Debt based economics are very much like drugs in my view. They initially bring the greatest high, but in the end they ultimately hollow out and destroy you in both body and soul.
One of the great tasks of the Right is to wean our countries off this economic heroin.
Directionally I agree in the sense there are no free lunches, but with some important caveats.
MMT is broadly correct in that, as long as you issue your own currency, you won't default. When faced with that prospect, Central Banks can just fire up the money printers; you can thus have inflationary episodes, but as long as you control the printing press you can prevent a default in nominal terms. Obviously, hyper-inflationary episodes aren't exactly a good outcome either, but there are ways to mitigate this.
MMT proponents get vague on this, and tend to basically boil down "just grow the economy more than inflation". I'm certainly in favor of productive Government investment in education, infrastructure and even into the welfare of the populace, but I think the trial run of 2017-2023 has pretty obviously shown that doesn't work. So what do you need to do then to avoid the inflation problem? Japan and China are pretty good examples of this:
- Hold a net account surplus, in other words don't have a trade deficit. China and Japan are both manufacturing powerhouses and thus can effectively export their inflation away.
- Hold non-own currency assets. Until 2013, both Japan and China held huge foreign currency holdings, mostly USD. China stopped acquiring USD then and switched to Gold; Japan has also, last I checked, starting to do the same. When/If inflationary spirals hit, their large asset holdings can be wound down to support the currency as needed.
- Be the primary holder of your debt. If your country holds its own debt, you're not going to default on it; Japan has something like 260% debt to GDP but this isn't much of an issue because the overwhelming majority is held by the Bank of Japan itself. Japan isn't going to call the debt collectors on itself, logically, and the same holds for China.
So what went wrong with the United States, then?
- Because the USD is the reserve asset, Trifflin Dilemma kicked in and triggered the hallowing out you speak of. The only way to have prevented this was to have maintained fixed exchange rates, kept Gold (not really feasible in the macro environment of 1971) or switched to something like the BANCOR scheme that was proposed in 1944. We did none of these and effectively replaced Gold with U.S. Treasury Bonds, which meant decades of spending but in the long run lead to rampant inequality and the destruction of our industrial base. To ditch Treasury Bonds as reserve asset at this point will still trigger an inflationary episode.
- The U.S. has reserve currency status really doesn't hold foreign currency and has no incentive too under the existing framework, as it's designed to encourage a deficit to meet global demand for Dollars. We've also not been acquiring Gold like other central banks.
- While the U.S. Federal Reserve holds much of our debt and could thus forgive it, much is owned by China, Japan, and other nations. They can't physically collect whats owed to them (yet), but they can dump their holdings and thus trigger a massive hyper inflation.
End result of these factors is the mess we are into today. As I've said elsewhere on this forum, you have three options left as the United States:
- Crash the economy, at somewhere between Great Recession and Great Depression levels, by drastically cutting Federal spending.
- Defaulting on the debt, with about the same impact as the above and immediately ends the Dollar Reserve status system.
- Let inflation run red hot at 20% or so for 4-5 years, give or take. This will inflate the debt away like we did after WWII, but at the cost of mass reductions in living standards in a country where roughly equal numbers of Leftists and Rightists support secession, with active secession measures under debate in Texas and with roughly 25% of Americans saying taking up arms against the Government is valid.
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