COVID-19: Fighting Recession: Public Investment, Not Debt

It’s time to stop pretending that we can’t create money, says Andrew Spannaus. It already happens, just not in a way that helps the majority of citizens.

EU Commission President Ursula von der Leyen.  (CC-BY-4.0: European Union 2019)

By Andrew Spannaus

The coronavirus crisis is forcing Western policymakers to bend their principles: lawmakers in the United States have just approved $2.2 trillion in emergency spending; the president of the European Commission, Ursula von der Leyen, has said that countries can pump as much as they need into their economies; and former European Central Bank head Mario Draghi has said that it’s time for public debt levels to be massively increased. Where years of populist revolts against the failures of austerity and globalization have failed, Covid-19 has now succeeded: suddenly deficits and debt don’t matter.

The Congressional Research Service estimated direct U.S. banking exposure in troubled European economies at $641 billion. U.S. banks say the amount is much lower.

Has the political and economic establishment, which until yesterday considered fiscal responsibility so important that it was willing to risk social revolt, really changed its stripes? Or is this merely a temporary scramble to avoid what threatens to become the worst depression in recent memory?

Without a permanent change, there is reason for great concern. Taking on a massive amount of new public debt seems necessary to help our economies weather the storm in the coming months, but what will happen afterwards? The EU institutions are wedded to the monetarist parameters enshrined in their treaties, and deficit hawks are unlikely to abandon their constant efforts to reduce spending for the poor in the United States. So, today’s emergency measures risk setting the stage for a return to harsh austerity in the future, when the ideologues of neoliberal monetarism deem that the crisis has passed, and thus that the role of the state in guaranteeing social welfare should again recede.

Homeless  in Seattle, Feb. 2, 2017. (Mitchell Haindfield, Flickr)

Debt-Free Money

There is an alternative: debt-free money. One of the worst-kept secrets about monetary policy is that central banks create money out of thin air basically whenever they want. Governments sell bonds and take on debt, but central banks are free of such constraints. When the global financial system was collapsing in the fall of 2008, the Federal Reserve injected trillions of dollars into the markets. No authorization was needed from Congress, and nobody had to give them the money; they simply created it on a computer.

The Fed’s balance sheet, i.e. the nominal value of the total assets held by the central bank, has risen from about $870 billion in August 2007, to over $4.5 trillion today, and is poised to jump up much further in the current crisis. This is not money borrowed from China, pensions funds, or anyone else; and nobody seems much worried about paying it back. Indeed, the only reason there would be to remove a large portion of these funds and thus reduce the money supply, would be if there were significant inflation, which is certainly not the case for the economy as a whole.

Considerable criticism can be made of the central banks’ interventions in the past 10 years. Liquidity has too often remained in the financial sector, fueling rising asset prices and increasing the wealth of the richest in society, while real incomes continue to stagnate for much of the population.

Yet it would be foolish to suggest that this means the economy isn’t in need of more stimulus. The opposite is true: massive investment is needed, but it must make it to the productive economy, rather than remain in the financial sector and thus breed even more inequality.

Florida residents lining up for jobless benefits during the pandemic, April 2020. (Screenshot)

How can this be done? The Fed appears poised to take steps in this direction: for the first time ever it will make direct loans to companies, and plans a program to get low-cost credit to small and medium-sized business. That’s encouraging, because the Fed is in part following the indications of the federal government on where to lend, making it an arm of government, rather than merely an independent monetary actor.

These are still loans, though. Many companies will have to pay them back over time, unless the money is left on the Fed’s balance sheet forever, or deleted by a keystroke just as it was created. On the other hand, some of the combined $867 billion dollars in loans to small and large businesses in the emergency aid package approved by the U.S. Congress are eligible for forgiveness. In this case, the debt would weigh on the government. How can we prevent future generations from suffering through decades of fiscal pressure to pay for today’s emergency, which we hope will last only a few months?

Debt-free money is a concept that has generally been treated dismissively by mainstream economists, at times considered the province of “conspiracy-theorists” who rail about how bankers control the world. Yet the mechanism is actually quite clear, and has historical precedents. It is unorthodox today, but the current orthodoxy has brought us plenty of disasters in recent decades. Now is the time for an open mind, to recognize that the options available to sovereign governments offer the possibility to save, and grow, the economy without mortgaging the future.

Legal Tender

First $1 bill, issued in 1862 as a legal tender note. (Wikimedia Commons)

During the Civil War, the United States Congress passed the Legal Tender Act of 1862, giving the federal government the authority to print paper money, known as “greenbacks,” without the backing of gold or silver. By mandating the acceptance of paper notes for the payment of taxes and “all debts, public and private, within the United States,” these dollars were immediately accepted and provided a strong boost to the economy. By the end of the war, the government had printed almost $500 million.

The Lincoln-era attempt at changing the mechanism of currency creation ultimately inaugurated the permanent use of paper money in the United States, but did not replace the way the government raises money to spend: through the collection of duties and the emission of bonds which become the public debt. The independent central banking system of today, which economists tell us is necessary to avoid too much “interference” in monetary matters, transfers power from elected representatives to barely-accountable technocrats. Thus, as central banks pumped unlimited money into the financial sector during the crisis of 2008-2009, regular people in the United States and Europe were subject to waves of austerity due to budget constraints. Is that democracy?

Governments have the authority to create money without having to borrow it from anyone. The principal technical objection to debt-free currency has generally been that it would create inflation. Yet this is easily overcome: first of all, taxes are used to avoid inflation and economic imbalances that can result from poor allocation of money (and are not actually needed to raise revenue). Secondly, the goal of money creation must be to increase the productivity and overall value of the economy. This can be driven by investment in infrastructure, industry, and innovation, i.e. targeted spending which creates lasting value, not just cash thrown around to prop up GDP. It will still be necessary to adjust the money supply in respect to economic conditions; the goals of such interventions will simply be clearer.

Does that eliminate the danger that lawmakers will spend too much at some point, or direct money for misguided purposes? No, but at least there is a direct political check on their actions, through elections. The same cannot be said for central banks, and financial markets, which have played a large role in allowing the creation of numerous speculative bubbles in recent decades.

Money is created out of thin air every day, by central bank operations and through the fractional reserve system. When banks give a loan they hold only a small portion of reserves, a system which works well when the funds are used to generate productive activities and tangible wealth. If the funds go into bubbles, on the other hand, the result can be a catastrophic crash. The constraint is how the extra money is used, not the fact that it exists per se.

So, it’s time to stop pretending that we can’t create money. It already happens, but is managed in a way that does not help the majority of citizens. Sovereign governments can modify the formal constraints on currency creation to address this crisis. The United States could start right away. Europe, on the other hand, needs to either rid the EU institutions of their neoliberal shackles — which seems unlikely — or allow national governments the room to work for the general welfare.

Andrew Spannaus is a journalist and political analyst based in Milan, and the elected chairman of the Milan Foreign Press Association. His latest book is “Original Sins. Globalization, Populism, and the Six Contradictions Facing the European Union,” published in May 2019.

The views expressed are solely those of the author and may or may not reflect those of Consortium News.

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14 comments for “COVID-19: Fighting Recession: Public Investment, Not Debt

    April 15, 2020 at 10:12

    The author responds to Calgacus’ comment below.

    Thank you for your comment, which I find in part contradictory, and in part useful and actually in support of the points made in my article.

    My only aim is to stop terrible economic policies that hurt most of the population. I have no “obsession” with money, and am not much interested in an ontological discussion of whether “every credit is a debt.” My point is simple: when a state creates money, for example through a central or national bank, it does not need to “borrow” it from anyone. There is no finite number of dollars out there that we must retrieve in order to get money flowing to the right places. In that sense it is “debt-free,” because governments already create billions and trillions right now, as you yourself state.

    I disagree, however, that changing the way this money is accounted for would not make a difference. This goes to the essential point: austerity. Millions of people’s lives are worse, or destroyed, because governments cut spending in the name of balanced budgets. It matters tremendously. As a related example, eliminating the secondary public bond market, a speculative tool used to blackmail entire countries (Greece and Italy, to cite some recent examples), would have a huge effect.

    I do not mention MMT, as that is not where I get my ideas. However, I know Warren Mosler (the founder of MMT) and even did a public event with him 3 years ago in Rome. We got along well on that occasion, and in other discussions as well, although there are points on which we do not agree.

    In the article I referenced the creation of the greenback, which I think is an important historical example. As for FDR, I am a big supporter of the New Deal, as you appear to be. However, that period offers direct support for my argument: FDR himself, in 1937, bowed to pressure to cut public spending and deficits. The results were catastrophic.

    On the one hand, we could simply say that it was unnecessary, a view which later prevailed in part. Or, you could stop counting public spending the way it’s counted today, which is my proposal. If that means just leaving money creation on the accounts of the central bank, with no consequences in terms of deficits, fine. But that’s precisely my point, that “public debt” should not be created on the government’s accounts. However, the government must tell the central bank what to do – perhaps you agree again here – to make sure the money goes to the right places.

    The details of money creation do indeed count, because they are used to justify very bad policies. They should be relegated to their proper place, though, as a subset of the politics of the state.

  2. April 13, 2020 at 11:07

    There is the danger of runaway inflation by making money creation a purely political act but there is the promise that money could be created for specific purposes such as infrastructure rather than what currently is a more chaotic and wasteful way of inserting it into the economy. Spannaus’s propositions are promising but call for great caution less things go awry. Best be sure we cannot fix what exists.

  3. Calgacus
    April 12, 2020 at 04:43

    Unfortunately, Spannaus doesn’t understand what he is talking about. Debt-free money, positive money, Zarlenga, etc are not MMT – rather they are confused cranks. Their proposals are nothingburgers, their changes are meaningless.
    MMT makes meaningful proposals, and gets the accounting right. MMT makes mild recommendations for what is called “debt-free money”, but notes and proves we it already, that our current system has no real difference. “Debt-free money” cranks and the mainstream are united in the accounting-illiterate idea that there is a meaningful difference, a meaningful constraint in operation now.

    Some other commenters support or criticize MMT based on mistaken impressions of what the theory says.

    A) There is no such thing as debt-free money. Money is credit, credit is debt. God could not create debt free money. It is like searching for a bird which is not an animal. Debt-free money is a contradiction in terms.

    B) To all intents and purposes, we issue debt-free money right now. Look at a dollar bill. It is debt free money in the crazy nomenclature of those advocating for this nothingburger. It is a debt of the government, but it bears no interest, nothing happens to it in the future. But all a bond is, is a dollar bill with a date in the future printed on it. Saying one is debt or the other is magically delicious and the opposite for the other is crazy. As FDR said “Government credit and government currency are one and the same thing.” MMT is nothing but New Deal, WWII true Keynesian economics, simplified, purified with distracting, useless dross taken out.

    Governments don’t get the currency they create by the billions from bonds, from “borrowing”. What is called government borrowing – trading government bonds for government dollars is nothing like the transaction called borrowing in the private sector – the directions of the debts are NOT parallel. Government borrowing is more like the government doing you the favor of allowing you to refinance a mortgage. The gov or the bank is in control, not you. But the government currency isn’t created “From” the government bond by some mystic ritual. No, both are created by just creating them. Printing currency, printing bonds. Or typing in a different key on the same keyboard these days. Who do you think creates the dollar bills in your pocket? A unicorn? A rich guy?

    Sovereign governments can modify the formal constraints on currency creation to address this crisis.

    There aren’t any formal constraints on currency creation in the USA. We create currency in the billions and trillions right now.
    And if we changed the “how” trivial details, it would do nothing to address any crisis.

    Sure, issue debt free money and only debt free money. No bonds, no interest. But the real change would just be that it makes everything simpler. It would have NO direct economic effect. “Debt-free money” is a numerological obsession, like a crazy idea that dollar bills with a serial number with a 13 in it are EVIL and should not be accepted or issued, and that people who pay with them are agents of the devil. If everybody is a crazy triskadekaphobe, sure, stop printing them. Sane people don’t care about such things.

    What counts is not the details of money-creation – any more than the serial number on a bill. What counts is what the money is used for. Is it welfare for the rich to do insane and criminal things. Or is it money well spent on the poor, the ordinary man or woman, to do beneficial work, or to efficiently and universally serve human needs like health care at no cost. The primary economic stability, anti-inflationary proposal of MMT is the Job Guarantee. You need money? Show up and gt a living wage job, as a matter of right. This is a classical socialist policy, which to Marx was tantamount or identical to overthrowing the power of the bourgeoisie.

  4. April 11, 2020 at 16:58

    I love the quote from Henry Ford, (founder of the Ford Motor Company). He certainly didn’t want this made public, but someone recorded it and we know it today. He said, “It is well enough that the people of this nation do not understand the banking & monetary system. For I believe that if they did, we would have a revolution before tomorrow morning.”
    Yeah,… Henry Ford!

  5. geeyp
    April 10, 2020 at 02:48

    It’s the “nothing in it for me” factor that prevents our government spokes-holes from allowing free college tuition, universal health care, a guaranteed income, with cash they insist they control. They got theirs, where’s yours? War criminals, you know the ones, have full lifetime pensions and all the accoutrements. When they die, a fawning media gushes throw up from the rear of the throat. As Andrew points out, all they need to do is done with one click.

    • April 11, 2020 at 16:43

      Right on! We all give to society when we work, but our work is not our own. We get paid only a small token of what our employers resell it for. More than that, our employers, (means “users”), are very likely not the ones to whom we would dedicate our work if we had our choice. Why work to make people you hate richer and more powerful?
      Canada has just used this pandemic to throw tens of billions of dollars at the rich in the hopes that some of it will trickle down to the poor. They ignore the fact that money doesn’t trickle down. Money flows uphill! The rich get richer and the poor get sick and often die early.
      The first step in building a better post-covid-19 world is to establish worker cooperatives as corporations go belly up, and they will! The rich have so much there is little left for them to buy and the poor have nothing left to buy anything with. When no one is buying anything the economy grinds to a halt.
      Decorporatisation is denazification! Worker coops would distribute profits more fairly among thiose who created the wealth. Alternative economic systems could take the power of money out of the hands of the psychopaths and into the hands of the common people.

  6. Jared
    April 9, 2020 at 20:02

    When people hear about MMT they just hear, “we can print all the money we need.” Which both sounds and is too good to be true. The correct formulation is, “we can print all the money we need, so long as we control inflation through taxation.” MMT is often presented as a solution that sidesteps the troublesome question of redistribution. But this is not true. Redistribution is still necessary and all the class antagonisms that go along with that are unavoidable.

    I think much the bourgeoisie indulges in magical thinking in regards to MMT. MMT is not a path to socialism without the class war. It still requires taxing someone to control inflation, and the same old political battleground of who exactly to tax in order to accomplish this will remain in place. With a capitalist class that firmly controls the political arena, it is likely the proletariat and modern peasantry will lose this battle unless political circumstances change dramatically. MMT policy in the US would undoubtedly be controlled by a combination of the Democratic and Republican parties, both of whom represent Wall Street and corporate America. I see no guarantee that capitalism under MMT would be any better for the working class than capitalism under Monetarism.

    The author of this article suggests that austerity is a result of Monetarism. I think that is incorrect. Monetarism is just the rationalization for austerity. Austerity was always the plan. If MMT is adopted, the need for continued austerity will just be rationalized again within the new theoretical framework. Like so, “Corporate Think Tank Warns: Inflation To Soar Without Spending Cuts.” That’s an entirely logical position within MMT theory. The assumption that because of MMT, money supply imbalances will always be resolved through new taxes instead of through spending cuts is unwarranted.

  7. dean 1000
    April 9, 2020 at 14:29

    The best piece I’ve read lately. If high school students had mandatory classes on money, finance, and monetary policy college students would not be suffering from debt slavery.

    • April 11, 2020 at 16:53

      As long as we have a moneyed economy, we will have “debt. slavery” or “Wage Slavery.” whatever you want to call it. Economic excommunication, I suppose. We never did eliminate slavery. We merely change the weapons of slavery from whips & chains to salaries and poverty.
      We need to fix that in no uncertain terms as we go forward in a post Covid-19 world, or maybe a post U.S.A. Empire world. That Empire is falling and they are not going quietly. The odds of this pandemic being an act of God are very low. It’s an act of the CIA and there is nothing Godly about them!

  8. Me my self
    April 9, 2020 at 07:59

    A key stoke to fix humanities problems? What’s the holdup? Did they misplaced their keyboard?

  9. Tom Kath
    April 8, 2020 at 20:26

    This MMT has the fundamental flaw of assuming that MONEY is wealth, regardless whether it was scammed, stolen, gambled, printed, or “created”, as opposed to EARNED. I doubt that “free money” can motivate individuals or societies to activity, production, or any real earning.
    Our perspective of “VALUE” has been fatally distorted.

    • Rob
      April 9, 2020 at 13:07

      Your understanding of Modern Monetary Theory is mistaken. I suggest that you research the subject more deeply. There are plenty of good sources (e.g. Stephanie Kelton, Randall Wray and others).

    • April 11, 2020 at 16:54

      Yes indeed, Tom. We need to do much better.

  10. Matt
    April 8, 2020 at 19:02

    Spannaus is spot on. The best kept secret… is the money creation machine. As explained in Stephen Zarlenga’s, The Lost Science of Money… the goldsmiths of the middle ages invented “reserve” lending knowing that not all customers needed their gold stored in the vault at the same time… so why not lend it out at interest? The Federal Reserve, a creation of J.P. Morgan and associates, took full monopolistic control of this mechanism in 1913. In a double heist, they fooled the government into believing the Fed was “Federal” (it was not) and assured it would never consider asking for the same money creation powers for the citizenry by simultaneously creating the INCOME TAX.

    Imagine no taxes, and unlimited funds for infrastructure, education, social security, and healthcare. Zarlenga’s non-profit has been submitting legislation in the US (HR 2990) for at least a decade that explains to the highest economic degree how this transition can be done. Every world citizen should understand money creation- learn at www (dot) monetary (dot) org

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