Manuel Suárez Mier*
The interest rate on the 10-year US Treasury bond almost tripled from a year earlier and is twice the level it was just three months ago. Many believe heralds that inflation will soon follow, which has been very low despite runaway spending and monetary expansion.
If the huge public deficit of 2020 is added to this year’s deficit, which will be higher, and the infrastructure spending plans that the government refines, of 2.25 trillion dollars, on top of the 1.9 trillion “stimulus” that already flows, we see an unprecedented scenario in US finances.
Voices of alarm are still ringing among progressive economists, such as Larry Summers, renowned academic and former Secretary of the Treasury, who warned that there would be “inflationary pressures not seen in a generation, which endangers the value of the dollar and financial stability.”
It did not take long for the disqualifications of the most foolish anti-economists, such as Joe Stiglitz, who affirmed “that he does not know what (Summers) is saying because the irony is that we have had a long period in which there was not enough demand,” so there will be no inflationary pressures.
He argues that if inflation resurfaces, the Fed can raise interest rates and the Treasury raise the tax on the rich, both on their income and on their wealth, but does not mention the devastating blow to public finances that the higher interest rates would have on a net debt of 108% of GDP.
How politicians and economists malleable to their wishes have changed their opinion of deficit financing is astonishing because the consensus was to resort to this source of financing only in emergencies such as serious economic depressions or wars. Still, as soon as normality returned, it would seek to generate a surplus and withdraw debt.
That consensus was lost as magic formulas sprung up on both sides of the ideological spectrum: on the right, what George Bush Sr called Voodoo Economics, which asserts that any reduction in taxes pays for itself by generating higher growth, which would offset the lower tax revenue.
With the left we arrive at paradise: the economy is irrelevant because the government can spend without limit and the Fed can print money without restraint without any consequence. Worrying about the level of debt or inflation are obsolete relics devised by neoliberals today completely discredited.
Both positions are based on false premises. Lowering taxes does not pay for itself, as shown for the eleventh time the one carried out by Trump, which cost $ 2 trillion, and instead of paying the debt of 19.5 trillion, as he promised, he increased it by 7.8 trillion.
The illusion that debt can be raised without limit is based on the recent period of extremely low-interest rates without inflation due to an insatiable global demand for dollars, which would immediately disappear if doubts arise about whether it will lose its value.
The laws of the economy are still in force, the big question is when they will manifest.
*Consultant in economics and strategy in Washington DC and professor at universities in Mexico and the US. Email: aquelarre.economico@gmail.com
This column is also published in Spanish on April 1st, 2021, in the Excélsior newspaper, based in México City.