In a phone interview with CNN Monday morning, Donald Trump said something startling: The US, he insisted, will never have to default on its debts, because it can always print more money:
This is the United States government. First of all, you never have to default because you print the money. I hate to tell you. So there’s never a default.
Trump was responding to a question from CNN's Chris Cuomo following comments he made last week suggesting that he'd ask American bondholders to take a haircut — accept less than they are owed — if the government debt problem ever got out of control.
That first comment understandably terrified a lot of people in the financial press. The entire world financial system is predicated on the notion that US debt is the safest investment there is. If the US started threatening to not pay back its debts in full (to partially default, essentially) its borrowing costs would skyrocket, and so too would interest rates on everything else: corporate debt, mortgages, credit cards, etc.
Such a haircut would, as Vox's Matt Yglesias explained, cause a financial crisis, and, worse, be totally unnecessary. While countries in the EU that don't control their own currencies can, theoretically, be forced to default, countries like the US that do control their own currencies always have another option: They can pay off the debt by printing more dollars. This might lead to undesirable levels of inflation, but that's probably better than a full-on financial catastrophe.
Trump's latest comments suggest that he grasps this notion. In doing so, he's echoing a heterodox left-wing economics movement that's gotten some buy-in from Bernie Sanders as well: modern monetary theory.
The left-wing economics movement that Trump is adopting
MMT emphasizes the fact that countries that print their own money can never really "run out of money." They can just print more. The reason we have taxes, then, is not to pay for stuff, but to keep people using the government's preferred currency rather than, say, Bitcoin. In some rare cases, consumer demand gets too high, so sellers raise prices and inflation ensues. Then, you need to raise taxes to cool the economy down. But the theory holds that this eventuality is pretty rare. James Galbraith, a MMT-influenced economist at the University of Texas at Austin, once told me that the last time it happened was in World War I.
The main takeaway from this is that you really don't need to balance the budget over any time horizon, and attempts to do so will hurt the economy. That's what Stephanie Kelton, a MMTer at University of Missouri–Kansas City and a senior economic adviser to Bernie Sanders, argues happened after the Clinton surpluses of the late 1990s/early 2000s. Any dollar of government surplus must show up as private debt, she reasons. And the private sectors just can't run up debt like that indefinitely. "Eventually, something will give," Kelton once wrote to Business Insider. "And when it does, the private sector will retrench, the economy will contract, and the government's budget will move back into deficit."
This is very much a minority view in economics — even among liberals. Paul Krugman, for example, has argued that MMT gets this all wrong. You still need people to buy government bonds, and if the interest rates on those get too high, then paying for it all might be hard to do without triggering runaway inflation. "Once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation," Krugman writes. Joe Gagnon, an economist at the Peterson Institute, also notes that Australia and Canada ran surpluses for years without suffering economically as a consequence. (You can see MMT responses to these points here and here.)
Why MMT is so attractive to Trump
If you want to learn more about MMT, I wrote a long profile of the movement back in 2012 that explains the basics. Before recently, mainstream economists and policymakers could comfortably ignore the movement. Galbraith told me that when, on a panel for an April 2000 event at the White House, he argued that the US's new budget surplus would harm the economy, the hundreds of economists in attendance laughed in his face.
That's all changed. The financial crisis created a huge appetite for new economic thinking, and MMT helped meet it. It gained new legitimacy through Sanders's adoption of Kelton as a senior adviser, first in the Senate and then on the campaign trail, and now it's made its way into Trump's rhetoric.
It makes sense, in a way. Trump is promising $9.5 trillion in new tax cuts — $11.2 trillion if you include interest payments. The anti-debt Committee for a Responsible Federal Budget (CRFB) estimates that his combined proposals would increase the debt by $12 to 15 trillion by 2026.
One way to get around these numbers is to tweak your proposals until they no longer cost as much, or find unrelated spending cuts and tax hikes that lower their cost. But with numbers this high, that's not really an option. So insisting instead that dramatically increasing the debt just isn't a problem — as implied by MMT — is a very attractive option for someone in Trump's position.