And true to form, the next week Trump reversed himself. Instead, he suggested that the Federal Reserve could just print money to pay off the debt, instead of defaulting. “You never have to default because you print the money,” he declared.
The question is whether this is a good idea. Many economists believe that if you print a lot of money, inflation will go way up.
That’s interesting, because Trump is right. Lots of countries are in a position to just print money to pay off debt. [...] If your debt is in dollars, then it’s even easier -- just fire up the presses and pay it off.
"Paying Off The Debt" Does Not Mean Unbounded DeficitsUnder any reasonable analysis, the only way government spending can generate inflation is via "excessive" deficits. However, changing the mix of liabilities between money and debt is not going to have any effect, beyond whatever implications there are for the level of interest rates.
A common sense interpretation of Trump's remarks is that he is using "paying off the debt" in the way people normally use the term: money is expended to extinguish debt liabilities. The implication is that this is purely an exchange of financial assets -- issuing money to extinguish Treasury liabilities. Such a step is a purely a balance sheet shuffle, and has no implication for the level of deficits. And it is not as if we have not seen such balance sheet changes in the past; countries have routinely changed the maturity structure of their debt outstanding, without any observable effect on macroeconomic performance.
Interpreting Trump's remarks in a way that assumes that excessive deficits are implied by the observation that the government need not default is purely a projection of Noah Smith.
Hyperinflation - Really?The article goes off the rails when it gets to hyperinflation.
So there’s a fear that if the U.S. starts paying off the debt using printed money, the result could be an inflationary spiral -- everyone raises prices because they expect everyone else to raise prices. That in turn could explode into hyperinflation, a rare but terrible phenomenon in which a currency essentially becomes worthless, wrecking the economy in the process. Venezuela is experiencing this now, and it isn’t pretty. Hyperinflation would be even worse than default.This is another example of the principle that an argument that revolves around hyperinflation is probably a waste of time.
But many people now believe that the danger of hyperinflation isn’t as big as economists believed in the past. The Fed doesn’t actually control the money supply -- it’s controlled by banks. If Fed money creation is balanced out by private banks withdrawing money from the economy, then money-printing almost certainly won’t cause hyperinflation. This is exactly what has been happening in the past few years. As the Fed has created unprecedented amounts of money through asset purchases under its quantitative easing program and swelling the monetary base, the money supply has increased at a modest and steady pace
His view of why Fed purchases of bonds had no effect on inflation misses the mark -- it is because it is a reshuffling of government liabilities. Meanwhile. this is not just wacky "MMT Theory"; this is also what the governmental budget constraints in mainstream DSGE models say. If you look at the Fiscal Theory of the Price Level, primary surpluses determine the price level, not the mix between "money" and "debt."
However, he seems to blissfully unaware of the fact that academics have actually studied economies in hyperinflation, and a hyperinflation is not just an extension of "high inflation." People do not just wake up one morning and decide to raise the price level by 10% based on the expectations of some "representative" household.
The domestic currency needs to be essentially abandoned, and transactions indexed to some external store of value (a hard currency). Hyperinflations are typically associated with government deficits that are around 50% of GDP, which is a deficit of a size that is not advocated by anyone serious (and I presume, Donald Trump).
It would take a great deal of institutional changes to allow a hyperinflation to take root in a modern economy. Private sector institutions need to change, with transactions indexed to some external store of value. Meanwhile, fiscal stabilisers would rapidly squelch a surge in the price level under current behavioural norms. Government taxes are withheld at source, and are therefore effectively indexed in real time, while almost all spending is not indexed in real time. A jump in the price level would cause a rapid movement towards a fiscal surplus, which would kill the excess demand that was allegedly fuelling the hyperinflation.
I have no idea whether Donald Trump's platform makes any economic sense, but the mainstream media does not help itself by publishing sensationalist silliness like this.
(c) Brian Romanchuk 2016