I have been so very fortunate during my 35+ years in the investment industry to work with and learn from so many incredibly bright individuals. One particular individual, Charles DuBois, is a former colleague of mine from my days as a member of the Invesco quant group. Charles was an early pioneer in quantitative investing dating back to the late ’70s, and he continues to be an incredible resource today. It is through Chuck that I have learned about MMT (Modern Monetary Theory), and because of his introduction to this subject I’ve had to relearn so much of what I thought I knew about economics.
The following letter to the editor was written by Charles. It is but one example of his many insights on U.S. monetary policy. Please don’t hesitate to reach out to me if you’d like to receive other examples of his forward thinking on these issues.
To the Editor:
Beware Balanced Budgets!
Part 5 of “Saving America” (December 26) is a thoughtful and thorough review of how a balanced Federal budget could be achieved over time.
However, under current and projected circumstances, such a balanced budget, if achieved and maintained, would likely send the nation into prolonged recession or worse. The U.S. runs a trade deficit of about $500 billion annually. This means that $500 billion flows out of the domestic private sector – as money paid to buy imports exceeds money received from selling exports by this amount.
Public sector budget deficits offset this financial drain. For example, a $500 billion deficit means that the private sector is receiving $500 billion more from government spending than the private sector is losing from paying taxes. If the budget were “balanced”, this needed offset to the trade-related financial outflow would disappear.
Reflecting this straightforward arithmetic, countries with meaningful trade surpluses, such as Germany, can maintain balanced budgets without incurring private sector economic distress. However, countries, such as the U.S., with persistent trade deficits, can not afford balanced budgets. Be careful what you wish for.