By James C. Sherlock

Steve Haner’s superb column on the state budget turned attention to federal aid to state and local governments. It is worthwhile to review where the feds get that money.

James T. Agresti, CEO of Just Facts (chart above), has written recently hat U.S. debt-to-GDP ratio is four times the historical average and climbing:

“The US national debt has just reached 120.5 percent of the nation’s annual economic output, breaking a record set in 1946 for the highest debt level in the history of the United States. The previous extreme of 118.4 percent stemmed from World War II, the deadliest and most widespread conflict in world history.”

The Federal Reserve

The Fed’s dual mandate from Congress is to maximize employment and stabilize prices. The Fed floods the economy with money in times like this and is supposed to sop it up with higher rates when the economy appears to overheat and prices rise too fast.

By the end of the year, the Fed is projected to have purchased $3.5 trillion in government securities with newly created dollars and lent over $2 trillion to businesses and state and local governments. Until there is another stimulus bill.

The Fed’s bond purchases create money to finance the massive debt run up by the political branches.

Many of the “loans” in the COVID recession are designed to be forgiven, and others will be forgiven as a political expedient.  More money is created.

Modern Monetary Theory

Keynesian economic theory promoted government intervention in markets during downturns. It posited that the debt incurred would to be paid back by taxes and growth.

“Modern Monetary Theory,” in contrast, argues that the government can always pay its bills by creating more money. It is said to mean that deficits and debt are relatively meaningless.

It represents the creation of an economic theory to support what the left wants to do politically. It says that creating money is a tool that can be used without consequence to fund anything considered politically desirable. Under MMT there is really no need to collect taxes at all except to punish the successful.

We may be about to test that fantastical theory. There will be no place to hide if we do.


A useful read is by Anthony Dories and James Harrighan. They state:

“The federal government is moving into the final stages of its fiscal life. Deficits have gotten so enormous that the Federal Reserve simply prints the money the government needs. Why? Because that’s the only option left on the table.”

They also contend that the only thing holding back massive inflation is that while the Fed massively increased bank reserves, the low rates they get for lending and the interest they are paid by the Fed on their reserves are preventing the increase in reserves from translating to a massive increase in the money supply.

“From 1985 until August 2008, total reserves averaged about $50 billion. Through three rounds of quantitative easing following the 2008 housing crash, the Federal Reserve increased banks’ total reserves to $2.8 trillion. That’s a 5,500 percent increase!”

The increases in the money supply that we have seen have been reflected in the prices of financial assets, not goods and services. Thus the big fall in stock markets due to COVID shutdowns was followed by rapid recovery based on Fed intervention. The NASDAQ is now at an all time high.

One day soon we will find out if the Fed has the will to try to stop inflation with higher rates that Treasury as well as private borrowers will have to pay.

If they do it will drive the percentage of government income used to service debt so high that political branches likely will borrow even more in order to continue to spend and stave off social unrest and political defeat.

It will also incentivize the banks to lend their reserves at the new higher rates.


After WW II the United States reduced debt-to-GDP (chart above) with growth.

The iron-fisted government control of the economy advocated by the “progressive” left has never produced economic growth anywhere. The Chinese Communist Party under the leadership of Deng Xiaoping who succeeded Chairman Mao created economic growth by embracing economic capitalism and enough personal freedom to let it work while maintaining political control.

The seemingly endless need to control personal freedoms that accelerated with Xi Jinping’s Presidency since 14 March 2013 is snuffing out the economic growth of that country as well.

Who stands on the side of rational economic policy?

The Congress is not a place to look for restraint in printing money.

President Trump has proven himself to be an easy money guy. Most developers are.

Joe Biden needs to take a stand on his economic policies. The omens are not good. His economic “task force” includes Stephanie Kelton, a former adviser to Sen. Bernie Sanders (I-VT), who is an advocate of the Modern Monetary Theory.

So the Federal Reserve and the Supreme Court seem to stand between the United States and economic ruin. We can pray they both have the will to do it.

But then, the left will want to “pack” them both.

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29 responses to “(Almost) Free Money”

  1. sherlockj Avatar

    I used a double negative that ultimately agrees with your quibble. I’ll clean it up.

  2. Basically, the federal government response is to fight every recession with more fiscal stimulus (spending and tax cuts) and more monetary stimulus. But each recession requires greater government exertions. Doubling down on our bets has worked so far, and it will continue to do so…. until it doesn’t. We don’t know when that will be. But when the day of reckoning comes, it will be truly awful. We are heading for a time of upheaval far, far greater than what we’re seeing today.

    I have long argued on this blog that Virginians should insist that their state government position itself to be a bulwark against a federal meltdown. Build a bullet-proof balance sheet, pay down debt, reduce spending, devise alternative ways of accomplishing core state responsibilities (K-12, higher-ed, health care, transportation, criminal justice, etc.) The vision would be for Virginia to be an oasis in the midst of chaos.

    I guess we can flush that dream down the toilet. We’re becoming just as profligate as the rest of the country. It might be time to buy that cabin the woods and stock up on rice, beans, and concertina wire.

    1. MAdams Avatar

      That’s probably related to the fact that the Fed doesn’t seem interested in controlling it’s spending. It lacks the desire to “tight it’s belt” so to speak. That isn’t an easy task when you have politicians from all parities who aren’t required full finical disclosures, private campaign funds and no term limits.

      Now, Virginia does have Executive term limits (for now) but the legislature is still going to function like the Fed until their is reform at all levels.

      1. sherlockj Avatar

        The fed was actually slowly raising rates until the COVID shutdown. I don’t have any problem with the fed helping fund the emergency.

        I just think they no longer have the option to truly “take away the punchbowl” when the emergency is over.

        That is especially true because the left has taken the trillions of dollars of new money as proof that Modern Monetary Theory is proven right before the actual results are seen.

        1. MAdams Avatar

          Very, very true. How many QE’s were we on at that point, although they did try to raise those rates pretty quickly which did cause some turmoil prior to COVID.

        2. LarrytheG Avatar

          they actually have money left over that no one wants…apparently:

          ” Stimulus program nears its end with $130 billion left unused”

    2. LarrytheG Avatar

      re: ” We don’t know when that will be”

      in the past, it’s been posited that when interests rates go up and the folks with the notes call them in.

      I don’t think it’s possible for Virginia to really isolate itself fiscally from the Feds… just on Medicaid alone – we’d get killed if the Fed falls, let alone NoVa and the shipyards.

      but you’re evading the bigger point.

      It used to be that the “virtue” of the GOP was their fiscal side and one could just swallow and accept their social conservatism as part of the package.

      We depended on the GOP for fiscal discipline and to keep the tax & spend fools at bay but now the GOP has just rolled and they’re as bad as the tax & spend fools…

      The GOP has blathered for decades and Jim Bacon for years about Boomergeddon – and now… what and more important – what say you about the GOP and fiscal discipline these days? For instance, why should we put them in the GA in Virginia? Given their current behavior, they’d be worse than the Dems who actually are showing SOME fiscal responsibility with respect to the current budget.

      All we’d get from the GOP is more bad stuff on social policy.

      1. sherlockj Avatar

        The fact that politicians are crass and follow the polls is not new.

        The fact that a lot of self-declared conservatives are really populists is not new. It is the larger numbers of them that is new. Some of them are probably attracted to MMT because it does not require taxes.

        The fact that a lot of traditional Democrats held traditional liberal views is not new. I hold a lot of traditional Democratic viewpoints myself.

        I have been working for 15 years to improve health care and education for the most disadvantaged. I have done that because I think it matches conservative principles, helping people so they can help themselves.

        You and I agree that both sides have folded on core principles.

        Some Republicans because they did not really understand economics and followed what their donor class asked.

        Some traditional liberal Democrats because they did not really understand economics and followed what their donor class asked.

        A core problem is with the donor classes.

        The Republican donors that upheld traditional values in economics are dying off. Some but not nearly all of the rest just want their cut in whatever deal is made.

        The Democratic donor class is trying to adapt to wokeness. Some of them don’t fully understand what that means long term, but they don’t want to get “cancelled” by the Jacobins in their party and want to be relevant at their next party in Gstaad.

        It is a particular anomaly of our times that some of the richest people in America are contributing to their own financial destruction and, worse, the destruction of America as an ideal of freedom in a stable republic.

        1. Nancy_Naive Avatar

          What is the saying?
          A politician spells “conscience”,

  3. Nancy_Naive Avatar

    Well, Trump said he was at war with COV2, and we have lost nearly 1/2 of WWII KIA in just 3 months, so maybe it’s where it should be.

  4. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    Give me a break, Jim (both of you)! You want to blame the rising deficit on liberals. You are right–it was a “liberal” who made this statement: “Reagan proved deficits don’t matter.” (Dick Cheney). It was a liberal who engineered a massive tax cut while the economy was expanding. (McConnell). And it was certainly a conservative, and not a liberal, who was President when the country experienced its last annual budget surplus. (Clinton)

    1. sherlockj Avatar

      Read it again, Dick. I blame it on politicians of both stripes.

      1. LarrytheG Avatar

        well, the Dems have not really changed…. right?

        we depended on the Conservatives to keep the Dems in check.

        The Va GOP held the GA on that basis for years, no?

        The Senate in Congress – the GOP claims they are the more fiscally responsible … no?

        even the Supply-siders… claim they know how the economy “works” and the Dems don’t, right?

        I just don’t buy the “both sides” argument… It’s the GOP that has bailed on their claimed principles…

      2. Dick Hall-Sizemore Avatar
        Dick Hall-Sizemore

        Not the original post. In that, you attribute the MMT as something created by the “left” so that it can do what it wants to do. Later, you talk about the iron-fisted control advocated by “progressive” left. You left no doubt as to who you blame.

  5. LGABRIEL Avatar

    I think it is time for James Bacon to update his book, “Boomergeddon”. In the meantime, the rest of us can read (or re-read) it.

  6. VDOTyranny Avatar

    I thought this was a blog about Virginia, not Argentina? Reminds me of the old economist joke, “sure, it works in real life but does it work in theory?”

    – In theory MMT might work to a point, ’til the world loses faith in your currency. At what point do you cross the event horizon?
    – MMT requires demand for your currency. Taxes have to be paid is US$ which creates demand for $ (try paying your taxes in yuan).
    – Nonetheless, MMT is a “tax” on your savings.

  7. James Wyatt Whitehead V Avatar
    James Wyatt Whitehead V

    In 2018 American households had $98 trillion of wealth. 89% percent of the wealth is held by the top 20%. I assume this will be the bracket of Americans who will bear the burden of deficit spending and national debt. Only a matter time right?

    1. LarrytheG Avatar

      that’s the theory… but I don’t see anyone talking about paying any of it back anytime soon though there have been attempts to put transaction fees on investment wealth…

      For decades, we’ve been told that the deficit/debt was going to ruin the country financially and the Dems were demonized for their irresponsible tax & spend policies but after the Trump tax cuts – funded by borrowing – at a time when the economy was going great guns – – we had GOP folks saying out loud that “deficits don’t matter”… then came the pandemic and the entire idea of the debt/deficit “disaster” has gone away.

      Hardly a peep about the deficit/debt coming back to bite us in the butt.

      As Peter posted back in April: ” “We Are All Keynesians Now” !!

      1. James Wyatt Whitehead V Avatar
        James Wyatt Whitehead V

        Jefferson was fortunate. His Secretary of the Treasury, Albert Gallatin charted a course for paying down the national debt. I think it was in the neighborhood of $140 million from the Revolution. It would considered to be concrete goulashes for the United States. Jefferson had the luxury of his disciples following him after 2 terms: Madison and Monroe. John Quincy Adams never could resolve his feud with Congress and was essentially tied to the Albert Gallatin model. By the time Andrew Jackson was President the national debt was nearly paid off. It took 28 years. Parents often named the sons of Albert Gallatin as a tribute in this era.

        1. MAdams Avatar

          His predecessor started with taxation on spirits as a method of paying down the War debt. All that did was start a rebellion and give us moonshine, so I suppose it wasn’t all bad.

      2. Larry, at the time Nixon said “We’re all Keynesians now”, the then-Keynesian beliefs were unraveling and a significant period of stagflation was rapidly setting in. The train was derailing but they didn’t know it yet. Just to put it in perspective. . .

        1. LarrytheG Avatar

          Izzo – That was then – this is now… if it was unraveling back then , what happened, and why in the world does the GOP continue to go back and forth on it rather than maintaining a consistent policy?

          How can the GOP be all in on supply-side and tax cuts for the rich one day then bail to Keynesian the next? lordy!

          1. Larry, I am just pointing out that things may not be as the majority may think. Most seem to think deficits do not matter now in the same way that most believed ongoing heavy fiscal stimulus would not have consequences in 1970. They were dead wrong then.

    2. Nancy_Naive Avatar

      Not that I’m a Biblical kinda guy, but the idea of 7 years of fat, was to “put it in the bank” for 7 years of lean. We just insist on being out of sync. The problem with that blue dolllar is that blue ain’t uniformly spread.

      Roughly 140 million households. The top 10% has assets of roughly $1M, the top 1% has $10M, the top 0.1% $100M and so on.

      1. sherlockj Avatar

        Pretty much the main issue. The left considers the fact that wealth is not uniformly spread is a”problem” and offers as a solution take it away rather than provide opportunities for others to get wealthy through education, entrepreneurship and hard work.

        1. LarrytheG Avatar

          what specific things are we NOT doing right now for education, entrepreneurship and hard work that we should?

          Liberals tend to have “do-gooder” mentalities and oftentimes without regard to cost and efficacy… but Conservatives have their own issues but I’d like to hear some examples of what we should be doing that we are not.

        2. Nancy_Naive Avatar

          I’m left, and I don’t think the distribution is so much of a problem as is the current rate of the shift further toward the few. Progressive taxing, and spending to move the ends ain’t all that bad of an idea, given the last 30 years of rate.

        3. Nancy_Naive Avatar

          A few years back, in an insomnia induced Google fit prompted by the thought, “Whatever happened in the Sophia Loren gives up Italian citizenship tax avoidance issue?”, I went down a huge rabbit hole about changing citizenship, wealth, and what countries do when it happens.

          Some are rather draconian, “Take 10,000 drachmas, leave the rest.” I was pleasantly surprised that the US is wildly logical, “Total your estate, pay the Long Term Capital Gains tax, take the rest with you.”

          But what caught my eye, and this was 2015ish, was the disproportionate number of 1%’res leaving. There were maybe 500 total emigrates, very small number, but 1%’eras made up some 20%.

  8. Something like 7 of the top 10 countries in the world by GDP per capita are tax havens of one form or another.

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