The Wall Street Journal Disappoints Yet Again
The Wall Street Journal asked a valid question on Tuesday in an article titled: “How Much Debt Is Too Much? It Depends on Your View of Inflation.” Spoiler alert: for those who love liberty and freedom, this doesn’t end well.
The tone is quickly set when the author notes how Western nations have the highest debt-to-GDP ratio since World War II, citing “the pandemic” as the cause, not socialist governments nor their anti-capitalist central banks. Considering that long before covid, the world was already reaching exponential increases in debt and money supply, it seems unfair to absolve those responsible by putting the blame on the pandemic.
Per the article, we are told fears of high debt-to-GDP ratios have been repeatedly proven wrong. Despite this, some, like the UK Treasury chief who called public finances “unsustainable,” are now trying to set the nation’s debt limit. To combat the rising debt level, the author presents two choices for fiscal policy in one very vague either/or fallacy:
Should they aim to stave off “bond vigilantes,” or simply not stoke inflation?
The author tries to explain that the answer lies in our understanding of “how inflation works”:
If governments keep borrowing too much, the theory goes, interest rates will rise. At some point, printing money will be the only alternative to a default, creating inflation. By contrast, MMT [modern monetary theory] advocates see inflation as a result of too much spending, regardless of whether it is financed by money or debt.
The first view point is named the “traditionalist” school, though the name of the school or theory is never stated. According to this school, price inflation after money printing is the only solution to a default, and this only after governments borrow “too much” money causing interest rates to rise.
As for the MMT idea, it seems to say price inflation is a result of “too much” spending…
Generally, as a rule of thumb, anytime an economic idea cites “too much” of anything, whether it’s too much borrowing or too much spending, a red flag should go up. For anything to be too much would mean there exists a “too little” amount, or worse, an “ideal amount.” It’s ironic because the importance of data dependency is often touted, however, we’re only given vague notions which cannot be quantified. To say (price) inflation is the result of too much borrowing or spending doesn’t offer anything we can discern, while overlooking other crucial ideas such changes to money supply.
Beyond these ideas exists the problem with the “inflation” calculation, such as the consumer price index (CPI). This idea is somewhat touched upon:
What indicators should policy makers follow then? Inflation itself is a good bet, though consumer-price baskets are crude—they often obfuscate specific supply shortages, as happened this year.
While not taking the CPI as gospel is good, the article concludes with the solution that:
Governments will need to monitor and control consumer spending and industry bottlenecks, as well as automatically link stimulus programs to persistent increases in unemployment, rather than leaving them to officials’ discretion. Outside of the U.S., much more attention should be devoted to the exchange rate, since depreciation can create inflationary spirals.
In other words, governments should intervene further in the market, and in this instance literally control consumer spending and industry supply chains while stimulating the economy through programs to fight unemployment. The recommendation also mentions to pay more attention to the exchange rate. How this can be done is not offered, nor can an adequate solution exist unless one is to come up with the ideal exchange rate for the US dollar which the government defends at all costs.
So, how much debt is too much? We are never told. But as long as the Federal Reserve is in charge of our financial system, we’ll never be able to get out of debt. While the USA is unlikely to ever explicitly default, it will nonetheless continue to debase its currency to lessen the debt bill in real terms. Economics shouldn’t be about finding a view of monetary inflation that allows us to justify inflationary policies; yet, unfortunately, it seems we’ve come to that.