This is actually a positive for taxpayers as the federal debt will become cheaper. Obviously we’re still spending a ton and are issuing debt at higher rates now, so it’s not some kind of magic cure or anything.
And of course when the expectations return to normal there is a period when the government must pay higher than needed rates.
But as others have pointed out, bonds eventually come to term and then have to be rolled over into the higher prevailing interest rate. With such a high debt burden, that debt service can become a significant portion of all tax receipts, at which point all services are funded from deficit spending.
2021 tax receipts estimate is $3.86trillion [0]. Debt stands at roughly $30.5trillion. Ignoring compounding for simplicity's sake, 12.7% rates would mean 100% of taxes go just to pay for servicing current debt.
When you look into discretionary spending (stuff outside of medicare/medicaid/social security) it's way worse. Subtract that away from the $3.86trillion and you only have $3.86- (1.3+1.1) = $1.46trillion to spend on defense, all services, and debt service from tax receipts. 1.46/30.5 = 4.8%, meaning that no tax receipts cover defense or any discretionary spending (services) if rates hit 4.8% (actually lower because of compounding), and all services are from debt. The most recent White House budget [2] suggests 10-year treasury bills will hit 2.8% by 2028; your faith in that number comprises a major part of your faith in the long-term solvency of the US government.
[0]https://www.whitehouse.gov/wp-content/uploads/2020/02/budget...
[debt, medicare/medicaid, and social security numbers] https://www.usdebtclock.org/
[2] https://www.whitehouse.gov/wp-content/uploads/2021/05/budget...
Edited for sources formatting
I will give you a full answer once we've agreed on a concise explanation of it that you stand by, but the short version is that it mistakes effect for cause and assumes stability in various factors while undermining the bases for that very stability.
Edit: sectoral balances are not very prominent either, which are an important conceptual tool, though not really MMT per se (more an accounting identity that most people ignore).
(Wikipedia) MMT's main tenets are that a government that issues its own fiat money:
1. Can pay for goods, services, and financial assets without a need to first collect money in the form of taxes or debt issuance in advance of such purchases;
The intended thrust of this principle is that you can spend first and tax later because the monetary system is not about accumulation but about equilibrium, and the equilibrium isn't about total balance but about interest rate and employment. The first part is the assumption: fiat money will be able to pay for goods, services, and financial assets.
This need not be true, and particularly tends not to be true at the beginning and end of fiat currencies. At the beginning of a currency, the issuing entity has to establish faith in the system. And as a currency fails through hyperinflation, it ceases to have any meaningful buying power. The point where you call it failure is obviously a point for debate, but I would suggest that your currency has proceeded past the point of failure if, when transacting for normal daily purchases (food, transportation, small durable goods), money is exchanged not by reading face values but by weighing large quantities of notes or similar (e.g. bread costs two bundles of orange notes.)
2. Cannot be forced to default on debt denominated in its own currency;
The only situation where this ceases is to be true is one where the issuing government does not possess the resources to do the requisite printing or, probably even more unlikely, to declare new money supply digitally. For all intents and purposes, this statement is true, but again it doesn't acknowledge the fact that all lending to a hyperinflationary government will cease when there is no faith in the value of that currency. This drying up of credit has the same effect as default, particularly since the debt was never secured by collateral.
Nonetheless, the effect will be similar to defaulting on secured debts, since so little of an economy would be functioning at this point that the hyperinflationary state would require imports which could only be acquired through selling off of hard assets and land.
3. Is limited in its money creation and purchases only by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment;
This part is trickier to handle. We can probably agree that inflation means the widespread rise of prices across goods and services (though the measurement is a tricky issue that we should put aside for now.) Full employment is the sticking point, because MMT replaces NAIRU with NAIBER. NAIRU is a point of uncommon humility for economists, because it acknowledges that, if we push for zero unemployment, we get accelerating inflation. NAIBER, on the other hand, pushes to extinguish unemployment through job guarantees in the form of government jobs (the 'rate of unemployment' of NAIRU having been replaced by 'buffer employment ratio' in NAIBER.) So, why wouldn't this be inflationary just like in the other scenario?
Well, the NAIBER principle suggests that you pull people away from the inflationary sectors of the economy into lower-paid government jobs. In this way, there's less inflation because wages aren't being allowed to shoot up in booming sectors of the economy. The methodology for convincing people to make job changes away from their chosen work to something new and lower paid is a question I haven't seen answered anywhere, but I doubt that the changes would be effected peacefully or voluntarily.
In the meantime, all this government payroll for the lower-paid jobs will result in more inflation from the extra government spending required.
4. Recommends strengthening automatic stabilisers to control demand-pull inflation[10] rather than relying upon discretionary tax changes;
This statement just means that there should be a set of policies that can be set long-term which would be preferable to tax changes with the changing political winds. Every other political wind that comes along also agrees with this statement and, like MMT proponents, they think that their ideas are the right one.
This is basically arguing for the rule of law. The devil is in the details, but diving into those would require us coming to a common understanding of those details first. I'll leave off there on this point.
5. Bond issues are a monetary policy device, not a funding device.
This formalizes an underlying assumption of the modern US federal government that we can always borrow more money. That clearly works at present, but it is more prone to failure than MMT proponents acknowledge. If the government doesn't issue bonds to attain funding for (or to counterbalance, per MMT framing) spending, the currency is debased. There comes a time when that accelerates painfully and it becomes worth the world's efforts to disentangle from the USD.
__________________________
MMT is a theory that starts with the premise that there will be no catastrophic end times, but working under that premise is the surest way to bring them about more quickly. MMT has a long runway to failure in the US (if it is done slowly) because there is so much financial infrastructure denominated in USD, and there is a lot of underlying value in the US. There are much slower ways for a government to fail, and those are the ones I want. Businesses should have some acceptance of downside risk, because a failed business is only pretty bad. A failed country is a whole different level of catastrophe, and our governments should be accordingly allergic to government-ending levels of downside risk.
Edited for formatting.
I will not quote your responses but try to reply directly.
1. The MMT position is consistent with the chartelist view that fiat currencies are worth something because the state requires payment of taxation in said currency. It's as simple as that. Enforcing of taxation in the state currency is a sufficient condition to imbue it with value. Note that this is not a necessary condition, but it is sufficient. The historical record suggests strongly this is how money evolved and existed historically, contrary to the oft presented view that it evolved from barter using a commodity intermediary.
There are various texts that discuss this but I'll link to Warren Mosler for an MMT definitive position. He discusses the chartelist position with references in this paper: http://moslereconomics.com/wp-content/graphs/2009/07/natural...
Moreover, as a simple point of logic, fiat currencies must spend before they can tax. How else can the tax be claimed if the money has not be spent or lent into existence?
2. MMT asserts lending to a government is unnecessary. The balance sheet can just as easily represent cash as a liability as bonds as a liability. The requirement to issue bonds is purely political. This is a factual statement and has been demonstrated in a recent UCL paper for the UK: https://www.ucl.ac.uk/bartlett/public-purpose/publications/2...
I understand there is a similar paper for the US but I don't have a reference to hand.
Moreover, in Mosler's document above, he argues that the natural rate of interest is zero, making bonds essentially equivalent to reserves (which serve an important role as risk free savings).
3 and 4 I'll discuss together in the context of the job guarantee scheme, since that's the primary automatic stabiliser policy advocated by MMT. The JG sets a pricing anchor, defining the value in currency of a unit of lowest price labour. This is really important - the value of the currency is tied to a specific real resource. I'll be honest that this was the bit I found hardest to grasp, but Warren Mosler has a very elegant justification which made it click (he calls it "employer of last resort" here, but it's the same thing): http://moslereconomics.com/wp-content/uploads/2019/02/Full-E...
5. As discussed, MMT asserts that there is no need to borrow money. Separately, the bond market appears to be rather more resistant to low interest rates than might be assumed from a mainstream analysis (bond sales with negative real term returns are still oversubscribed). This fits with the understanding that bonds are really just interest bearing reserves, and who wouldn't want to buy something interest bearing when the alternative is no interest (CB reserves).
I'll be honest and say I can't actually contribute more to the discussion until we're talking in terms of those references, and even then I may not be the best person to discuss them. I'm happy to discuss more though if posed in good faith.
The big point about MMT is to have a much better understanding of the system so as to have a better understanding of the available policy space. The main test of MMT would be to implement a JGS and see who turns up.
Edited for clarity.
You might raise taxes to for current monetary reasons under MMT, but you wouldn't do it because debt service costs were too high for it to be attractive to issue debt in the amount your desired spending exceeded revenue before the tax increase, because you would recognize that there is no need to “borrow” money that you yourself issue. You would spend what you spend and tax what you tax and if you want to undertake future commitments for some stabilizing purpose you do that, to, but none of those things depend on or fund the others when you are working in your own fiat. That's the myth of the fisc, which is produced when a fiat-issuing government acts as if the currency is an external commodity.
MMT takes the interesting twist of claiming that the means, taxation, is actually an end in itself.
I don't disagree that it looks like a decent description of how many countries run, but the assumptions propping up the theory would rapidly fall apart if governments acted on the beliefs that MMT espouses.
The theory rests on the probably correct assertion that you can only voluntarily default in a currency that you print with impunity. But that statement sits atop a tacit assumption that the money is worth the paper it's printed on. In reality, any country pursuing this theory will inflate its currency to the point where the currency can't be used internationally, and the citizens will abandon the currency to the extent that it hasn't been made illegal to do so.
If they can't skip out on the inflationary currency, the people who failed to flee in time will stop working and innovating consistent with the degree to which the hyperinflation means that there is no means of saving for the future.
The hyperinflating government will try a combination of preventing emigration and ownership of stable stores of value (gold, foreign currencies.) The leakiness of the system keeps everything from fully and officially failing, but MMT's guarantee of no default will ring hollow when the government can't afford to feed its political prisoners or even the guards watching them.
Of course, I've used the wrong verb tense, because I'm describing Venezuela.
But the government also has a deficit. Which means it's exchanging low % notes for high % notes.
Bonds coming to term means it's exchanging low% for high %. Deficit means that the problem accelerates even faster than that, because the total value of bonds continues to increase.
For example: Pretend you currently make $75,000/yr and the next tax bracket is at $80,000. And you get a nice raise to make your salary $85,000 this year. Only $5,000 of your new income (the amount "above the next tax bracket") will be charged at the higher rate.
Oh, for sure. But that money that moves into those brackets will be taxed higher.
(i.e. For an absurd example - suppose inflation is 100%. Last year you made 50K, this year you make 100K, which is the same in real terms (after inflation)). However, you will pay more of that 100K in tax than you would have last year, so your real income will decrease.
This tax drag can also happen for investments. If your investment goes up 100% and inflation is also 100%, you pay tax on the inflated nominal value of your investment even though the real value has not changed. Long term capital gains taxes are one way to reduce the impact of this - but they don't eliminate it altogether.
Tax brackets are usually (but not always) inflation-indexed to avoid this effect.
Ie if the fed funds rate doubles what’s the impact on the interest rate payments the government makes.
I think the interest paid is public knowledge, im wondering if the breakdown of rates/terms is known.
What I'm curious about is what it would look like if interest rates went to 10% in terms of the interest payments (as loans mature and rollover etc)