Mauldin: Is Modern Monetary Theory Just Modern Monetary Madness?

MMT is a revival of an early 1900s idea called chartalism. Now it is influencing the thinking of new socialist-like movements in the U.S…and increasingly appearing in mainstream media like this sobering Financial Times article. Since it is increasingly discussed in more public venues, you should know more about it and that will be today’s topic.

More than 10 years ago some Australian readers begin regaling me with the ideas of economist Bill Mitchell of the University of Newcastle in New South Wales. He was teaching about something he called (and he coined the term) Modern Monetary Theory. I looked into it and fairly quickly dismissed it as silly. Actually printing money as an economic policy? Get serious.

[That being said,] economists advising major presidential and congressional candidates on the progressive and even “moderate” left are more and more openly talking about MMT and its practical applications.

Modern Monetary Theory – A Definition

Essentially, MMT espouses that:

• the public through the government owns the process of money creation,
• and that, in addition to borrowing and taxing, should simply issue currency as payment for its obligations.

This is not the sleight-of-hand that quantitative easing was. This is direct monetization in lieu of borrowing. If that sounds like printing money, that’s because it is. MMT is put forth as an up front and in-your-face serious economic proposal.

Most of the time when I am talking with my fellow writers and economists, when somebody mentions MMT, everybody smiles, maybe chuckles, and shakes their heads. The problem is, what seems like a joke is actually getting traction.

…[Below is] the official definition of MMT from Wikipedia. My comments are inserted in brackets.

In MMT:

• “vertical” money (money created by the government and spent in the private sector) enters circulation through government spending. 
• Taxation and its legal tender enable power to discharge debt and establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that must be met [and, thus, higher taxes create more demand for the currency and help to maintain the value thereof.]
• In addition, fines, fees and licenses create demand for the currency. An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value.
• Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government’s deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government’s activities by itself. [The more you want the government to spend, the higher the taxes have to be in order to keep from creating inflation, or so the theory goes.]
• Proponents argue that unemployment is caused by lack of demand and lack of demand is caused by insufficient money entering the private sector, a problem the government can solve by creating money and spending it in the private sector. Voilà, demand is created and unemployment goes down. Inflation? That can be controlled by higher taxes.

Hey, it’s their theory. Don’t ask me to explain it…

Can This Really Be a Thing?

…There are multiple and growing motivations and rationales for adopting MMT into your own philosophical base…Let me give you just a few scenarios…

Politicians are increasingly talking about “free stuff.” Free college, guaranteed basic income, more total healthcare paid for by the public, basic housing, and more. It is almost like there will be an auction to see who can promise the most free benefits, paid for by taxes on the rich. They will cite economic advisors who say it is completely doable and even necessary for the general welfare…[and] that means these ideas will be increasingly promoted in the public space. More politicians will argue for increased spending and/or at least different spending priorities…Over the next few years this will enter the national mindset. An increasingly large group of voters, especially younger voters, will feel a natural affinity with the idealism. Why shouldn’t a rich nation help those who are less advantaged?

…A recession will eventually occur, however, causing unemployment to rise and deficits to increase until we are on our way to a $30-trillion debt in just a few years. This will crowd out private investment, slowing whatever recovery there might be and making us vulnerable to a quick second recession, not unlike the recessions of 1980 and 1982 – but it will also produce the potential for a true “change” election. The frustration noted among Trump voters will still be there, but it will also be shared by many on the left who will see the promises as a way to change things. It is hard to argue in the middle of financial crisis and recession that we don’t need change…It is not far-fetched to imagine a White House and Congress beginning to work around the principles of MMT, if not adopt it outright with sharply higher taxes and spending.

Now here’s where it gets a little bit murkier. The Federal Reserve, even if a new president could pack the board with members philosophically attuned to a new president’s desire to increase public spending through monetary creation, does not have the legal authority to directly create money. That is a right reserved strictly for the federal government and specifically the US Treasury. The Treasury can issue all the debt into the private sector it wants. The Federal Reserve can then go into the private market and buy all the debt it wants, adding that debt to its balance sheet. This is called quantitative easing. It is technically not the same thing.

Congress has tried to create agencies which would use the Federal Reserve to directly create money. These agencies and methods have all been ruled overwhelmingly unconstitutional by the Supreme Court. For the Federal Reserve to create money as MMT advocates want, you would have to amend the Federal Reserve Act. Certainly a possibility, but not easy…

Editor’s Note: The above summary* of the original article has been edited ([ ]), restructured and abridged (…) by 34% for a faster – and much easier – read. (Please note that the previous sentence must be included in any article re-posting to avoid copyright infringement.)

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*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.