Since the onset of the pandemic, Congress has been spending more money than ever. The pandemic hit when it was already projected that in fiscal 2020 the federal budget deficit would once again top $1 trillion. On October 16, however, USA Facts reported that the 2020 deficit was $3.1 trillion. That’s more than twice as much as the previous record of $1.4T set in 2009 in the wake of the financial crisis. On April 12, The Fiscal Times reported that the deficit for just the first six months of fiscal 2021 was $1.7T: “In March alone, the deficit came to nearly $660 billion, driven in large part by $339 billion in pandemic-relief payments to individuals.”
On top of that, the feds just enacted a $1.9T stimulus bill, and on March 31, Pres. Biden proposed his “infrastructure bill” that’ll run to $2.3T in new spending, and more new spending is promised. A trillion here, a trillion there, and pretty soon Americans will be thinking that no one in D.C. cares about the federal deficit anymore, and that the “deficit hawk” is no longer an endangered species, but is extinct. Nor could your average sentient lifeform conclude that our federal lawmakers have a clue about the immutable Law of Supply and Demand.
In other eras, some claimed “We are all socialists now” or “We are all Keynesians now.” Today, some might claim: “We are all MMTers now.” The “MMT” there is for Modern Monetary Theory, which says that we shouldn’t worry about deficits, because the Federal Reserve can safely “print” much more money than it has been. The Fed creates new money when it buys things, and the main thing the Fed buys is U.S. sovereign debt, i.e. U.S. securities, a.k.a. treasuries.
There were times when the Fed bought treasuries “directly” from the Treasury. In 2014, Kenneth D. Garbade posted a short history for the Federal Reserve Bank of New York headlined “Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks.” For the last 40 years, the Fed has not bought treasuries directly from the Treasury. But the Fed can still buy new treasuries at auction in the primary market, which is the way the Fed creates money for Congress. When the Fed buys treasuries in the secondary market, such as in quantitative easing, Congress doesn’t get the proceeds.
When other buyers, like private citizens or foreign concerns, purchase treasuries, they do so with pre-existing dollars. The concern with the Fed buying treasuries is that it involves creating new money, thereby inflating the number of dollars. With more dollars out there, prices tend to rise. And that gets us into what was the Fed’s original mission — preserving the buying power of the U.S. dollar.
Unfortunately, the Fed’s core responsibility of protecting the value of our currency has been diluted. With the Federal Reserve Reform Act of 1977, Congress heaped a new responsibility on the Fed: to promote maximum employment. Though it’s said that the Fed has a “dual mandate,” it actually performs a bunch of necessary services that should give one pause when considering ending the Fed, as some urge. Rather than ending the Fed, it should be reformed by ending its second mandate of maximizing employment.
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