Bond Economics

Book Comments: "The Deficit Delusion"

2026-04-30T09:17:00.000-04:00

A new book at my library caught my eye — “The Deficit Delusion: Why Everything Left, Right, and the Supply Side Tells You About the National Debt is Wrong,” by John Tamny. I was not familiar with Tamny, but he is Editor of the RealClearMarkets website. I would not describe this article as a review, rather I just want to outline what I see as major points in the book (which I am not too convinced about).

The angle appears interesting in that we have a pro-free markets person arguing that we should not need to worry about the American government defaulting on its debt. Given that there is a Republican in the White House, it is perhaps timely for free marketeers to pivot away from debt worrying. The author has fun skewering the professional government debt worryers that dominate “serious” fiscal analysis in the United States.

Too Much Reliance On Market Efficiency?

The following quote (from page 19) is a key argument of the book:

How, if the United State is bankrupt, can it borrow so much now, and according to the CBO, well into the future? Hopefully the answer to this question is a little bit clearer at this point. The answer is that — love or hate government borrowing — the United States is not bankrupt. Quite the opposite. Since exceedingly few throw away money or disdain potential returns, there’s no way the United States could keep borrowing trillions a year now and into the future if it were bankrupt. Sorry, but there’s not nearly enough dumb money in the world to fund all the United States’ borrowing.

This is one of the few times that I am aware of a pro-free market person pointing out that the same people who argue that markets are efficient are also prone to arguing that government bond markets are wildly mispricing the risk of default.

(Note that there might be better expressions of his this view in the book, but the text has a tendency repeat the same points, so I picked the first example I found when I started writing.)

Although I do not disagree with the sentiment, it faces an obvious rebuttal. Historically, the American government listened to the debt doomsayers, and so it did not push the bounds of fiscal propriety in peacetime. (In World War II and its aftermath, the U.S. government used “financial repression” and rationing to allow government war finance to function.) As financial disclaimers say, past performance does not guarantee future results.

The argument also ignores the obvious reality that some governments borrowed for extended periods peacefully then succumbed to financial crises. (These crises tend to be tied to currency pegs, which is a point that proponents of Modern Monetary Theory (MMT) would highlight.)

Equity Finance

The book is filled with an inappropriately large discussion of the financing of start-up firms. These anecdotes allow the author to offer flowing tributes to the entrepreneurial genius of rich people, but do not tell us much about government finance.

Tamny’s point can be summarised that the rate of interest does not matter to entrepreneurs at start-ups, as their businesses are so risky that they can only get equity finance. Since most large firms were originally small, one could try to argue that equity finance is the only thing that matters in capitalism. since it is at the root of growth.

However, even cursory knowledge of the national accounts tells us that equity financing is not relatively important within the national economy. (Equity market capitalisations are large — but the amount of financing raised is typically a very small proportion of market caps.) The modern favouring of stock buybacks means that net equity financing is typically negative. Meanwhile, established firms and the household mortgage market have extremely large gross and net debt financing flows.

Start-ups might be largely decoupled from interest rate markets, but they are small, and thus have a small economic weight (even if they catch the imagination of the financial press). So we cannot use their experience to say much about the effects of interest rates on the business cycle.

Pre-Keynesian Economics

The reason why I decided to not position this article as a review is that the theoretical basis of the discussions appear to be a variant of pre-Keynesian economics. Rather than trying to find compact quotes, I will just paraphrase the arguments as best I can.

The argument is made that only supply matters — demand (which are treated as equivalent to “desires”) is unlimited. This would be a plausible way of viewing the economy if production was always at full capacity, so we have a fixed real output that has to be allocated amongst “agents” in the economy.

A related point is that money is seen as being “real,” as exchange is always “goods for goods.” (Think of “money” as being gold — which needs to be mined and refined, as opposed to electronic entries on banks’ computers.) The U.S. dollar is real money because of the success of the American economy (and the ability of the American Federal Government to tax that ever-growing economy), while Russia and other dubious states like North Korea allegedly use American dollars because their economic prospects stink. (Business people supposedly do, but what about the rest of the economy?)

Although real goods matter, my argument is that we cannot ignore monetary constraints. Wages are paid in dollars, sales are made in dollars, and debt contracts are denominated in dollars. Dysfunctional monetary situations can happen independently of what is happening to real production. Given the gulf between my views and Tamny’s on this basic theoretical point, it would take an inordinate amount of my readers’ time to cover his theories in detail.

MMT Gets Mentioned (Yay?)

One reason that the book caught my eye was its title. A book entitled “The Deficit Delusion” released five years after Stephanie Kelton’s best-selling “The Deficit Myth.” I assumed that there had to be a call back to Kelton’s book, but nope. That said, MMT gets mentioned, but the previous theoretical issues shows up. He summarises the MMT position relatively well, but he dismisses it due to his views about money. That is, if you believe that money is a real object, that is incompatible with the MMT/Functional Finance view that the value of money is driven by convention and existing monetary contractual obligations, not real constraints. Even though governments now try to keep inflation at a target level, that does not guarantee that money can be treated as a real commodity in analysis.

Concluding Remarks

The book is written at an introductory level, which may benefit some readers. The problem is that the author is so busy giving us anecdotes about how rich people became rich that he failed to cover even the basic objections to his theory that the American Treasury market is always efficiently prices and there is no prospect of risk-taking preferences changing.

That said, free marketeers who want to have any shred of intellectual integrity might want to start changing their thinking along the lines suggested by this book. Screaming that the Treasury market is going to explode in a ball of flames due to the deficit when Obama is President and then wrack up record deficits under President Trump and arguing that everything is going according to plan is obviously incoherent. That said, I see little hope for intellectual coherence to come back into fashion any time soon.

Email subscription: Go to https://bondeconomics.substack.com/

Canadian Inflation Comments

2026-04-20T16:42:00.000-04:00

So far, the gasoline price shock in Canada has not been as bad as what happened after the pandemic, but I am not incredibly optimistic about the medium-term outlook. The above figure is the national average cost for unleaded gasoline (at self-service stations if you want to get even more specific), but the data ends in March, so it is missing the price rise since then. In my neck of the woods in the Greater Montreal Area, the pump price has been around $2 per litre, although Montreal is normally higher than the national average series shown above.

The Carney government announced a temporary suspension of the excise tax on gasoline on April 14th, which dropped the price by about 11 cents per litre. This generated a lot of flak from economists, but I doubt that it will matter that much if the situation does not improve in the Middle East.

The Canadian CPI numbers for March were released today, and core inflation remains stuck at a level above the 2% target. This starting point makes it hard for the Bank of Canada to be too complacent in the face of commodity prices.

The diplomatic situation around the Strait of Hormuz seems muddled, but it is clear that that full traffic flow will not resume immediately. This means that oil and gas fields will be shut in for an extended period, and restarting them will take time. As such, it is clear that regions that are dependent upon the commodity flows from the Gulf are going to be hit hard. Canada is not directly affected, but it will see a lagged effect of slowing growth elsewhere. At the same time, the signals from the White House remain belligerent towards Canada, and an attack on the Canada/Mexico/United States trade pact may occur once attention is drawn again to that topic.

The Bank of Canada’s next scheduled policy rate announcement is April 29th, and I see no reason for them to switch from their last assessment that growth risks are skewed to the downside, while inflation risks are to the upside. In the absence of clear data, it seems unlikely that they will move in the near run.

Fiscal Policy?

Although the gasoline excise tax cut was unpopular with economists, it is still a limited measure that targets the fastest rising price in the economy. My uneducated guess is that fiscal policy is going to deviate much from already announced plans. There are currently no measurable growth risks that will cause panic loosening of policy. A global recession due to the commodity shock would take time to hit Canada (and as a commodity exporter, some sectors of the economy will benefit from higher commodity prices). A complete rupture of free trade with the United States is a scenario that might provoke a more rapid fiscal reaction.

Without accommodative fiscal policy, the commodity price hike will tend to squeeze consumers, and so there might not be second-round price effects. (Although Canadian commodity exports would benefit, the employment in primary industries is not large enough greatly push the overall labour market.)

Email subscription: Go to https://bondeconomics.substack.com/

Ceasefire Sort-Of Holding?

2026-04-16T13:07:00.000-04:00

The world economy remains hostage to the war in the Middle East. Although the news flow remains extremely erratic, direct combat between Iran and the United States has been muted (although fighting was happening in Lebanon with Iranian proxies).

As I believe I noted before, one of my “hobbies” in university was reading up on international relations theory and diplomatic history. The current situation appears somewhat bizarre from the perspective of that theory. The usual story from the Realist perspective was that diplomacy since the Peace of Westphalia was determined by national interests. Since nations’ interests are determined by material facts, we do not need to enquire too deeply into the inner workings of countries to understand their international behaviour. We have reverted to an earlier mode of affairs, as many key governments are acting as neo-Royalist entities, where the interests of the ruling clique determine national policy. (Neo-Royalism has been the term recently floated by a few academics to explain the dynamics of the Trump administration.)

From the traditional perspective, the American intervention in Iran has been an unmitigated disaster for the American national interest. However, from the neo-Royalist perspective, the direct impact on President Trump and his colleagues has been muted so far.

The neo-Royalist perspective offers an explanation of how the United States can extricate itself from the war — since the national interest does not matter, walking away and leaving Iran in control of the Strait of Hormuz is not a concern. There are a few snags to the “chickening out” scenario.

The leadership of the Israeli government (as well as some Arab states) feels that it is in their interest to drag the United States into a wider war against Iran.
President Trump appears to be locked into his views from the 1980s, and has a strong fear of nuclear weapons. Ending Iran’s nuclear programme is therefore a personal concern.
He also first floated the idea of seizing Kharg Island in the 1980s, and the idea remains stuck in his head. Fighting wars to “take oil” represents the peak of his geopolitical thinking.
He dislikes the political ridicule associated with losing a war.

The common thread is that all of the analysis revolves around the personal situation of President Trump and his compatriots. Despite these negative factors, it appears that he understands that the conflict is disastrous for his Presidency, and therefore wants to get out. So long as American troops are not in direct contact with Iranians on the ground, the exit door is open and inviting. However, anything that leaves American troops in range of Iranian drones and missiles (which includes occupying the gulf islands) risks turning into a quagmire as troop casualties drive the logic of escalation.

(One possibility is that all the peace talks are just cover to give time for American troops to arrive in the theatre of operations. I believe that exit is still possible, but if the conflict expands, there will be an attempt to paint the situation as following a political plan that probably does not exist.)

The problem that the rest of the world faces is that there does not appear to be a mechanism to force a fast resolution. American energy markets remain orderly, so domestic pressure on the White House is limited. Problems in Asia and Africa with commodity prices are not a factor in their decision-making. The saving grace is that there are reports that ship traffic is starting to flow through Hormuz.

It will take months for the inflationary shock to work its way into economic data. We are going to see parts of logistical chains fail due to inadequate inputs, and they will then work their way downstream. Although neoclassical theory suggests that “expectations” should short-circuit the physical lags, the problem is that very few people know what to expect. To the extent that inflation can be driven by expectations, it needs to be a broad-based economic shock, like a collapse in the exchange rate.

It is also too early to have much insight into the reaction of central banks. It is very easy for central bankers to give tough rhetoric about not allowing inflationary psychology to sink in, actually hiking rates when an economy is imploding is harder to do.

Email subscription: Go to https://bondeconomics.substack.com/