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The fiscal hawk who cried wolf

Alexandra Scaggs at Financial Times (requires a free account):

A prime example of this can be found in the warnings from some fiscal hawks about how financial markets would be overwhelmed by the wave of government bonds needed to fund the stimulus. Seven months later, 10-year Treasury yields are hovering around 2.8 per cent.... Where are the storied bond vigilantes?


For their efforts, US lawmakers have now educated a generation in the risks of dogmatic opposition to government debt, and made austerity a more tangible threat to young Americans than harmful inflation. Small wonder then that Alexandria Ocasio-Cortez, the self-described democratic socialist, was recently elected to represent New York in Congress. She has backed the increasingly popular view that restraints on a government's spending are primarily set by the amount it can borrow in its own currency without fuelling inflation -- not its annual tax revenues.

Some economists may find this perspective uncomfortably liberal, but it is not necessarily inaccurate. It acknowledges global demand for US Treasuries, which is a more honest depiction of the government's finances than a Treasury that is only capable of spending the amount it raises through tax revenues in any particular year.

Milton Friedman famously said inflation is "always and everywhere a monetary phenomenon". So those who argue that government borrowing causes an acceleration in inflation implicitly acknowledge that Treasuries more closely resemble money than a highly burdensome debt load.

Beyond that, when it comes to rising prices, more evidence is required to argue that wage-driven inflation hurts consumers. Particularly because it is shareholders whose companies' margins are dented by rising wages, and bondholders who get hurt by inflation regardless of its source.

Americans, particularly young Americans, are starting to question the assumptions that underlie some policymakers' categorical opposition to federal government borrowing. For those hawks who make politically motivated forecasts of doom for the US's fiscal health, it may be their own credibility that ends up paying a price.

By fnord12 | July 14, 2018, 10:35 PM | Liberal Outrage