Of the over 50 Sherlock Holmes mystery stories written by Sir Arthur Conan Doyle, only one centers on something that didn’t happen. In “The Adventure of Silver Blaze,” a famous racehorse has been stolen and his trainer murdered. After carefully sifting through the evidence, Holmes focuses on one “curious incident” — the watchdog did not bark. Therefore, Holmes reasoned, the culprit had to be someone the dog knew.
Our current economic and political mysteries are not worthy of a Sherlock Holmes plot, but it is curious that of all the proposals made by the 20 presidential candidates who made the cut for the televised debates, there is no plan or scheme to control the deficit or reduce the federal debt.
The missing debt issue is curious, certainly, but understandable. The federal debt and deficit are a politically lethal combination of boring and frightening. Most people prefer not to think about it, let alone talk about it. For an office-seeker, then, raising it as an issue would be foolish at best, risky at second-best and game-ending the most likely.
When discussing our fiscal policy, many people use the terms “debt” and “deficit” as if they were interchangeable, but they are not the same thing. Together, they are more like the government’s financial statement; an income statement and a balance sheet. One, the deficit, shows the results for the current year or quarter. If the government spends more than it takes in, that’s called the deficit.
The other element, the debt, includes the accumulated deficits from past years that we still haven’t paid off. It is like a household. If you spent more than you earned in, say, 2018, that is a deficit. And it just sits there as debt — perhaps as your credit card balance — until you pay it off.
This year both the debt limit and the federal spending limits are converging in a financial and political annus horribilis. If Congress does not act promptly, the Treasury Department will be unable to issue bonds to fund the deficit spending. It has already been forced to suspend its investments to the Civil Service and Postal Service benefits funds — and a similar situation is developing in Social Security.
This precarious financial position didn’t sneak up on Congress or on us. The situation in Social Security was known and reported to Congress dutifully by the trustees, with hope for prompt and effective Congressional action, Even columnists have written about it.
The federal debt limit needs no introduction, either. The Treasury Department and the Congressional Budget Office have been writing reports and letters to Congress on these subjects for months.
Since these are Congress’s own laws and regulations, and the consequences of inaction are so dire, we might think that the senators and representatives would move quickly. But here we are again, facing a two-month Congressional recess in July and August, and the topic is not even on the agenda — unless you believe that issuing threats and demands are the same as doing something.
The economics behind the deficit and the federal debt has become more complicated by two events: the “Quantitative Easing” policy of the Federal Reserve, which made good sense from an economics standpoint but appeared to Congress as a way to make deficit spending disappear; and the emergence of “Modern Monetary Theory” (MMT), which has as a central tenet that it doesn’t matter how much money you print up to cover deficit spending and debt — as long as the debt is held by your own citizens and inflation is kept at bay.
Many economists are skeptical of MMT, but leftist politicians have bought into it fully. It is at the financial core of the Green New Deal, for example.
Politics aside, taken on its own merit, MMT takes advantage of conventional monetary theory’s weaknesses, especially in the area of its integration with the real economy. Nevertheless, though, it looks, feels, and smells like a rationalization of existing or desired financial behavior rather than an economic theory. The two “as long as” conditions, for example, are interesting, but there is no way for either one to be met by our economy. The value of U.S. debt is heavily dependent on its credibility in global markets, for example, and the U.S. dollar is the world’s reserve currency. These two factors transform MMT into an exploding cigar for countries adopting it.
The Federal Reserve’s actions and the emergence of MMT are just side issues to the real problem. Congress needs to wake up and take action to straighten out our financial position right now, no more excuses. They are inviting a global financial meltdown when they play politics with our country’s good name and good credit.
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