Problem? Maybe. But It Isn’t The Federal Debt!

There is an article in today’s WSJ reporting on a recent study by two Harvard economists claiming that the recent tax legislation will not pay for itself but in fact, will lead to a $1.2 trillion increase in the Federal debt during the next 10 years.

On March 5th, there was an article in the NY Post debating the “morality” of adding $1.5 trillion to the national debt, while neglecting to discuss the “$82 trillion avalanche of Social Security and Medicare deficits that will come over the next three decades”.  The author, Brian M. Riedl,  claims that “future historians — and taxpayers — are unlikely to forgive our casual indifference to what has been called “the most predictable economic crisis in history.”

We continue to be amazed at articles such as these that claim that the U.S. economy will collapse under this debt burden as if it were household debt. The U.S. benefits from having a Fiat currency. With this currency comes the ability to meet all of our future obligations.

Furthermore, anyone who has studied Modern Monetary Theory (MMT) appreciates the fact that the liabilities highlighted above (SS and Medicare) will produce income for the private sector if the government deficit spends. I was introduced to MMT by Charles DuBois, a former partner of mine at Invesco, who has spent years studying these economic concepts.

According to Mr. DuBois,  “the problem is not the federal debt, but whether all of this “income” will make the economy too strong – causing inflation”. Hopefully, we will create a robust economy that will continue to meet the enhanced demand for goods and services created by this significant stimulus. So as the title of this article suggests, the Federal Debt isn’t the issue, but the stimulus that results from it just might be.

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