Jun 25, 2020 - Economy & Business

Funding deficits with cash, not bonds could help avoid oversized stimulus debt

An illustration of a printer printing money.
Illustration: Sarah Grillo/Axios

The best way to avoid a W-shaped double-dip recession is to ensure that fiscal stimulus continues past July. Many members of Congress, however, worry about the effect of multi-trillion-dollar deficits on the national debt.

What they're saying: The solution, per Stony Brook economics professor Stephanie Kelton: Run deficits without issuing any debt at all. Kelton suggests we should just monetize the deficit instead — fund it by printing dollars rather than issuing Treasury bonds.

Between the lines: Economically speaking, there's not a lot of difference between paying for the deficit with money or paying for it with bonds carrying a near-zero interest rate. As former IMF chief economist Olivier Blanchard writes, "it just replaces a zero interest rate asset, called debt, by another one, called money."

  • Printing money does not cause inflation — quite the opposite. If you issue debt instead of money, then any interest on the debt is excess money entering the financial system. Take away the interest, and you take away inflationary pressure.

The big picture: There's still enormous demand for risk-free assets, and Treasury bonds serve a very important role in the financial system. No one's suggesting that we stop issuing them entirely. But insofar as rhetoric around the national debt is acting as a brake on necessary economic stimulus, it might make sense to have deficits without debt.

My thought bubble: There's a paradox here. The people who want to print money to avoid adding to the national debt are also the people who say that the size of the national debt doesn't matter. The hope is that monetization would placate the deficit hawks, but that seems unlikely.

Go deeper: Kelton was a guest on my podcast last week, and went into detail on how Modern Monetary Theory views sovereign finance.

Go deeper