MMT: The Cure More Dangerous Than The Disease?

Watch this:

It’s called obligate siblicide.

That’s pretty screwed up.

You know what else’s screwed up?

The largest economy in the world and bearer of what is still the world’s reserve currency has an ever increasing debt pile, which looks close to toppling over.

Now, I’ll take this opportunity to point out that the US’ problem isn’t unique. In fact, compared to the pointy shoes running the ship that is the EU, the situation in the US is rather peachy.

As it turns out, if you borrow and spend like a drunken sailor without increasing your income level, you reach a point where your interest expense overwhelms your income level.

And according to the Budget Office themselves that’s going to happen within just 5 short years.

Now, none of this will matter if we have ZIRP or NIRP.

Both provide a perpetual money flow with no consequences. It’s the well without a bottom, the holy grail, the elixir of life.

What exactly happens if your balance sheet expands into infinity with the cost of capital pegged at zero?

I have my own thoughts, but before that…

What if the cost of capital is negative?

Does that mean that the very concept of savings and liabilities roles are reversed? Isn’t a credit a credit and a debit a bloody debit? Well, not really when there are no repercussions to adding debt.

This is clearly all a bit of a head scratcher, and the fact is nobody knows where we’re going, which is why it’s fascinating to me that we’re seeing a lot of discussions around Modern Monetary Theory (MMT).

MMT reminds me of the Nazca booby above with its desperate desire to stay alive. In the case of MMT it’s an attempt to keep a debt-fueled global monetary system from collapsing on itself like a cheap tent.

Now, when I first heard about MMT I did think to myself, “This sounds as crazy as Aunt Hilda we lock under the stairs.” But I’d ask you to find me a fund manager who 20 years ago wouldn’t have said the same about QE, ZIRP, or NIRP.

Now, Aunt Hilda’s terrible habit of trying to eat the drapes clearly shows us she’s as mad as a meat-axe. But, like QE, ZIRP and NIRP, she’s still around, alive and kicking. Who woulda thought?

And so though MMT looks frighteningly like Aunt Hilda — only madder — we should try figure out exactly what it is and, more importantly, what its implementation would mean should it take place. Because don’t look now, but it’s getting some attention amongst the policy elite.

It’s easy to understand why. For folks like Bernie Sanders and that comedian Cortez, who want to give everyone everything for free, it promises them that this is indeed possible.

Firstly, they can point to the fact that the Fed created a truckload of money and look it didn’t lead to inflation.

When I set out to discuss MMT I actually didn’t think it worth talking about MMT itself. There is plenty information out there about it and it’s quite complex, certainly more complex than I can explain in a few paragraphs for you here.

With that caveat in place, I’ll try summarise the thinking.

MMT advocates argue that the government should use fiscal policy to achieve full employment, creating new money to fund government purchases. The primary risk, once the economy reaches full employment, is inflation, which can be addressed by raising taxes and issuing bonds to remove excess money from the system.

In practicality this means that deficits don’t matter.

Certainly, if we look at the Western world today, they don’t. Or at least they haven’t mattered. Not yet, at least.

The problem I have with this is that it requires confidence in holders of the paper. We’ve plenty examples of how — when confidence erodes — citizens will dump the paper, and then the next thing you know you’re scavenging for toilet paper because it’s in short supply and costs a month’s wage.

But I want to take a step back and instead of debating the pros and cons of MMT ask ourselves the question, “Why is it that this is now being discussed at a policy level? Why is it that it’s suddenly becoming more mainstream? Why not 10 or 20 years ago?”

The Carrot and the Stick

You know what I think? I think governments have looked around at the world today and having witnessed central banks increasing money supply since the GFC out the whazoo into “holy mother of Mary” territory and yet they’ve been unable to create inflation.

This is being used as evidence that the government can indeed just print money and it won’t lead to hyperinflation.

And now they’ve tried NIRP and ZIRP and gotten away with it. Look, we’re in 2019, over a decade since the GFC, and looky here… nothing has blown up.

Those are the carrots.

The stick?

This I explained at the beginning of this article. The US and indeed much of the Western world is fast approaching the seemingly impossible situation where the interest bill on debts accumulated are greater than the revenues generated needed to pay that bill.

The Conundrum

The above is a conundrum for sure, but there is another.

The Fed needs to raise rates to help address the issue that pension funds are going to implode.

With rates so low no pension funds can meet obligations and that’s a fairly massive issue if you’re an elected official trying to keep your head. It’s one reason to believe that rates must be raised… and fast.

The problem with this is obvious as mud.

Raise rates and the budget explodes. But fail to raise rates and pension funds implode. Now, you could say, “Ah well, let the pension funds implode. It’s just the old crusties who’ll get it.” But realise that when pension funds implode and you’ve fertile grounds for social unrest.

Hmmm….

What Now?

The above problems and the MMT “solution” is why I think it’s even being considered.

Remember, it’s easy to point fingers at central bankers, and they’ve certainly their share of blame that is well deserved.

But remember they simply create money. And while it’s been in the “oh sh!t, really?” realm it’s nothing compared to the debt created by governments.

That’s the big kahuna, and this is what is interesting about MMT.

You see, unless I’m reading this all wrong, MMT allows governments a veil of economic legitimacy. “Look see, this isn’t just us saying this. We’ve academics, scholars,… You know, people with letters and thousand dollar suits who say it’s legit.”

What I do know is that we’re fast approaching a “something must be done” question, and we’ve reports that the Donald’s response to the impending debt crisis hitting after his second term in office was, “Well, I won’t be here.”

Now, I don’t know if that’s true or not but it’s certainly been true of every president and entire cabinet before him. And really, what the hell are they supposed to do? Cancel all the entitlement programs that everyone now expects and fire most of the government. Nope, not gonna happen!

And so it’s entirely plausible that sometime between now and 2024 these podium donuts all sit down and Trump in characteristic fashion says, “Lock and load, folks. Let’s waste the motherf***er! It’s MMT time!”

I know what I’m going to keep doing with my money, but I’m genuinely curious what those who’ve thought about this are thinking.

Let me know in the comments below.

-Chris

“The only free cheese is in the mousetrap.” Russian proverb

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