It’s that time of the political cycle again, folks. The ongoing, never ending, and never resolved debate about the U.S. debt ceiling is making its way back into the news. Of course, politicians will never waste a good crisis as a way to further their agendas (and careers). In fact, this very issue has come up a whopping 78 times since 1960! While we coach our clients to ignore the political circus when it comes to their personal finances, I wanted to share a different perspective on the debate.
A few years ago, I was recommended a book written by economist Stephanie Kelton titled The Deficit Myth. It took me a while to get around to reading it but when I did, I really did find myself viewing the idea of national debt through a different lens. While I wouldn’t say I agree with all her arguments, as we’ve digested the impact of the unprecedented spending during and after the pandemic, many of her ideas do seem to hold water. Read on for a (very) brief summary of her book’s main idea and how it fits in with today’s debate.
House Speaker Kevin McCarthy recently stated, “Debt-limit debates have been used for nearly every successful attempt to reform federal spending in living history… Why? Because the problem only gets solved when both parties come to the table.” The debt ceiling debate has long been used by politicians to bring both parties to the table for a whole host of issues like infrastructure and military spending, and programs like Social Security and Medicare. However, the debate is always framed around the traditional idea held by many that “deficit = bad”. The Deficit Myth attempts to reframe that view.
Kelton’s book begins with a chapter that sets the tone for her viewpoint. That chapter is titled “Don’t Think of a Household”. When we think of the word deficit, we immediately frame it in our own view of the world. If our household finances are in a deficit, we are spending more than we make. You don’t need to be a financial planner to see how that’s not a great spot to be. However, Kelton argues that when it comes to a deficit in spending by the government, the comparison doesn’t hold up.
Kelton submits that the U.S. government is not bound by “money in, money out” the way we are. The U.S. isn’t limited to spending money it receives from taxes or even by the money that it borrows in the form of U.S. Treasuries. As comforting and relatable as the term sounds, the US government just does not have to worry about a “balanced budget”. It can’t “lose its job” the way we can. It can’t even default on its debt! Well unless it chooses to, at least. As a currency issuer, it can just create money to spend as it sees fit! Does that sound too good to be true? It should. We all know that there’s no such thing as a free lunch and there must be consequences to government overspending.
So, if a spending deficit itself isn’t an issue, what happens if/when the government were to spend too much? In the months and years after the government’s pandemic relief spending, we’ve had a front row seat to what The Deficit Myth argues is the real evidence of overspending. Inflation. Kelton explains that we can quite literally ignore the deficit as a measure of overspending and what we should instead focus on is inflation. Interestingly, the book was officially released in June of 2020. Just a few months after the pandemic and way before any of the runaway inflation that we’ve witnessed since. As I watched mind bending inflation data come in month after month, I was drawn back to the ideas presented in the book. An arbitrary deficit number wasn’t harming the economy. It was the inflation that Kelton had forecasted as a result of government overspending that was the real issue.
So, if you view inflation and its counter, unemployment as the true measures of government over/under spending, the perpetual debt ceiling debate in Washington seems silly, doesn’t it? Our politician’s time could be better spent focusing on the issues of inflation or unemployment instead of holding hostage our country’s liability payments. In the end, they may actually agree with Kelton even if they don’t realize it. They always raise the debt ceiling after all.
The Deficit Myth challenges many of the conventional assumptions about government spending and deficits. It also offers many more ideas on things like the purpose of taxation and goes a little deeper into Modern Monetary Theory. I found the book very interesting read and would recommend it to anyone that would like to get a fresh perspective on an old debate. If you’d like to discuss this book or nerd out on anything else, reach out to an advisor at Innova Wealth Partners.
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