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The Problem With ‘Monetizing the Debt’
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The Problem With ‘Monetizing the Debt’

Just printing more money won’t solve our problems.

(via Getty Images)

“Inflation is always and everywhere a monetary phenomenon.” So said Milton Friedman, and so say his monetarist acolytes. If you ask a particularly reactionary kind of economist (my kind of economist!), he or she will tell you that what inflation actually means is an increase in the money supply, that what we usually mean when we say inflation—a general increase in prices—isn’t inflation at all, but only a consequence of inflation. Inflation, from that point of view, means inflating the money supply. You know—like this:

(via the Federal Reserve Bank of St. Louis)
(via the Federal Reserve Bank of St. Louis)

If you held the money supply constant while the economy grew, then you’d get deflation, or relative deflation, i.e., a money supply that is smaller relative to the size of the economy. In principle, there isn’t anything necessarily wrong with that: Deflation rewards savers (because the money they hold increases in value relative to goods and services) and punishes borrowers (who have to pay off yesterday’s debts in today’s more valuable dollars), while inflation penalizes savers (because the money they hold decreases in value) and rewards debtors (who get to pay off yesterday’s debts in today’s less valuable dollars). There’s just the question (again, in theory) of whose ox is getting gored, of who is getting subsidized and who is in effect getting taxed by monetary policy. In reality, experience suggests that deflation has significant undesirable economic effects, the general idea being that as real prices fall, households and firms are likely to put off purchases—why pay $100 today for something that will be $90 in a week?leading to reduced economic activity, driving real prices down even farther—the dreaded “deflationary spiral.” That’s the conventional, widely held understanding of the situation, though there are dissenters. As the Polish economist and politician Jacek Rostowski wrote 20 years ago in the New York Times:

There are five ways in which deflation is supposed to plunge the world into a spiral of economic contraction. First, once deflation has started, falling prices will make people put off spending, causing prices to fall further. Second, with prices falling and the value of debt fixed in nominal terms, the real indebtedness of households and firms will grow, acting as a drag on the market, as in Japan since 1990. Third, nominal interest rates cannot fall below zero because companies and households always have the choice of holding cash, which gives a zero return. Banks cannot therefore offer interest rates below zero to depositors so cannot charge negative nominal interest rates on loans. The demand for loans will fall, shrinking the banking sector and the economy with it. Fourth, because nominal interest rates cannot turn negative, central banks will be powerless to offset the effects of deflation. Finally, with prices falling and nominal interest rates stuck at zero, real interest rates will keep increasing, turning the deflationary screw.

In fact, all of these supposed effects either do not matter much, or are the result of inflation being lower than expected, or happen because institutions have not yet adjusted to a potentially deflationary world. They are not the inevitable result of falling prices.

For example, we have experienced falling nominal prices in computers and telecommunications for decades, and although we may think twice before buying that new computer, we buy it in the end. We are not putting off those long-distance phone calls at all. That is because it is quite difficult to put off the consumption of many services. And with services accounting for three-quarters of many advanced economies, most activity will be protected from significant delays in purchases.

The Puritan in me rather likes the idea of a monetary policy that rewards thrift and discourages indebtedness, but it is likely that the Puritan in me is not a very good economist—he did not do me any good as a struggling undergraduate, I can tell you that much—and that the moralizing temptation often leads us into some bad policy postures. And so I generally take the view that the wiser thing to do is to have the Federal Reserve pursue price stability with a little bit of inflationary wheel-greasing, i.e., to do more or less what the Fed has been doing for the past several decades with a reasonable degree of success. (Save your emails, please—my definition of “a reasonable degree of success” accommodates performance that is far, far from perfection.) My main complaint about the Fed is with its so-called dual mandate, which marries the pursuit of price stability to the political priority of full employment. Best to have the Fed do only the one thing and do it relatively well rather than pursue two sometimes incompatible policy goals and do so relatively poorly. I am enough of an optimist to believe that it is possible to have a government (oh, I know, “independent”) agency that does one thing well but am not superstitious enough to believe in government agencies that do two things well, for the same reason I don’t believe in unicorns or little green men or self-financing tax cuts. 

A little bit of inflation is tolerable. Everybody is used to it. As usual, the poison is in the dosage. 

If you’d like an update on the rapidly deteriorating fiscal position of the U.S. government, I highly recommend my friend Jonah Goldberg’s recent Remnant podcast with Brian Riedl, a senior fellow at the Manhattan Institute working the debt-and-deficits beat. “Eat your spinach,” the subheadline says—it is pretty good spinach. (Larry Kudlow used to refer to me as “an eat-your-spinach guy” on debt and taxes, and I embrace the ethos.) Riedl is appropriately despairing, noting that the deficit effectively doubled in size in fiscal year 2023, that higher interest rates are driving up the share of today’s spending to finance yesterday’s consumption, that we already are near the point of debt-service consuming $1 out of every $3 in taxes paid and are on our way to spending 90 cents of every dollar paid in taxes on debt service, and that the politics are against doing what is needed to put the federal government on more stable fiscal footing (and, hence, to put the country on more stable economic footing), which will necessarily include cuts to entitlement benefits (mainly in Social Security and Medicare) and higher middle-class taxes. As Riedl says, the politics of fiscal reform—which is to say, bipartisan cowardice and stupidity—means that the most likely outcome is that nothing will be done until the bond market forces action, either by demanding much higher interest rates on U.S. government debt or by effectively refusing to lend the U.S. government more money at whatever rates are on offer. 

What happens then? 

The usual answer given is “monetizing the debt,” which really means “monetizing the unfunded liabilities.” Caught between two howling mobs—the bond market on one side and Social Security beneficiaries on the other—the federal government will have powerful incentives to try to finesse its way out of the dilemma by making sure both the bond mafia and the oldster mafia get paid by simply exnihilating money into existence. These being digital times, Washington won’t even have to fire up the printing presses over at the Bureau of Engraving and Printing. There are some technical maneuvers involved but, basically, Uncle Sam can have an extra $100 trillion more or less by declaring that there’s an extra $100 trillion in the Treasury—by creating money. 

Which is to say, by means of inflation—in the older sense of the word.

Americans have been learning to hate inflation (in the popular sense of the word, meaning higher prices) after many years of not thinking about it very much. It is interesting how modest an increase it takes to get Americans’ attention. In 1984, the inflation rate was a little higher than what it was for the 12 months ending in December 2023—it was 3.9 percent back when Ronald Reagan was running for a second term and 3.4 percent as of December. (Excluding food and energy, the rate in December was 3.9 percent; a significant decline in gasoline and diesel prices made the overall number a little better.) Of course, inflation had been 12.5 percent when Reagan was elected in 1980 and 13.3 percent the year before that, so 3.9 percent inflation smelled like victory. But you can look at a lot of years in U.S. history when inflation was as high or higher than it is today and appreciate that those years are not remembered as being times of economic crisis—and some of them were pretty good. Inflation was 3.4 percent in 2000, at the height of the boom that sustained Bill Clinton’s political prospects, and 4.7 percent in 1968, when the economy was growing and Americans were on their way to landing on the moon. On the other hand, if you look at such fondly remembered economic times as the Eisenhower years, you’ll see very low inflation: an annual average of only 1.27 percent from 1952 to 1961. 

So there’s a lot going on when it comes to setting the economic mood of the country, and inflation is only one factor among many. But it is an important factor. Inflation during the first three years of Joe Biden’s presidency (and here, please imagine that I have fully restated my caveats about presidents not being magical god-kings who determine economic conditions) ran more like 5.6 percent. So today’s 3.4 percent is on top of an already inflated baseline. “Things are getting worse, but the situation is not deteriorating as rapidly as it was during my first three years in office” isn’t a hugely confidence-inspiring sales pitch. 

Recent sunny headlines notwithstanding, there are some reasons to suspect that future inflation reports will be worse than the most recent ones, not better. The difference between the Fed’s usual 2-percent inflation target and today’s 3.4-percent inflation may not seem like a lot, but it very well may be enough to cost Joe Biden reelection in November—never mind that a lot of the inflation that we have seen in the Biden years was baked into the cake during the Trump administration. As Riedl points out, if you judge presidents by the new spending that was taken on because of legislation they signed during their presidencies (as opposed to spending driven by already established programs or economic fluctuations), then Trump is the biggest offender in modern history: “President Trump signed legislation and approved executive actions costing $7.8 trillion over the decade—compared to $5.0 trillion for President Obama and $6.9 trillion for President Bush, and he enacted these costs in just a single four-year presidential term, compared to his predecessors’ eight years in the Oval Office.” Sure, Trump had the COVID-19 pandemic—and Obama had the subprime meltdown, Bush had 9/11, etc. Everybody in politics has a sad story to tell about why he and his party had to spend so much money. Events, dear boys, events, etc. 

Everybody knew that under a hypothetical future scenario in which the government attempted to monetize/inflate its way out of a debt crisis, there would be a political price to pay. But now we have some experience to suggest that an anti-inflation revolt would pick up steam right around a (relatively) modest 5-percent to 7-percent level, nothing like what we might expect in a scenario in which Washington is trying to suffocate its Social Security, Medicare, and tax problems under a tsunami of rapidly depreciating U.S. dollars wished into existence. The inflate-away-the-crisis model has always assumed that monetization would be the path of least political resistance, but there’s good reason to doubt that it would be. The problem is that the sensible answer—and, really, it is ultimately the only answer—is a painful bipartisan compromise that will represent the path of maximal resistance until political calculation is entirely overtaken by events. Given the way in which every interest group, ax-grinding society, and populist demagogue attempts to “fiscalize” its pet issue—I reference here the people who don’t actually give a fig about balancing the budget but insist that we’d be well on our way toward solvency if only we’d starve the welfare malingerers or round up the Mexicans or cut off aid to Ukraine or seize Jeff Bezos’ assets, etc.—we can probably expect up-ratcheting fiscal pressure to produce some genuinely imbecilic and dangerous policy responses ranging from expropriation to attempted autarky. Every cheap demagogue has some kulaks he’d like to see liquidated as a class. 

Depending on how you add up the numbers, the current unfunded liabilities for the federal government are between four and five times U.S. GDP. Unfunded obligations for Social Security and Medicare alone now exceed $600,000 per household. What that means, in a practical sense, is that these obligations are unlikely to be met. And that’s fine—the whole idea of entitlement reform is coming up with a plan to go about not meeting those obligations but doing so in an orderly way. The average net worth of a U.S. household is just over $1 million (the median is just under $200,000), and there isn’t an economically or politically practical way to seize 60 percent of Americans’ net worth to fund two programs. If you think about it, doing so would be asinine: Seizing the majority of Americans’ wealth to fund what one reasonably straightforward income-support program and one lightly disguised income-support program would be a poor policy in any case, but in this case, an enormously disproportionate share of that wealth and a disproportionate share of the benefits are associated with the same people, the nation’s wealthiest demographic: oldsters.

Good luck with that!

In Other News … 

In spite of its bad politics and title that gives me nausea, the best Clash album was Sandinista! You have to love a triple album. Those of you who aren’t old enough to remember going into a record store don’t know the feeling of walking in thinking you’re going to get a single LP, like London Calling, and then finding out you’re getting three. It’s surprising at first, but also delightful. 

In Other Other News … 

For some reason, Amazon really wants me to watch The Three Musketeers: D’Artagnan. I am a fan of the story (and of Dumas in general; The Count of Monte Cristo is one of my favorites), and it’s the kind of movie you don’t have to twist my arm real hard to watch. But the streaming-algorithm spirits seem particularly insistent. 

In Other Other Other News … 

Reading about another trio—cousins Jerry Lee Lewis, Jimmy Swaggart, and Mickey Gilley, three extraordinary men, each in his own right, who grew up together in Louisiana—I came across these sentences

Lewis and Swaggart are double first cousins. Lewis and Gilley are first cousins. Gilley and Swaggart are first cousins once removed.

I didn’t come from a large or close family, so cousin technicalities have never loomed large on my personal radar. Double first cousins are cousins who have both sets of grandparents in common, as opposed to one set of grandparents in common. That’s what you get when two brothers marry two sisters. Lewis and Swaggart’s relationship was a little more complicated than that: The Killer’s father and the preacher’s grandmother were siblings. So, if I understand how this works, they were double-first cousins once removed. “First cousins once removed” aren’t exactly first cousins—they are a generation away from being first cousins. So, your father’s first cousins are your first cousins once removed, as are the children of your first cousins. 

Jerry Lee Lewis, Jimmy Swaggart, and Mickey Gilley—what a trio! Jerry Lee Lewis said the three were more like brothers than cousins. Must have been something in the water up there. Like his musician cousins, Swaggart was—among the many other things he was—a more than competent piano player. Somehow, pianist doesn’t sound right in that context—Jerry Lee Lewis was a piano player. He also infamously married a cousin—a first cousin once removed—though the infamy had as much to do with the fact that she was 13 years old and he was 22 at the time of their marriage. She was, incidentally, his third wife, what turned out to be third of seven, including one case of bigamy and a seventh wife who had been a sister-in-law to that 13-year-old third wife. These family trees will give you a headache. But, in line with our curious three theme this week, Mickey Gilley was comparatively tame, with only three wives. 

(Swaggart just has the one wife—he was 17 when they married, and she was 15—to complain about his escapades. Donald Trump is a big Jimmy Swaggart fan. Takes one to know one, as they say.)

Economics for English Majors

See above! If that’s not enough for you, you’re going to have to wait a week. 

Words About Words

Do you want to know something that irritates me? (Of course you do—you’re still reading, aren’t you?) Defensive journalism. Defensive journalism is a result of the journalistic posture in which the writer, whether a reporter or an opinion columnist, places himself too much at the center of the story, and produces a lot of prose that isn’t intended to tell the reader a story but to tell the reader how he or she should feel about the writer. An example of this is Nicholas Kristof’s recent New York Times essay on a childhood friend whose life went astray in various bad ways and who committed a brutal crime. There’s a lot of interesting stuff in the piece: 

It was evening at a Circle K convenience store, and Betty Gerhardt, 23, was working alone at the register. Bill walked in and asked for some bacon, so she walked over to the cooler and turned her back on him.

“He grabbed me and pushed me into the back room,” she recalled, and he hit her over the head with a jar of honey, knocking her to the ground. “He went for my pants. And when he did that, I started fighting.”

Bill pulled her pants and underwear down to her ankles, she said. Fearing she was going to be raped, she struggled back furiously, even as Bill grabbed empty bottles stacked nearby and smashed them over her head and body. The glass cut her badly—she had scars on her forehead and arm from the attack—and he left her bloody and unconscious on the floor.

After failing to break into the cash register, Bill walked out of the store and drove off with his girlfriend. Gerhardt awoke and called 911, and an ambulance rushed her to a hospital, where she remained for three days. The police promptly caught Bill, still covered in Gerhardt’s blood.

Deeply ashamed of what he had done, Bill always claimed to me that he had been so high on meth, cocaine, and alcohol that he was in “a stupor,” as he put it. “I blacked out,” he told me.

Arresting material. But there’s also a ton of “please don’t think poorly of me for writing sympathetically about a man who did a bad thing” prose in the piece, paragraphs of it: 

Frankly, in writing this essay, I worry that sharing details of this crime will leave the impression that this horrific action represented all of who Bill was. He had another side full of humor, warmth and eagerness to help others. Forgive me, Bill—for nobody should be remembered for the worst thing he ever did.

I also fear that some readers may believe that I’m minimizing a brutal assault, or will be perplexed that I remained friends with a violent drug dealer who in many ways destroyed a young woman’s life. I make no excuses for Bill or his actions. But one thing I’ve learned in a lifetime of reporting is that humans contain multitudes, and in this case I hope we might learn from Bill’s troubled journey how trauma self-replicates: When we let so many Americans fall behind, they not only suffer greatly but also inflict great suffering on others.

I get why some writers do this. The world is full of intellectually dishonest people with axes to grind. (Ask me how I know.) A few years ago, my friend Charles C. W. Cooke wrote a piece about a now-infamous essay in which a man wrote about struggling with his sexual attraction to children, which he describes as:

a preference for a group of people who are legally, morally and psychologically unable to reciprocate my feelings and desires. It’s a curse of the first order, a completely unworkable sexuality, and it’s mine. Who am I? Nice to meet you. My name is Todd Nickerson, and I’m a pedophile. Does that surprise you? Yeah, not many of us are willing to share our story, for good reason. To confess a sexual attraction to children is to lay claim to the most reviled status on the planet, one that effectively ends any chance you have of living a normal life. Yet, I’m not the monster you think me to be. I’ve never touched a child sexually in my life and never will, nor do I use child pornography.

In response, Charles wrote: 

How should we treat such a person’s decision to talk about his affliction in public? Honestly, I have no idea. Social taboos are important, of course. But I do know this: Unless you believe that people “choose” to become pedophiles—and I don’t—the author seems to be doing exactly what he should be doing given his condition: Namely, a) accepting that he has an unimaginably serious problem, and b) doing his utmost to refrain from acting upon it. I am not a practicing Christian, but, as far as I can recall from my instruction as a child, the author is taking precisely the approach that Christians are supposed to take when they find themselves tempted toward sin. I suppose that it is possible that I am seriously mis-remembering the core tenets of the faith, but don’t followers of Jesus believe that everybody is born with impulses that lead them toward unacceptable behavior? And don’t they also believe that they are called to act chastely—that is, to avoid indulging those impulses and instead to seek a way to be freed from them? It was a while ago, I accept, but I cannot recollect any caveats being attached to these rules. Are we now to suppose that it does not apply when the propensity in question is sufficiently egregious? Is there a new-fangled carve-out for instincts that turn our stomach? If there is not, we might think twice before condemning a man for admitting he has a terrible, terrible problem—even if we can’t move ourselves far enough in the opposite direction to “understand,” to “support,” or to like him much at all (and I can’t).

(I’d link to the whole thing, but I can’t find a link that works. Don’t blame me!)

As you might expect, Charles was met by a barrage of imbecilic and dishonest accusations that he was “defending pedophiles” or attempting to “normalize pedophilia.” Which is, of course, absurd, and too stupid really to remark on beyond observing the stupidity of the claim and the dishonesty of the people who made it. 

Sometimes, there is something to say about a bad thing other than “Bad thing is bad.” Nobody thinks that Nicholas Kristof is in favor of brutally assaulting store clerks or that he is indifferent to the victims of violent crime. You can dislike his writing or his politics—you can dislike the man himself—without talking yourself into believing something that stupid. And, yet, he feels, probably with good reason, that he has to append several paragraphs of defensive addenda to his column, lest he suffer—what? I don’t know. The wrath of two dozen illiterate rage-monkeys on social media, I suppose.

The digital age is a time of democratization and leveling, and the populist spirit has reached even into the pages of the New York Times. I suppose that has had some good effects, though I can’t think of any off the top of my head, but it has robbed us of something very useful, something morally and intellectually necessary for the columnist to have in his arsenal: contempt for the contemptible.

The world is full of contemptible people. The media and political world are especially full of contemptible people—Bethany Mandel exists, and so does Baytya Ungar-Sargon, to cite a couple of personally relevant examples of the sort of thing I’m writing about. We don’t have to let them dictate the rules of how we write and talk—and we shouldn’t. 


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In Closing

The first ultrasound of a pregnancy is always memorable. It is usually a happy occasion, but it also is an anxiety-causing one: If you are going to get bad news, an ultrasound is probably when you are going to get it. And I am the sort of person who is always at least half-expecting bad news. If I were ranking conversations I’ve had in my life by how much they surprised me, first place would be one that went something like this:

“There’s a baby and a heartbeat!” 

Relief. Gratitude. Big exhale.

“And there’s another.”

Big inhale. 

“And—hold on a second, let me get the doctor.” 

Brief terror. 

“Doctor, are you seeing what I’m seeing?”

“Huh. Well, look at that.” 

There’s a whole lot more to the story, which I’ll get into in the future, but we have just welcomed identical triplet boys into the world, meaning our little son has three new brothers and Pancake has a whole new raft of problems tugging at her tail. Triplet pregnancies are complicated (ours a bit more so than usual—again, more on the story at some future date) and the boys will be in the hospital for some time, but the little ones and their indomitable mother are doing well. 

So, our cup runneth over. Also the spare bedroom.

Newsletters may be a little irregular in the coming weeks.

Kevin D. Williamson is national correspondent at The Dispatch and is based in Virginia. Prior to joining the company in 2022, he spent 15 years as a writer and editor at National Review, worked as the theater critic at the New Criterion, and had a long career in local newspapers. He is also a writer in residence at the Competitive Enterprise Institute. When Kevin is not reporting on the world outside Washington for his Wanderland newsletter, you can find him at the rifle range or reading a book about literally almost anything other than politics.