Modern Monetary Theory: If you read only one post all year, this is the one (+3K Views)

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If you read only one…post all year, this is the one I want you to read. I think it’s that important [so please]…take some time to learn about Modern Monetary Theory.

…Modern Monetary Theory (MMT) is a macroeconomic theory that contends that:

• a country that operates with a sovereign currency has a degree of freedom in their fiscal and monetary policy which means government spending is never revenue constrained, but rather only limited by inflation.

…MMT’ers believe that government’s red ink is someone else’s black ink. Sure, the government owes dollars, but they have a monopoly of creating those dollars, and not only that, the creation of more and more dollars is essential to the functioning of the economy.

Here are the policy implications of accepting MMT:

• Governments cannot go bankrupt as long as it doesn’t borrow in another currency.
• Governments can issue more dollars through a simple keystroke in the ledger (much like the Fed did in the Great Financial Crisis).
• Governments can always make all payments.
• Governments can always afford to buy anything for sale.
• Government can always afford to get people jobs and pay wages.
• Government only faces two different kinds of limitations; political restraint and full employment (which causes inflation).
• Government can keep spending until they begin to crowd out the private sector and compete for resources.

[Indeed, according to] Professor Stephanie Kelton from Stony Brook University, it is immoral not to utilize this power to fix problems in our society.

…[The above] sure sounds like socialism…but MMT is not socialism – not by a long shot. MMT’ers don’t necessarily believe in taxing the wealthy and redistributing it to the poor…[although] they do believe the way conventional economics and politicians think about money is wrong.

I know it seems insane to think about the government as not having to worry about deficits and debts. It doesn’t seem to make sense…but here is another way to think about it. If you have an economy with underused capacity, having the government spend on infrastructure or other societal useful endeavors is actually raising the total GDP of the country…MMT’ers argue that by not spending now, we will be harming our productive capacity in the future. Ultimately it makes no sense to have economic capacity sitting fallow because of a self-imposed worry about paying back a debt that is denominated in an asset that only the government can create. But, but, but… won’t that create inflation? Yup! Darn right it will, and that’s the point. MMT’ers believe that inflation is the only true constraint a government faces…

Let’s step back and think about what’s happened in our economy since the Great Financial Crisis and then think about how MMT changes the equation…

• In 2007 it looked like we had hit the Minsky moment when no more debt could be balanced on the teetering edifice, and when the final piece of the Jenga puzzle was removed, it started to come tumbling down.
• At this point, private credit had entered into a deflationary self-reinforcing credit destruction loop which would have resulted in a cleansing reset of the entire system…[that] would have been extremely painful…
• It soon became clear that the government didn’t have the stomach to live through this sort of reset so they flooded the system with money through quantitative easing – much to the howls of protest from the economic and Wall Street elite who insisted this would cause inflation.
  • Much to almost everyone’s surprise, [however,] there was almost no inflation…There was plenty of financial asset inflation as all that new money pushed down interest rates and caused asset prices to lift, but the average worker saw little benefit from the Fed’s largess…

You might think these sorts of tax-cutting pro-business policies are the best thing for our economy…but the tide is shifting away from this belief… Society’s mood has changed and Stephanie Kelton’s concepts will continue to gain supporters…

The public has woken up to the fact that supply-side-trickle-down economics is not helping them anywhere near as much as promised [and that, in fact,] monetary stimulus with fiscal austerity doesn’t do anything except make the rich richer…MMT is a novel, ambitious, and a little bit scary, I get it, but young people aren’t afraid of trying something new. They know the system isn’t working and are desperately looking for an alternative. I think they found it in MMT…

What does this mean for your portfolio?

…I have lots of worries that under MMT inflation would quickly rise and before too long, the government would be forced to cut back it’s spending…Therefore:

• I would expect fixed-income to be a terrible investment under MMT. Even if the government pegs rates low, inflation will be the real risk. It would make little sense to sit in an asset that pays fixed.
• To me, MMT would scream that the best course would be to buy real productive assets hand over fist.

Ben Hunt had an interesting piece in his excellent blog Epsilon Theory titled, “Modern Monetary Theory or: How I Learned to Stop Worrying and Love the National Debt”. [Check it out!]

I will leave you with two quotes. One from Ben Hunt and one from Stephanie Kelton. They sum up the battle that will soon envelop the political and financial landscape.