We can afford it
Deficits don't matter, after all
“Hence a historical problem arises, namely, that of discovering why the West has insisted for so long on seeing the power it exercises as juridical and negative rather than as technical and positive.” —Michel Foucault
A classic policy cudgel, conservative Democratic lawmakers like Joe Manchin will at least be consistent in pretending that US public debt is somehow unsustainable, while Republicans will bring up the issue selectively depending on whether their party is in power.
But anyone arguing about the deficit is already playing a pointless Washington D.C. game. For the last decade the country has added an enormous amount every year to the national debt, and it has not mattered. The yield on a 10 year Treasury bond is 1.63%, which gives America an enormous amount of borrowing power still, at incredibly low rates.
It actually makes sense to invest in the country now with more spending. The Build Back Better proposal isn’t particularly important in itself, what is important is maintaining the solid economic performance recently despite the pandemic over the next year. Renewing programs like the direct payments to parents per child would help many working families but would also keep consumers buying. The risks of not spending are much higher than the risks of spending.
And what exactly are the risks of adding more debt to the total? The government could conceivably face a loss of confidence in its debt if it was seen to be a repayment risk—or if that currency was not expected to be valuable anymore when it was repaid. But as the yield mentioned previously demonstrates, domestic and foreign borrowers still have plenty of appetite for the low risk and stable returns of American bonds.
What about the risks of domestic inflation? This is something that can probably be managed with a fiscal as well as monetary answer, but then here’s the optimal form of that response: maintain spending but raise taxes until the price rises slow down. But somehow that is not the answer that the majority of lawmakers, connected as they are with wealthy financial interests, are probably going to want to hear.
From a traditional Keynesian perspective, this is probably still the time for deficit spending. But what is Keynesian about running large deficits all through the last decade even during growth? Whatever rhetoric they throw out there, politicians are not making realistic attempts to reduce debt, or even stop issuing it. The traditional ways of discussing fiscal policy just don’t make much sense any more. A new set of ideas sometimes referred to as Modern Monetary Theory (MMT) is attempting to move into that vacuum. I have started reading about it and my newsletter today is influenced by some of its basic ideas but I can’t claim much knowledge of it really—but I think it’s worthwhile for investors to see what ideas they take away from reading economics sometimes.