Hyman Minsky famously asked, Can “it” happen again? No, he answered, it can’t: A deep depression on the scale of the 1930s is not possible in the post-World War II US. One reason why not:
There is a large outstanding government debt… This both sets a floor to liquidity and weakens the link between the money supply and business borrowing.
|DR is the federal deficit as a percent of GDP. It’s the one that goes way up during the war. CPR and RRBR are the two main private interest rate indices for the period. They’re the ones that don’t.|
When the world is short of safe assets–and investors are desperate to hold them–to complain about budget deficits in rock-solid reserve-currency countries and thus about safe asset issuance is profoundly stupid.
Now, Brad, will you take the next step with me and Hyman? Can we also agree that even when there isn’t a shortage of safe assets today, it’s good to keep a stock on hand, just in case? Can we agree that if there’s a chance that in the next decade the world economy will fly apart due to a lack of safe assets, then it’s a bit foolhardy to deliberately reduce the supply of them? Can we agree that, in retrospect, those big Clinton surpluses were — well, I won’t say profoundly stupid, but maybe not the best idea?
And then we can agree that whenever anyone talks about “tackling our long-term government debt problem,” what they really mean is “making future financial crises more likely.”
EDIT: Obviously, this sounds a lot like Modern Monetary Theory. But while I agree substantively with MMT, I think it’s better to think of government liabilities being special because they increase the net liquidity of the financial system, rather than because they can be used to satisfy tax obligations.
There’s one other analytic issue, which I haven’t seen dealt with satisfactorily. Government deficits operate through two channels: They increase the flow of demand for currently-produced goods and services, and they increase the stock of government debt in private hands. Now, under certain assumptions, you might say these are just two ways of describing the same phenomenon. If you think of the economy as a market with two goods, current output and bonds, then increasing the demand for one and increasing the supply of the other are logically equivalent. But this is not the only way of thinking of the economy. (Among other things, while markets certainly exist as social phenomena, describing the economy as a whole as a market is only a metaphor — one that may be more or less illuminating depending on the questions we are interested in.) In general, the two channels are going to have two distinct effects, and it would be nice to be able to think them through separately. But almost everyone, across the whole spectrum, tends to collapse them into one.