Paul Krugman wrote a good piece today that got me thinking about my favorite monetary contradiction. Have you ever heard someone complain about the size of the national debt as well as the zero interest rate policy currently enacted by the Fed? Yeah, we hear it all the time. Usually from conservative pundits who are making an argument against the Fed and/or the size of the national debt. But these pundits don’t seem to have connected the dots on the ways our monetary system works or the clear contradiction in their thinking. Now, I am a pretty fiscally conservative guy. I tend to be skeptical of the Fed’s various manipulations and guesses at monetary policy and I also tend to be fairly skeptical about government spending. But this contradiction is one that makes no sense to me….
The obvious thing about the national debt is that it’s the non-government’s saving. So grandma’s saving bonds in the form of US Treasuries are the Federal Government’s liabilities. That’s just the simple reality of how this arrangement works. The government issues debt and the non-government holds it. You can’t “pay off” the national debt without taking away grandma’s saving bonds. But the weird part is that these same pundits always seem to complain about the way the Fed’s policies are hurting savers like grandma. But low rates reduce Federal interest outlays directly reducing the size of the Federal deficit so you would think that this is something that conservative pundits would love. But they don’t. They want grandma to earn more on her saving (thereby increasing government spending through interest outlays), but they also want to “pay back” the national debt thereby taking grandma’s saving away.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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