Joining me now is a guy who wrote a great column about something that is so insidious and so incredibly mindnumbingly stupid at the same time that it almost sounds like it's something made up, but it's not.
So.
Joining me now is Alexander Salter, who happens to be the Georgie G. Snyder Professor of Economics in the Royals College of Business at Texas Tech. He is one of the co authors of this article from The Hill dot Com. Alexander, Welcome to the show, Thanks Maddy. Let's talk about modern monetary theory. What is it.
All? The boy so? Mod monetary theory is a complete topsy turvy approach to public finance. Basically, it says the government should finance itself entirely by printing money, and the only thing that we would do with taxes is raise
taxes if eventually we need to control inflation. Now, many people who back modern monetary theory claim that that's a very rare thing that would ever have to happen, because if there's any quote unquote slack anywhere in the economy, if there's any idle resources, prices won't go up when you print money. So it's really impressive is that we had a pretty clean test of this theory over the past couple of years, and while we saw skyrocketing inflation.
So it's actually amazing that you had anybody who identified as an economist who was willing to sign on with this paradigm. And yet they did, and it's caused a lot of problems for millions and millions of Americans.
But in my view, and you can correct me if I'm wrong, I think that too much of our monetary policy is simply designed to enable more government spending. And this is like a government spender's dream. I mean, you can spend and spend and spend and not have any negative replication repercussions. This is this is like big government's you know nirvana here And how did this become so accepted? Who started this nonsense and how did to gain steam mainstream wise?
It is absolutely a recipe for fiscal qualities and money mischief. If you look back at what happened during and just after COVID, you had blowout government spending, deficit spending. Now that by itself would not have causedlation. What ultimately made it inflationary was all those new bonds that appeared on the market all the money that the government had to borrow to finance that spending. Our central bank, the Federal Reserve, then stepped in created money at usin air to buy
up all those new bonds. So it was an indirect process, but nonetheless it was printing press finance. Again, the usual way we think about these things is we should use money. Monetary policy control the money supply to dampen down inflation, and the government gets revenue via taxes. Modern monetary theory turns that on its head. We only use taxes to control inflation, and we print money to fund the government well,
with politicians and bureaucrats at the helm. That's a recipe for printing too much money too fast, and of so, of course prices go through the roof. Now, there are many economists who are close to democratic policy makers, policy makers and politicians and the Democratic Party who advocated these ideas. From twenty twenty to twenty twenty two, it became de facto policy and governed our COVID response, and as a result,
household were hit with crippling inflation. So this was every bit as tragic as it was predictable.
What sort of responsibility do you think the FED has in terms of putting fiscal policy in place that is good for the American people versus putting fiscal policy in place that allows for a larger government through the sale of government bonds.
Well, it's a difficult question to really pin down exactly how we want fiscal policy and monetary policy to work. So usually the way that we think about these things is that the government the treasury elected officials decide how much to spend. That's fiscal policy, and then in the background you have the FED Bank conducting monetary policy. Ultimately, inflation is the federal reserves problem. The central bank in the long run, determines the cost of living by controlling
how much money is in circulation. The reason that things can get a little bit dicey is that when the government needs to borrow a lot of money to finance what it perceives to be emergency policy, that's going to put upward pressure on interest rates. And the FED often doesn't like seeing upward pressure on interest rates, so they create new money to buy up government debt to keep
yields and hence interest rates down. So the problem here is that irresponsible fiscal policy by politicians puts pressure on the central banking bureaucrats to conduct monetary policy too loosely, and again the predictable result of that is that prices for everything are going to go up.
So during the go go years of COVID, when we were coming up with one giant stimulus program after another, how much was the money supply expanded during that timeframe, meaning how much more money did they throw into the circulating money in the economy.
It grew really fast, really quick. Before COVID, the Federal Reserve's balance sheet, which is a narrow measure of the money supply, we sometimes call that the monetary base. The total assets on by the Federal Reserve system that was about four trillion. It's sent shot up to around eight trillion, although it's falling now. It's slightly smaller than that now.
And that actually compounded to larger measures than the money supply that grew even more so, this was a lot of liquidity, a lot of new money created very quickly and spent very quickly. Again, think about the COVID stimulus checks. Right when everybody opened the mail and day and found a seven hundred and fifty one thousand dollars check from the Treasury Department. Now was that financed indirectly. It was financed by the FED creating money and distributing it to
the financial system. And so it's not really a surprise that when America and households get all this new money, they needed to spend it on stuff. So as soon as they could they did. They spent it on everything, and as a result, everything got more expensive. What makes this truly tragic is that the prices of goods and services that households need, food, clothing, shelter that rose much
faster than wages is did. So if the things that you need to buy to maintain your standard of rialting are getting more expensive faster than your income, you're basically taking a pay cut. And that's why I think Americans were so hopping mad about this when they went to the ballot box for the most recent election.
So I agree with you on that. By the way, I do think inflation was one of the main drivers that drove Trump back into the White House. But I want to ask you a question about that election, because before you came on the show, we were talking about the efforts by Elon Muskin to think Ramaswami to shape five hundred billion dollars off of the budget, and what
would you think a contraction. Let's just say for this sake of this conversation, they pull it off right, and they shrink the size of the federal workforce, they shrink the size of some of these departments, and that five hundred billion comes out of the deficit spending. What does that do to the economy overall? Does it force us into recession in the short term? What would be the most likely outcome of that kind of of contraction.
Well, I don't think that there would actually be a recession. When you shrink government spending, that frees up resources for private parties who can then spend that money elsewhere. So what that sort of a project would do, if they actually accomplished, it would transfer resources resources that were previously being spent by the government. Money that was previously being spent by the government would then be back in private hands, where there are much stronger incentives to use that funding,
to use that money more efficiently. So, if anything, you might even see a very small optic in productivity, which would of course mean that the economy is able to produce new goods and services easier than it was before. Now I think that that effect would actually be very slight. You'd probably get a much more radical reduction and federal expenditure and the size of the bureaucracy to get a
real big boost of productivity. It's worth remembering that five hundred billion in the grand scheme of things really isn't that much. Yeah, right now, the national debt stands at roughly thirty trillion dollars, larger than the size of the overall US economy, and it's just on a course to grow and grow and grow. We need to get serious about this now and be thinking about even more cuts.
What does a debt crisis look like if we do get to the point where we don't get serious about this, and then we get to the point where no one wants to buy our debt and they either have to print money, which creates a hyperinflation situation, what would be the outcome of us getting to that point.
It's going to be ugly. What you really have to worry about is investors no longer willing to buy US bonds, like you just said, and in fact, if it becomes if we ever get to the point where the US is not able to meet it's that obligations we're actually looking at a default that would be truly catastrophic. Remember, the global financial system basically treats US treasury securities, government
debt as a quote unquote risk free asset. It's the asset upon which all other assets and transactions and the global financial system are built. If the value of those things becomes comes called into question, you're basically pulling out the bottom layer of a house of cards. The whole thing is going to come crumbling down. Well, this, we really need to make sure that Uncle Sam's fiscal houses in order, otherwise we could be looking at something nasty.
Alexander Salter, I wish I disagreed with you. I wish that I could say no, I don't think that will happen. I think my issue with the United States of America right now is that we have this attitude of hey, we're the USA, We're good for it. You know, we're not going to run out of them. Who's going to stop buying our bonds? But the reality is is that when they're perceived to be a bad investment, people will stop buying our minds, and then we get to the
point where we can't pay benefits. It's just the cascade effect is something that I don't think Americans can even imagine happening here.
It is frightening, But there is a silver lining. The silver lining is that we don't actually need to shrink the national debt in order to get this problem under control. All we need to do is mop out rate the
rate at which federal spending grows. As long as we can get government spending growth at or below the rate of overall economic growth, tax revenues to Uncle Sam are naturally going to grow faster than the debt, and so we're actually going to pay pay down the debt on its own without having to actively try and reduce it.
And so really this is a sustainability question. If the economy, in terms of actual goods and services that we produce, is growing at say three percent per year, it's okay for federal spending to grow, but it should grow at no more than two point nine percent per year. Keep real economic growth a heap of a head of government spending growth, and after five, ten, fifteen years, our net fiscal position is actually going to look stronger than it is now.
But is that kind of like paying the minimum payments on your credit card? So it would take us seventy k jillion years to actually pay off enough of that debt to where we can maybe take a breath. Because you know as well as I do, even if there's great economic policy put in by one president, the next president can come in and undo.
All of that. Yes, that's the scary thing, right. You need continuity across several policy regimes, across several presidential administrations and legislators congresses. So as long as you don't have a bipartisan consensus to keep federal spending growth below overall economic growth, right, if the more profligate party comes back into power and just floods things with spending, then we're back off to the races. We haven't solved the fundamental problem.
And so that's silver lining, I think is our best politically feasible hope for getting our fiscal house in order. But there really does need to be a consensus between the two parties that this is something that we have to take seriously.
From your lips to God's ears. But I've been watching politics long enough to know that will never happen. Allexander Salter is the Georgie E. Snyder Professor of Economics in the Rolls College of Business at Texas Tech. The Mouthful's worth it, great column, Alexander. I hope we can talk about it again in the future.
It was my pleasure. Thanks for having all right, Thank you