The U.S. government predicts that in 2020 it will have a deficit of $1.1 trillion: Revenues of $3.6 trillion and expenses of $4.7 trillion.
Now Rep. Ocasio-Cortez, the new blithe spirit of the Democratic Party, wants to spend an additional $4.3 trillion on:
-- Free College Tuition for All: $70 billion a year.
-- Guaranteed Employment for All: $400 billion a year.
-- Green New Deal: $600 billion a year.
-- Medicare for All: $3.2 trillion a year.
And the best part of her plan is that nobody will have to pay for it! Instead of a $1.1 trillion deficit, the congresswoman would give us a $5.4 trillion deficit.
So exactly how would Ocasio-Cortez pay for her additional $4.3 trillion of goodies?
In the days of the kings, when a government wanted to spend money it didn't have, it would debase its coinage by substituting a bit of lead in its gold coins. In the 20th century, governments found if they needed more money, they could just run the printing presses! Then, when the "great recession" hit in the early years of the 21st century, U.S. Federal Reserve expanded the money supply by something called "quantitative easing."
In an effort to stimulate the economy, our Fed began purchasing assets from commercial banks and other private financial institutions: Treasury bills and notes, bonds and mortgage-backed security paper.
When the government issues a treasury bill, it promises to pay principle and interest to the bank that buys the bill. If the bank buys a bond, the issuer of the bond promises to pay back the purchase price of the bond plus interest to the bank.
Quantitative easing (QE) has been described as an "unconventional monetary policy used by central banks to stimulate the national economy when Conventional Monetary Policy (CMP) has become ineffective.
QE differs from CMP. When the Fed utilizes CMP, it does two things: It lowers interest rates, and it increases the money supply. QE became necessary because the Fed had already lowered interest rates to 0% and couldn't lower them further. QE, therefore, relied on the Fed's only remaining tool: increasing the amount or quantity of money in the system to stimulate the economy. The "quantitative" in QE refers to the "quantity" of money made available.
But where did the Fed get the money to buy the Treasury bills and notes, bonds or securities to implement its QE? It created money out of thin air -- ex nihilo (out of nothing). In these modern times, there's no need to run printing presses. Somebody at the Fed simply clicks a computer keyboard, and, zingo! Billions and trillions of dollars are created!
That's how Ocasio-Cortez plans to give free everything to everybody. She subscribes to something called Modern Monetary Theory.
Professor Stephanie Kelton, a former economic adviser to Sen. Bernie Sanders, has said that in accordance with that theory, “the government can afford to pay for any program it wants. It doesn’t have to raise taxes."
But if we can implement the Ocasio-Cortez $3.2 trillion Medicare-for-All plan without raising taxes, why did Sanders recently tell Martha MacCallum (Fox News) the following?
Sanders: "you're not going to pay any health insurance premiums."
MacCallum: "You're going to pay one way or another. Whether it's in your income tax, or your payroll tax, you're going to pay."
Sanders: "Health care is not free."
MacCallum: "You just said it was going to be free for everyone."
Sanders: "It's going to be free at the point at which you use it."
In comparing Kelton's remarks with those of Sanders, it seems rather clear that the professor and the senator are on very different Modern Monetary Theory pages.
So, is there a real difference between the government running printing presses 24/7, and the Fed creating trillions of dollars by clicking the computer?
If our government has revenue in the neighborhood of $4 trillion, can we have deficits of $5 trillion, $10 trillion, or $50 trillion? Or at some point does inflation set in and utterly destroy the earnings, savings and purchasing power of rich and poor alike?
What happened in the years following 1716 when France subscribed to John Law's paper-money policies? The Weimar Republic? The Soviet Union? Twenty-first century Venezuela?
In each case, the bubble burst. Modern Monetary Theory is a fool's gamble.