According to Modern Monetary Theorists (MMTers), governments of nations that control their own currency need not rely on borrowed money or revenue collected in taxes for funding. They can simply fund projects by printing more currency (i.e. monetary expansion).

Economists are weary of this kind of deficit spending because of the risk of price inflation.

On the other hand, MMTers argue that deficits aren’t as harmful as our common sense tells us they are. Among other sophisms, they argue that government deficits are private sector surpluses.

They say, “The government’s red ink is our black ink”, which means that the money the government spends ends up in the hands of businesses and individuals. So, to them, every government deficit is a good thing, as the money spent is an increase in the financial wealth of non-government actors.

This MMT view of deficits is true, but that it is true doesn’t make it beneficial – or moral. I ask two questions to determine whether or not monetary expansion is beneficial; in this article, I focus particularly on the second question.

Are deficits harmful?

MMTers employ all kinds of sophisms to try to hide the fact that deficits are indeed inflationary and therefore harmful to economies, but it remains a fact that monetary expansion is inflationary. What good is it to have more financial wealth, while at the same time forcing all prices to rise?

Some argue that doing it in moderation (i.e., inflation targeting) is good, but I argue that even when done in moderation, it is still harmful, as even though prices don’t rise (as an unrelated result of productivity outpacing money growth), the money growth (though done in moderation) still robs us of higher living standards that are the inevitable result of a deflationary economy. This leads to my second question.

Are deficits necessary?

Inflationists argue that endless price increases are a necessity for economic growth. “Inflation is the price we pay for growth” they say.

Some consider moderate price increases a fair trade-off for economic growth. However, I argue that this trade-off is entirely needless, as the more money that is needed for growth” can be made in two ways:

1. By printing money (i.e. inflation)
2. By increasing the purchasing power of money (i.e. deflation)

Consider two scenarios. Thamsanqa has only R2,000, but needs two cases of Van Der Hum Liqueur.

1. Scenario one: One case costs R2,000, so in order to buy the second case, Thamsanqa would require R4,000 (i.e. more money) to purchase two cases.
2. Scenario two: A case costs R1,000. Here, Thamsanqa’s R,2000 would purchase two cases. Though Thamsanqa has the same amount of money as Scenario One, his R2,000 in this scenario has more purchasing power.

Scenario two is more desirable, because under that scenario money has more purchasing power (i.e. commodities are cheaper). Money with more purchasing power is achieved by increasing productivity while the money supply remains fixed.

This happens because just as money is used to demand commodities, commodities are also used to demand money.

Consumers use money to buy commodities from producers, while producers use commodities to buy money from consumers. Therefore, when the supply of commodities rises (i.e. increase in productivity), it increases the demand for money.

This means that more producers now want to buy money than before, and when the demand for something goes up, while the supply remains the same, the price goes up. The price of money going up means it is more valuable and can purchase more things than before.

What this all means is that a fixed money supply eventually leads to falling prices (i.e. deflation). MMTers and other inflationists know this, but argue that this natural deflation causes production to fall.

They argue that this natural deflation is bad and leads to recessions. They say that if prices fall:

1. Producers stop producing because they make less money from the lower prices of products. This is demonstrably false, as they fail to consider that lower prices also mean lower costs of production for them, so producer profits aren’t affected. Not to mention that though revenues fall for producers, these “lower” revenues purchase more than the formerly higher revenues.
2. Consumers cease consumption, because they expect prices to continue falling. This is false because no one can defer consumption indefinitely. No one ever says, “I’m hungry, but I’ll wait for this bread to be cheaper next week before I purchase it.” Even though consumers know that the newest iPhone will be cheaper next year, they still buy it this year.
3. Deflation makes it harder for people to pay debts, as the debts – though the same in nominal terms – are now more than before prices fell (in real terms). This ignores two things: Being unable to pay debts, although bad for the debtors, does nothing to affect real resources. Defaulters will have their assets sold to new owners. There is no productivity lost, and absolutely no harm done to the overall economy.
4. Wages are sticky (i.e. they don’t fall as fast as other prices), and this leads employers who are unable to afford to pay these wages to lay off workers. However, this also ignores the fact that workers can easily renegotiate for lower wages. These new lower wages do not erode the wealth of workers, as all prices are now cheaper, and workers can meet their needs better than before the deflation.

Understanding the laws of demand and supply teaches that, contrary to the misconception that there can be no growth without inflation, the exact opposite is the true. Prices will begin to fall instead of rise, and contrary to the alarmism of inflationists, this is a good thing. Falling prices mean the cost of living is falling, and standards of living are rising.

Contrary to what inflationists argue, more money isn’t needed for economic growth. A fixed money supply will cause the purchasing power of the money to rise, leaving individuals and businesses not with more money, but with money that can purchase more than it could before.

This shows that not only are deficits harmful – they’re also needless.

Daniel Agbake (@EconBreau and @EconBreau2 on Twitter/X) is a Nigerian Austrolibertarian economist and an apprentice at the Mises Institute. Under the organisation name “The Freedom Institute” he teaches individual liberty, personal responsibility, private property rights, free markets, and sound money to mostly young people across Nigeria. Econ Bro is an Associate of the Free Market Foundation.