Another Fallacy

Countless articles mention the burgeoning US federal deficit, as if it is a rival to the Covid-19 virus, getting ready to unleash long-term harm the likes of which we’ve never witnessed. They are WRONG! Yes, deficits for individuals, businesses, states/municipalities, etc. must be closed or financial harm could be realized, but the US federal government enjoys the benefits of a fiat currency. As such, we are NOT constrained by what is raised in taxes or issued through bond sales.

In fact, deficits ADD to private saving, as witnessed in April when record savings were achieved, and people’s incomes. To the extent that people spend this money, MORE goods and services will be sold. According to my former colleague, Charles DuBois, “all else equal, this stronger business will increase investment spending”. There is no crowding out. Regrettably, there is very little pushback regarding this misconception except for proponents of Modern Monetary Theory (MMT). We should embrace the recent activity as a positive action to support the US private sector.

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