Larry Kudlow Needs to Reread Hans Christian Andersen’s “The Emperor’s New Clothes”

Mar. 25, 2019
by Bob Adelmann

Last month this writer concluded that, if passed into law, AOC’s Green New Deal would hasten the bankruptcy of the United States of America. He noted that for all intents and purposes the U.S. is already bankrupt, but that the credit rating agencies are overlooking the obvious by keeping their top ratings on U.S. government debt.

Now it appears that this writer was wrong. According to Larry Kudlow, Trump’s chief economic guru, “I don’t think good growth policies have to obsess [interesting word choice], necessarily, about the budget deficit.”

He apparently had been reading how Modern Monetary Theory – MMT – makes deficits irrelevant, as written by a professor in public policy and economics from an obscure university. That professor, Stephanie Kelton, at Stony Brook University, said the only thing standing in the way of spending our way into the green new world is politicians’ will to spend it:

What we don’t (yet) have is the final, vital ingredient: a critical mass of politicians prepared to unleash the enormous power of the public purse to save the planet.

In order to do that, she says, “We must change the way we approach the federal budget. We must give up our obsession [there’s that word] with trying to ‘pay for’ everything with new revenue or spending cuts.”

Kudlow’s comments apparently reflect the Trump administration’s complacency over soaring deficits and the national debt. On Friday the U.S. Treasury announced that the federal government has spent $1.8 trillion since October 1, the start of its fiscal year, while tax receipts were only $1.3 trillion. This leaves a deficit of a little over $500 billion.

It would have been only $489 billion except that in the month of February the IRS began sending out refund checks, and personal and business tax returns aren’t due until April.

Only $489 billion? On an annual basis, if nothing changes, the federal government will ring up deficits of $1.2 trillion this fiscal year, pushing the national debt to over $23 trillion by October.

Last month the Congressional Budget Office (CBO) estimated that, if nothing changes, by 2029 the national debt will approach $36 trillion. A lot of things can change in 10 years: wars, depressions, and the Green New Deal for starters. So readers should brace themselves for a national debt that exceeds human imagining.

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But wait! Hasn’t the federal government been running massive deficits for years, with few lasting consequences? The reasoning, from common sense (Austrian School) economic thinking, goes like this: deficits are financed either by borrowing or by printing new money (digital new money since printing new currency is so passé). When the newly borrowed or created money is spent by the government, it pushes prices upwards, reflecting its loss of purchasing power. Viola! Great concerns being voiced about runaway inflation followed by recession or depression.

But history seems to have gotten in the way. The national debt first hit a trillion dollars in President Reagan’s first term (1981), and now clocks in at $22 trillion. Where is the runaway inflation? Where are the rising interest rates as investors and lenders demand more to protect themselves against loss of purchasing power and possible default? Today the government is able to borrow all it needs at 3 percent interest.

What about Japan? It has been attempting to stimulate its moribund economy for decades. That nation’s national debt is now two-and-one-half times the size of its annual economic output. Interest rates there? Declining, from just over one percent in late 2018 to 0.2 percent in February.

Where is the depression in Japan? Its Gross Domestic Product (GDP) is $5 trillion, making it the third largest economy in the world, behind China and the United States.

Happy to report, not everyone has lost his mind. Ben Hunt runs a hedge fund and still clings to the now old-fashioned idea that deficits do matter, and that MMT is merely the old alchemy that promised to turn lead into gold:

At its core, Modern Monetary Theory is an argument that would be wonderfully familiar to every sovereign since the invention of debt. It is essentially the argument that significant sovereign debt is a good thing, not a bad thing, and that budget balancing efforts on a national scale do much more harm than good.

Why? Because there’s so much to do and so little time for the right-minded sovereign [to do it]. Because it is fundamentally unjust for the demands of private lenders to thwart the necessary ends of the sovereign, and it is politically difficult to finance those ends through tax levies on a fickle citizenry.

MMT is the sovereign-friendly justification for deficit spending without end.

Kudlow and Kelton need to reread Andersen’s The Emperor’s New Clothes. They’ll be reminded that when the emperor trotted out in public sporting his new clothes – invisible to those who were unfit for their positions – the only person viewing him was a little child who hadn’t yet been taken in by the deceit. She shouted “But he isn’t wearing anything at all!”

Neither is Kelton and her alchemy that promises the Green New Deal through unlimited government spending without any consequences.



The McAlvany Intelligence Advisor: AOC’s Green New Deal Will Hasten U.S. Bankruptcy

The Emperor’s New Clothes

The Wall Street Journal: U.S. Budget Deficit Grew 39% in First Five Months of Fiscal 2019

Bloomberg: U.S. Posts Largest-Ever Monthly Budget Deficit in February

Bloomberg: MMT Has Been Around for Decades. Here’s Why It Just Caught Fire

Japan’s GDP

Japan’s inflation


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