Can't stand it anymore! Father of MMT, Mosler, angrily retorts: US government spends money like a "drunken sailor"

According to the Zhitong Finance and Economics APP, the US government spending money like a "drunken sailor" is a well-known topic in the financial markets and political fields. From billionaire investor Stanley Druckenmiller to Jamie Dimon, who has long served as the CEO of Morgan Stanley, everyone uses this phrase to describe the ever-expanding US federal deficit. However, it was surprising when Warren Mosler, the father of Modern Monetary Theory (MMT), also referenced this phrase.

One of the main arguments of MMT is that when the government spends and borrows in its own currency, this debt should not be understood in the same way as private household debt, as there is no risk of default. In theory, this allows for a higher degree of fiscal flexibility.

Mosler stated that he believes the toxic combination of high debt levels and historically large deficits will directly impact the Federal Reserve, which is still using high interest rates as a traditional tool to combat inflation.

He mentioned that in a situation where the US economy has not yet entered a recession, a deficit of 7% of the Gross Domestic Product (GDP) is "equivalent to government spending at the level of a drunken sailor".

His remarks have sparked an increasingly intense but controversial debate on whether higher interest rates will ultimately exacerbate inflation through the so-called interest income channel.

To fully understand why he is so concerned, it is necessary to understand Mosler's unorthodox views on monetary policy. According to traditional economics, when the Federal Reserve raises interest rates, capital becomes more expensive. This leads to reduced spending, decreased business investment, lower asset pricing, etc., thereby slowing economic growth by reducing demand and suppressing inflation.

However, Mosler believes that interest rates should be permanently kept at zero, leaving the task of macroeconomic adjustment entirely to fiscal policymakers. He argues that mainstream economists have not fully considered the stimulus provided when US Treasury bond holders receive regular interest payments.

He believes that the US has not fallen into a recession even after experiencing the Federal Reserve's aggressive tightening cycle because economists have overlooked a dynamic phenomenon: as the entire yield curve rises, Federal Reserve rate hikes mechanically lead to increased government spending.

Mosler stated: "They simply ignore the impact of increased deficit spending on the economy." "The only way I can explain it is that deep in their models, there must be a zero consumption propensity for interest income. No matter how much you raise interest rates, no matter how much interest you pay, no one will spend a penny."

In other words, it is widely believed that when the rich earn more money, they will not spend this additional income like the poor. As those who hold financial assets such as US Treasury bonds are more likely to be in higher economic classes, Mosler believes that economists have not taken into account that some of this interest income will eventually be reinvested in the economy, stimulating demand and putting upward pressure on price levels.

Of course, this also has a counter effect. Mosler mentioned that during the global financial crisis, quantitative easing (taking government bonds away from the private sector) led to the economy losing interest income, thereby slowing down the pace of recovery after 2009 A key challenge at present is that due to the massive scale of US debt, the stimulative effect of increasing interest payments is much greater when the debt total is lower. According to Mosler, as old debts are repaid, new debts at current market interest rates replace the old debts, increasing the importance of interest income channels.

Mosler also predicts that if the Bank of Japan starts raising interest rates to counter rising prices after years of deflation, Japan may also experience a similar situation.

He said, "Considering Japan's debt-to-GDP ratio, they will fan the flames like us, just to a degree twice as much as ours."

Ultimately, due to these dynamics, Mosler believes that the risk of an economic recession in the future is very low, as there is simply too much money entering the financial system.

However, the 75-year-old retired fund manager warned, "Reality may prove me completely wrong, and a 7% deficit will lead to a complete economic collapse." In that case, "you will never hear from me again."