Renowned economist and father of Modern Monetary Theory (MMT), Warren Mosler, recently elucidated the grave repercussions of reaching the U.S. debt ceiling. Moselr was talking with Maggie Lake on a Real Vision show. He suggests that such a scenario could plunge the GDP by a staggering 10-30% within a week, a catastrophic downturn that would rapidly spiral out of control.
Mosler’s discussion pivoted around the basics of MMT, which posits that a federal government need not accumulate taxes before spending because it generates the funds required for taxes. The government’s monopoly over the supply of the currency required to pay taxes forms the basis of the price level. He stressed that inflation is essentially a political issue, not just an economic one.
Challenging the existing discourse around government deficit spending, Mosler, with references to the insightful work of Stephanie Kelton in “The Deficit Myth,” moved the conversation from concerns of solvency and borrowing to those of inflation. The concept of government solvency, he argued, has become irrelevant, with the focus shifting to the impact of hitting the debt ceiling.
The catastrophic risks associated with reaching the debt ceiling are a point of contention for Mosler. He pointed out that the resulting instantaneous downward spiral would halt government revenues, preventing any increase in debt. This would be followed by a corresponding fall in spending, leading to a drastic contraction in the GDP. Mosler fears these risks have been significantly underplayed.
Contrary to conventional economic thought, Mosler stated that a government could spend as much as it wishes and determine any price it wants, thereby controlling the rate of inflation. He mentioned that such spending policies could cause a minor annual increase in inflation, as observed by the Fed. However, he argued that most inflation is a result of a series of one-off events.
Mosler highlighted the Fed’s imprecise language surrounding inflation, which creates confusion about the target inflation rate. He criticized the Fed’s practice of increasing interest rates to control inflation, stating that this leads to increased public debt, thereby boosting deficit spending and supporting the economy.
According to Mosler, the Fed’s monetary policy, driven by ignorance rather than conspiracy, is causing inflation and damaging the economy. He critiqued the Fed’s policy of providing money only to Treasury bond holders and questioned their competency in monetary operations. He cited Argentina’s failed attempt to curb inflation by increasing interest rates as a cautionary example.
Disputing the reliability of recession predictions through yield curve and stock market peaks, Mosler discussed the 2008 recession as a case study to underscore the importance of fiscal tailwinds. He argued that inflation creates a shortage of transactional money, effectively acting as a tax that diminishes the value of money and eradicates public real debt.
In his concluding remarks, Mosler expressed bewilderment at the lack of acknowledgment of his ideas in MMT, despite their proven success. He claimed that understanding and adopting these principles could double the nation’s real wealth within a few years without wealth redistribution. The additional wealth could foster non-disruptive growth, akin to the reduction of global warming during the pandemic. Mosler urges a shift in economic approach, one that doesn’t revert us to our pre-pandemic state, but instead propels us forward in a more sustainable, equitable way.