But when the Chair of the Federal Reserve gets asked a question about MMT, one cannot ignore the topic anymore. The idea behind MMT is getting more traction than it should today, the same way that ideas like dotcom and bitcoin did in previous years. In a similar fashion, investors who ignore MMT do so at their own peril.
What Is MMT and Why Should You Care?
The central proposition of MMT is that the U.S. Government should spend as much money as needed to provide employment to every willing worker, and that spending should be financed by running huge deficits financed by creating new money. The corollary to this proposition is that a central government in a fiat currency regime can never go broke because it can print enough money to pay for its obligations. Further, the MMTers don’t expect high rates or much inflation. But if the economy overheats, they recommend using taxes, as opposed to interest rates, to contain inflation.
In a nutshell, MMT is Keynesian economics carried to an extreme. It is the “nuclear” version of quantitative easing and deficit spending combined in one giant package. That is the primary reason why conservative economists are chuckling at the debate, and old school Keynesians are getting themselves worked up in a froth as they’re truly worried that the MMT discussion will get Keynesian economics reclassified as “voodoo economics.” Just go to Twitter and entertain yourself by reading the vitriol criticizing MMT by established mainstream luminaries such as Paul Krugman, Larry Summers, and Ken Rogoff.
An Economic Policy Panacea?
The problem with MMT, in my opinion, is that it is more of a political idea that is being sold as an economic policy panacea.
In the U.S. political debate, Progressives in the Democratic party are looking for a new policy platform (case in point: the Green New Deal). However, for a policy platform to be perceived as credible it needs lots of new-found money to finance the spending. Since there is no new money to be found, it might as well be printed. The result is MMT. In other words, MMT is the Progressives’ version of the Laffer Curve – an economic theory invented to justify the implementation of a political goal.
To be honest, I have some empathy for MMT proponents. There is academic support for the idea that at various points in a typical cycle, and even more so in the current atypical cycle where global deflationary pressures are paramount, the government can do a lot to revive an economy. Deficit spending is not a bad idea in and of itself. Similarly, when inflation is low and trending down, quantitative easing, in my view, can help the economy by re-anchoring inflation expectations. Unfortunately for MMTers, deficit-financed stimulus is precisely what the old-school Keynesians advocate for as well. So that in itself is not a new idea.
Potential Consequences of MMT
In addition, I would like to highlight the following:
First, in a global economy, MMT taken to an extreme, which it will be, can cause hyperinflation. While monetization of government debt may solve the debt problem (although even that is questionable), MMT ignores the fact that we live in an era of globalization and anyone counting on their savings to be repaid won’t hold U.S. currency if its value is being inflated away. The U.S. would largely look like Venezuela in this MMT scenario, with massive inflation eroding the value of domestic and foreign savings as a result of excessive government spending. In our efforts to solve the current deflationary problem, we may end up creating an even bigger problem.
Second, MMT effectively gives total control over the economy to the U.S. Congress. Congress would control both the fiscal policy and monetary policy, and would have a single mandate of full employment with not much concern for inflation most of the time. I don’t know about you, but I find that idea somewhat unappealing. Having an independent Fed in the mix of things has been a good outcome for the U.S. economy.
Third, the mechanism for the control of inflation in the MMT context is increased taxation rather than increased interest rates. For example, if inflation picks up, the government could increase taxes on gasoline and that, in turn, would cool the economy (and achieve a green objective at the same time). Again, I don’t know about you, but I am not comfortable with the idea of politicians raising taxes to contain inflation.
Finally, there are numerous theoretical issues with MMT with respect to over-investment (as rates will be zero), private capital formation (who needs savings when the government will be there to help you all the time), economic incentives, and more.
But you get the general idea. MMT is about taking a good idea – Keynesian Economics – to an extreme, and into totally uncharted areas with huge potential consequences for the U.S. and global economy.
Unfortunately, the idea is getting traction in the current political and economic environment. Old Democratic Keynesians like Summers and Krugman have good reason to fear as it may end up costing the party an election or worse.
The bottom line: I hope and believe that the time for MMT will never come and the political idea will die a natural death during the primary process for the 2020 elections. But that needs careful watching as MMT has deep investing implications. Even if MMT never gets implemented (implementation, of course, would be catastrophic), substantial support from an ascendant progressive wing of the Democratic party alone could have a meaningful impact on the economy and markets.
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