Modern Monetary Theory (MMT) has the power to change the United States in more ways than anyone realizes.
As the essential economic plank of the Democrat party, MMT is about to explode out of the far left-leaning academic containment tower it’s been brewing in.
Here’s What MMT Really Is
MMT is based on two premises: 1) a country that issues its own currency can print as much money as it wants without the risk of default, and 2) public spending can finance free services like Medicare for all, free college tuition, and guaranteed full employment.
Under the current economic system, the U.S. government issues Treasury debt to finance its fiscal expenditures. Investors, including big bank primary dealers, buy government-issued bills, notes, and bonds. Banks then use Treasuries as collateral to borrow cash (electronic credits) from each other, which they lend out into the economy.
The Federal Reserve System, America’s so-called central bank, was given ownership of the United States’ currency when it was legislated into existence as a private enterprise with some government oversight. It was also given the right to create credit out of thin air to give to banks when they get in trouble and give bank constituents money to buy Treasury debt.
The New School Embracing the Theory
With wealth inequality as their top priority, Democrats have embraced MMT the same way Keynesian theory was embraced in the 1930s as an economic cure for the depression or Monetarist theory was embraced to fix runaway inflation in the 1970s.
Stephanie Kelton, Professor of Public Policy and Economics at Stony Brook University and an MMT proponent who advised Bernie Sanders’ presidential campaign in 2016, acknowledges that, under the current system, the money to buy government bonds comes from deficit spending. That means that the money banks have to buy government debt comes from the issuance of that debt itself.
Kelton says, “That is why it is so crazy that we use the word ‘borrowing’ to describe what’s happening.” She explains, “If I borrow money from a bank, I don’t give the money to the bank and then ask them for a loan. But that’s how the federal government ‘borrows.’ It all follows from the failure to see the dollar as a simple public monopoly.”
In Kelton’s MMT world, interest on the debt the government would issue to pay for free everything would become a new expenditure in the budget, but that payment would be made by instructing the Federal Reserve to credit bondholders’ accounts.
In other words, the money to pay interest on the debt would be printed by the Fed. Presumably, since the U.S. owns its money, it can print as much of it as it wants. It can pay for whatever politicians running the government want to spend it on.
That fiscal stimulus, or so-called “free lunch,” is what’s supposed to pay for the Green New Deal, Medicare for all, college tuition, rebuilding roads and bridges, new schools, new hospitals, and guaranteed full employment.
What Kelton’s calls crazy, detractors agree with…just not in the same way.
Fed Chairman Jerome Powell called the idea that deficits don’t matter in countries with sovereign currencies “just wrong.” But he added there weren’t enough specifics to comment on the policy directly. “I haven’t really seen a carefully worked out description of what is meant by MMT,” he said.
BlackRock Inc. (BLK) Chief Executive Officer Larry Fink calls MMT “garbage,” while former New York Federal Reserve President Bill Dudley calls it a “crackpot theory” and blamed MMT-like policies for hyperinflation in Weimar Germany, Zimbabwe, and Venezuela.
Larry Summers, the former Treasury Secretary and liberal, called MMT “ludicrous,” “fallacious at multiple levels,” and a “recipe for disaster.”
Billionaire bond guru, Jeff Gundlach, founder of DoubleLine Capital LP, calls the whole idea “crazy.”
While the establishment wields plenty of ammunition to shoot down MMT, the bottom-line for its naysayers is it would eventually unleash uncontrollable inflation, to say nothing of upending capitalism.
MMT theorists don’t see inflation as an issue. They say there hasn’t been any in a couple of decades, there isn’t much now, and the Federal Reserve has been trying to engineer just 2% inflation and can’t.
According to MMT, if inflation rears its head, it can be bridled back by raising taxes or targeting “bottlenecks” where excess demand or supply constraints cause excessively rising prices.
Sounds easy enough, right?
Besides, President Donald Trump is arguably doing an MMT test run of sorts by blowing a nearly $1 trillion hole in the budget, unleashing a round of fiscal stimulus eight years into the economic expansion – ordinarily a time for the government to trim. And benchmark 10-year Treasury yields are just 2.64% (about average since the recession ended in June 2009).
The market expects inflation to run at less than 2% over the next decade, even with the national debt exceeding $22 trillion.
More importantly to the new crowd is that MMT is a way to shift gains from Wall Street to Main Street. The knock on the current system is that monetary stimulus with fiscal austerity doesn’t do anything except make the rich richer.
The growing MMT crowd sees the world running on continuous monetary stimulus, which, they say, feeds the inequality divide and justifies targeted fiscal policies necessary for a new political class.
The Problems of MMT in Practice
There are more than a few impediments to implementing MMT.
The first one, which is by itself a theory killer, is that the United States owns its money.
The Federal Reserve owns America’s money supply, all of it. So, the government can’t just “print” all the money it wants, it’s not the government’s money. That’s not a joke, that’s a fact. That’s partly what the Federal Reserve System got when Congress legislated it into existence in 1913.
At the heart of the discussion then is the independence of the Fed as well as its congressional mandates.
Currently, the Fed adjusts the monetary base to meet its objectives of price level stability and maximum employment. The Fed’s monetary policy operates independently of the Treasury’s financing needs.
Under an MMT framework, the Fed would explicitly finance the deficit, however big it becomes. But, to make MMT work, the Fed would have to become a branch of the government, eliminating its so-called “independence” entirely.
Giving control of the inflation priority over full employment, which is what guides the Fed, to MMT politicians, and making ministries responsible for supply and demand management in the whole economy is, frankly, frightening, especially considering how intractable inflation could become.
The solution to inflation, MMTers say, is to increase government control of economic activity.
As MMT theorists Scott Fullwiler, Rohan Grey, and Nathan Tankus put it, “the more actively we regulate big business for public purpose, the tighter the full employment we can achieve.”
They also advocate limiting consumers’ ability to borrow to buy specific goods and services if their prices are rising too quickly and proscribe “incomes policies” and “wage rules” to hold down inflation if needed.
A Socialist Manifesto
If MMT sounds like the headwaters of a command economy where the trickle-down part is determined by a socialist regime as opposed to a capitalist regime, as imperfect as ours is, you’re right.
It’s what the Democrats are pushing, though not honestly. It’s all they have to offer.
Instead of fixing what’s wrong with America’s capitalist democracy, which requires a lot of fixing, they would rather replace it with a system that requires a new political class, which is what they’re holding themselves out as, to operate and make America work again, for everyone.
It could happen, though it’s unlikely because Americans aren’t all fooled by the promise of free stuff from politicians.
But stranger things have happened, so think ahead.
If we look like we’re heading into MMT orthodoxy, buy gold and hard assets; investments that won’t depreciate in the face of runaway inflation.
That includes stocks. Own stocks, at least until the tax laws change and your profits are redistributed.
You’ve been warned.