Jon N. Hall, Since the onset of the pandemic, Congress has been spending more money than ever. The pandemic hit when it was already projected that in fiscal 2020 the federal budget deficit would once again top $1 trillion.
On October 16, however, USA Facts reported that the 2020 deficit was $3.1 trillion. That’s more than twice as much as the previous record of $1.4T set in 2009 in the wake of the financial crisis. On April 12, the Fiscal Times reported that the deficit for just the first six months of fiscal 2021 was $1.7T: “In March alone, the deficit came to nearly $660 billion, driven in large part by $339 billion in pandemic-relief payments to individuals.”
On top of that, the feds just enacted a $1.9T stimulus bill, and on March 31, Pres. Biden proposed his “infrastructure bill” that will run to $2.3T in new spending, and more new spending is promised. A trillion here, a trillion there, and pretty soon Americans will be thinking that no one in D.C. cares about the federal deficit anymore, and that the “deficit hawk” is no longer an endangered species but is extinct. Nor could your average sentient lifeform conclude that our federal lawmakers have a clue about the immutable Law of Supply and Demand.
In other eras, some claimed “We are all socialists now” or “We are all Keynesians now.” Today, some might claim: “We are all MMTers now.” The “MMT” there is for Modern Monetary Theory, which says that we shouldn’t worry about deficits, because the Federal Reserve can safely “print” much more money than it has been. The Fed creates new money when it buys things, and the main thing the Fed buys is U.S. sovereign debt, i.e. U.S. securities, a.k.a. treasuries.
There were times when the Fed bought treasuries “directly” from the Treasury. In 2014, Kenneth D. Garbade posted a short history for the Federal Reserve Bank of New York headlined “Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks.” For the last 40 years, the Fed has not bought treasuries directly from the Treasury. But the Fed can still buy new treasuries at auction in the primary market, which is the way the Fed creates money for Congress. When the Fed buys treasuries in the secondary market, such as in quantitative easing, Congress doesn’t get the proceeds.
When other buyers, like private citizens or foreign concerns, purchase treasuries, they do so with pre-existing dollars. The concern with the Fed buying treasuries is that it involves creating new money, thereby inflating the number of dollars. With more dollars out there, prices tend to rise. And that gets us into what was the Fed’s original mission — preserving the buying power of the U.S. dollar.
Unfortunately, the Fed’s core responsibility of protecting the value of our currency has been diluted. With the Federal Reserve Reform Act of 1977, Congress heaped a new responsibility on the Fed: to promote maximum employment. Though it’s said that the Fed has a “dual mandate,” it actually performs a bunch of necessary services that should give one pause when considering ending the Fed, as some urge. Rather than ending the Fed, it should be reformed by ending its second mandate of maximizing employment.
In June 2020, right as the pandemic was raging, American Institute for Economic Research ran “It’s Time to End the Fed’s Dual Mandate” by Alexander Salter. The article is fairly short, quite readable, and this writer recommends it:
While both of these ex-Fed chairs can hardly be called models of restraint, they were nonetheless correct on these issues. Their prudence was highly commendable. Alas, Jerome Powell seems to lack this prudence. And now that the precedent is set, we know it is only a matter of time before the money printer gets fired up again, for completely mistaken reasons. […]
For better or worse, the Fed is a creature of Congress. It must be Congress that reins it in. The American people can and must ask their representatives to end the dual mandate. It is time to refocus the Fed on what it is good at (aggregate demand stability) and away from what it is bad at (everything else).
It’s doubtful that the Congress under Chuck and Nancy will “rein in” the Fed in any way whatsoever as the Fed works pretty much the way they want it to. You see, tax hikes can’t begin to pay for all of the Democrats’ massive spending. So Congress must finance its imprudent improvident new spending by going further into debt. And since the “lender of last resort” has a printing press, the Dems can rely on a limitless supply of “helicopter money” courtesy of the Fed.
Salter, however, is right that the Fed’s dual mandate should end. Maximizing employment is the proper province of Congress, not the Fed, and it should be accomplished with fiscal policy, not the Fed’s monetary policy of money creation. Even so, Congress expects the Fed to come up with the cash for its spending. So if anything is going to rein in the Fed, it’ll probably be done by the Fed itself.
To appropriate Salter’s language, Chairman Powell should “make it clear” that the Fed will “take no part” in bailouts of California, Illinois, New York City, and other mismanaged governments. Powell also needs to put the quietus on any hopes that the Fed will bail out underfunded pension plans, especially the “defined benefit” pensions of government employees and unions. The Fed needs to stand up on its hind legs and say “No” to Congress: no more bailouts, no more money printing for insane new programs, no forgiveness of student debt, no, no, and no. If they think it’s a good investment, then let other lenders use their (pre-existing) old money to buy new treasuries.
I’m suggesting that the Fed resist Congress; that the Fed not buy the new debt being floated to pay for Chuck and Nancy’s wasteful new spending programs that have little to do with stimulus and infrastructure, (this brief editorial elegantly explains the fraud). Fed governors need to ask themselves if they really want to risk being the agents of the destruction of the currency.
MMTers aren’t so idiotic that they think that the Fed could, for instance, print a trillion dollars for each and every American citizen without affecting the buying power of the dollar. Even MMTers recognize limits. However, MMTers do seem to think that the “experts” in government can step in at just the right moment to head off inflation, and that we therefore don’t need to worry our pretty little heads off about the trillions being added to the deficit. But are the government experts really that competent? I have my doubts that they are, and think the Fed needs to err on the side of caution.
The Fed has no mandate to debase the currency just because Congress can’t control itself. It would be pathetic if the end of the American experiment were brought about by too much money. The Fed must change.
Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.