (the actual people) get to hold & use. It's much more akin to a scorekeeper, tracking the points everyone has. The national debt is essentially the net money supply, and that money is being created by running a deficit (constantly for hundreds of years, with no reason to stop if the people keep wanting to accumulate monetary savings). Government deficit & debt are good things, and the only problem is along the lines of 'too much of a good thing' (inflation, which is the self-correction mechanism).
I think MMT was especially catching on amongst politicians around like 2018-2019. The inflation of 2022 probably put it on the backburner for awhile. But even back in 2012, here they are talking about how a load of congress members understand things but just can't say anything publicly: https://youtube.com/watch?v=ba8XdDqZ-Jg&t=1h4m25s
The problem is never the amount of debt, but the backing of that debt. It is true that government debt is useful: money is a government liability (zero coupon, infinite maturity for cash) and treasuries are a safe security (until we default) in a world where safe securities are scarce. In the 90s, people were worried that by lowering deficits we would create a shortage of government debt and safe assets. This was completely misguided because we can always issue more debt and use the proceeds to buy valuable assets to finance the repayment.
When people say that they are worried about government debt, they mean relative to the ability to repay. Since we see that increases in debt don’t go towards increasing our ability to repay it but rather decrease it, it is natural to say that we want government debt to stop increasing.
I actually think that there is not enough Treasuries around as we can see by the convenience yield that they have. This convenience yield says that we could profit by issuing debt and investing in real assets, turning the federal government into a massive bank (which it kind of is). Yet issuing more Treasuries and then wasting the proceeds is not sustainable.
But what are the 'proceeds' in your formulation? They issue a government liability that pays the policy rate, swap it for a different government liability that pays the policy rate (central bank reserves), and then spend it. There is no difference between reserves and treasuries, so calling one 'money' and calling the other 'debt that requires backing and an ability to repay' is only serving to confuse your thinking.
It's akin to printing up a new $5 bill, then exchanging it for quarters because that's what the arcade takes. No more or less money in any form. They can print as many central bank reserves or treasury securities as they want, so 'repayment' is a non issue. Inflation is the only relevant concern.
When the government issues treasuries and receives money, it can spend that money. When the federal reserve “issues securities” (more accurately, the ON RRP), it withdraws that money from circulation.
If the government were to just take the money from the issued bonds and just sit on it, then there would be no effects (except those via the relative supply of money and treasuries). But it issues debt to get money to spend, so after issuance, the amount of things the government can afford at that moment has increased.
The point is that issuing debt gives you resources now that you have to repay later. Money or nominal versus real does not change that.
My thinking is not confused because I admit that money and treasuries are (consolidated) government liabilities, both of which need backing and ability to repay. People get confused with “fiat money” and think that it doesn’t require any backing. But the value of fiat money today depends on the expectations of its value in the future; that value depends on the demand and supply of money then. If the federal reserve has no assets, then it cannot react to a lower demand for money by withdrawing the money from circulation so the value of money would be lower. Therefore, if you don’t have “ability to repay”, your currency in aggregate and in real terms cannot be too valuable.
The usefulness of money allows you to get some value without any backing (for a different example of that look at Bitcoin). But at the margin, if you want an economy with enough money in real terms you must have backing.
Finally, repayment in real terms is the concern. Inflation is default. No serious monetary economist will ever tell you that a central bank has no meaningful budget constraint (but you might read that in a paper in the AER).
I don't know what you would mean by "backing" in this context. The treasury issues IOUs that pay interest (bonds/bills/etc), and they make those interest payments by issuing more of the same IOUs in the future: they indefinitely roll over. The central bank issues IOUs that pay interest (reserves), and they make those interest payments by issuing more of the same IOUs in the future: it indefinitely rolls over. There is no promised future real 'value', it is what it is, and if there's inflation, so be it (other than the inflation-indexed bonds). And the only thing any of these government IOUs can be redeemed for when returned to their issuer is tax relief (or you can freely swap them for other different types of government IOUs).
They are the monopoly issuer of the currency, and thus can either control price or quantity. There was a bit of a monetarist experiment with Volcker where they tried to control quantity and let price float, but that just caused the price (interest rate) to keep ratcheting up, because commercial bank lending creates deposits endogenously. They have since recognized that they just have to fix price and let quantity float, to run the system properly. So they just set the interest rate and do not care about 'demand for money' - it's infinitely available at some price. We're simply talking about numbers in account balances.
Whose concern? The government doesn't care. And no one else's opinion matters. They are not beholden to the market. If inflation ticks up, that is definitely not the same as defaulting on the debt. We still need the government's IOUs to pay taxes, so they will perpetually be valuable to that extent.
Not sure what you mean by a central bank budget constraint. They have various expenses each year, but any preparation of a formal budget is to make their case to congress that they're behaving well and shouldn't be slapped on the wrist. It's not an economic constraint. They tend to end up in profit every year and just dump that amount into the treasury's account.
Bitcoin has no issuer offering a redemption value, and thus is a commodity rather than money. As an economic instrument, the fair value is $0. Any valuation above that might be a small amount for the utility of making transactions (would work if each btc were 1 cent or something), and otherwise just speculative (don't get caught holding the bag).
If you're saying that bitcoin has no 'backing', but US dollars have 'backing', maybe you're using that term for what I'm calling IOU 'redemption'? (returning an IOU to its issuer, to get what is 'owed')
Yes, there is. It made somewhat explicit by inflation targets. I don't understand at all what you mean by "if there is inflation, so be it."
Sure, they set a price but how is that implemented? It is implemented by changes in the quantities. Yes, the rule says adjust the quantity as much as needed to get to the price. But to do that quantity adjustment sometimes you need to reduce the quantity in the market (OMOs sometimes require 'buying back' money) and for that you need assets that the market values.
This is my point about budget constraints. The central bank supplies money which, to think clearly, we should measure in real terms. The amount of money in real terms that a central bank can supply is limited by the assets that they hold because otherwise the bank cannot maintain the real value of money in the face of demand shocks. Demand matters because it is obviously easier to maintain the value of your currency when its demand is growing than when its demand is declining. I don't see how this point is hard to understand, but it is easy to show in a very simple model.
The difference between defaulting on debt and defaulting on money (inflation) is who gets to bear the losses of the default. This is easy to see if you think of money as an infinite-maturity bond with zero coupon (for currency) or some coupon (for reserves). Your argument proves too much: if it were true, there would be no issues with the monetary crises in the late 20th century. Taxes are set in nominal terms, but they are set with a delay so the government will lose in real terms with inflation (after we are all bumped up to higher brackets).
In monetary economics, commodity money means an asset or durable good that has intrinsic value. That is, value for non-monetary uses. In this sense, Bitcoin is not commodity money. Backing need not be about redemption. Think of stock buybacks, stocks are backed by the companies cash flows. You can't show up with one share and demand a payment from the company, but there is an implicit expected future value of the stock and the buybacks help maintain it. Bitcoin doesn't have that and the dollar could work without that, but it would mean a low aggregate stock of money in real terms which is bad because we need money valuable in real terms to make transactions.
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The damage isn't done by money simply being created or spent. It's done when it's used to Dig Up and Fill Holes Again, or worse, paid to my political enemies to actively undermine my interests. The money is then "backed" by holes dug up and filled again, or hit pieces against Twitter nobodies.
These things probably don't generate as much real wealth as what the private sector would back it with instead, if it was allowed to create the money instead.
Well the private sector definitely creates money and real wealth as well, so it's not a competition for any kind of limited quantity of financing. But it does so pro-cyclically: when times are good there's lending & investments everywhere, but everyone clams up when times are bad. The government can be the counter-cyclical engine, stopping the paradox of thrift.
If you would have otherwise had high unemployment, then creating money and paying those unemployed people to dig holes is at least better than letting them atrophy away, in terms of "damage done", because at least they go on to spend that money and generate more demand. But yeah it would always be a better idea to put people to work generating some kind of base-level valued output (goods/services). Ideally the government catches people at the bottom unemployment end, and they can as quickly as possible transfer back into the private sector to make more money and do something valuable.
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