The old saying is, “there’s no such thing as a free lunch.”
But that’s old school.
The new economic orthodoxy, better known as Modern Monetary Theory (MMT), says that it’s possible.
And not just possible, but a perfectly viable option for the economic prosperity of any nation who does it properly, which sounds a bit pretentious to me.
In fact, according to political advocates of MMT, which Leftist Democrats and honest Republicans will tell you is currently being practiced successfully by the Federal Reserve, MMT makes free college, free healthcare, and even guaranteed income possible, in theory.
Calling Out Current MMT Practitioners
The idea behind MMT is that a government which controls the issuance of its own currency can spend whatever it wants and can’t go bankrupt, because it can always issue more of its own money to pay off its creditors.
Although the Federal Reserve will never admit that it practices MMT, that’s exactly what it does.
When the nation’s too-big-to-fail banks were insolvent in 2008, the Fed “printed” money and gave it to them, directly and indirectly, so they didn’t have to go bankrupt.
The indirect practice was to buy underwater mortgage backed securities (MBS) and Treasuries from banks and pay them in “cash.”
While we still use words like “printed” and “cash”, printed means electronically created, and cash means electronic credit.
Buying MBS got those non-performing assets off banks’ books, so they didn’t have to write them down and take losses on them.
Buying Treasuries injected fresh cash into banks.
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So in order to keep injecting cash into needy banks, the Fed gave them short-term loans to buy new Treasury bills, notes, and bonds which were auctioned by the Treasury.
The Fed then bought those Treasuries from banks, paying for them with freshly printed money.
They played that game to such an extent with banks that they had to come up with a policy name for the extraordinary practice.
They called it Quantitative Easing, or QE.
If you think printing money to pay banks for real Treasury debt is magic, you’re right.
It’s MMT magic.
The Fed doesn’t have real capital, at least nowhere enough to justify buying the $4.5 trillion worth of securities that it eventually parked on its balance sheet. Today, there’s $3.8 trillion on the Fed’s books.
What really happened, besides making banks hugely profitable again, is the Fed’s been buying U.S. debt with printed money.
Interest rates haven’t risen, and the Treasury’s been able to issue all the debt it needs.
In a sense, you can say the government’s been getting a free ride on its debt spending.
Politicians who promise voters free stuff because MMT works, and claim the Fed proves it, would technically be correct.
The Real World Versus the Magic World
Before I tell you the number one reason MMT isn’t possible in America, unless it’s practiced by the Federal Reserve, let’s look at real history.
Contrary to the magic thinking of MMT, governments that issue and repay debt in their own currency can and do go bankrupt.
According to the Journal of International Money and Finance, defaults on local and foreign currency bonds are equally frequent.
The authors of the 2016 article Sovereign defaults by currency denomination state, “in 1996-2012, governments stopped honoring their foreign currency bonds 27 times, and their domestic currency bonds 31 times (the most-known contemporary examples are Russia in 1998, Turkey in 1999 and Argentina in 2001), which empirically falsifies MMT.”
Modern Monetary Theory recognizes the risk of inflation, but it assumes inflation, which in MMT theory is the only negative outcome of “printing press finance.” Governments can reduce inflation by cutting back on free stuff that’s contributing to inflation or by increasing taxes.
Since this isn’t an economics paper, forget about debunking MMT on the basis of its ability to magically inflate the money supply exponentially without repercussions.
Like inflation, its magical ability to control currency depreciation and capital flight with all the good that it does makes it okay for politicians to increase unpopular taxes to stem the inflation runaway that all the money printing causes.
I’ll just make one point about the entire theory’s reliance on the supposition that “a government that controls the issuance of its own currency can spend whatever it wants and can’t go bankrupt.”
The United States does not own its own currency.
The Federal Reserve System, the private central bank which most Americans think is a branch of government, is in reality, in fact, and in law the owner of all the Federal Reserve Notes, the currency, and money in all our wallets, purses, and bank accounts.
It’s also worth realizing that the government’s largest creditors are commercial banks, including the biggest too-big-to fail banks who are the Fed’s owners and true masters.
So, ask yourself, is free anything with MMT possible?
If you said, yes, you’re right.
There’s one thing that MMT works for: giving big banks Get Out of Jail Free cards. That’s it.
Now when you listen to politicians offering free anything, you’ll want to throw up too.
Our Greatest National Nightmare Has Already Begun
Congress won’t own up to the truth – the pension industry is sitting on a massive, $6 trillion lie.
Now, that lie has become a silent killer for the retirement dreams of millions of Americans.
Retired ironworker Frank Joseph used to receive $3,500 a month in pension checks from his Iron Workers Local 17 Pension Plan.
Then the plan started to run out of money, so his checks were slashed nearly in half to $1,900.
Now, he’s at risk of losing his home, and your pension could be next.