International Forecaster Weekly

MMT the New Old Buzzword

Pay attention over the next year and a half and you’re going to see MMT become a main stream talking point.

Bob Rinear | March 6, 2019

One of the themes you’ll see recently is this push for acceptance of “MMT” or modern monetary theory. As we’ll see, this isn’t a new concept, it’s simply one that’s being given a lot of air time because our current politics have a lot of communist/socialists on board. Consider Bernie for example. He freely admits hes a socialist.

So just what the hell is MMT? Well that depends on whom you ask. But the most basic concept is that if a nation is using a fiat currency, it can “never’ run out of it, because it can print all it needs. Therefore, we should simply print all the money needed to provide such services as free medical to all, or free homes for the homeless.

What about the debts, you ask? According to MMT theorists the debts don’t matter because if the Government is doing the printing, we don’t owe it to anyone. When the bills come due, we can simply print some more. Now, before you go roll your eyes, this isn’t some Johnny come lately concept. Japan has been engaged in a form of it for 20+ years.

To understand what we’re going to be hearing a LOT about as we head into the 2020 elections, you’ve got to understand what these people believe. So let me steal a piece out of Vice:

Modern Monetary Theory, a school of economics that says our panic over government budget deficits is delusional, a misguided and atavistic remnant of the gold standard. MMT has become increasingly influential on the left, giving progressives like Myerson a reason to believe that a high price tag shouldn’t stop the US from instituting wide-ranging social reforms like Medicare for all.

Modern Monetary Theory’s basic principle seems blindingly obvious: Under a fiat currency system, a government can print as much money as it likes. As long as country can mobilize the necessary real resources of labor, machinery, and raw materials, it can provide public services. Our fear of deficits, according to MMT, comes from a profound misunderstanding of the nature of money.

Every five-year-old understands money. It’s what you give the nice lady before she hands you the ice cream cone—an object with intrinsic value that can be redeemed for goods or services. Through the lens of Modern Monetary Theory, however, a dollar is nothing but a liability issued by the US government, which promises to accept it back in payment of taxes. The dollar in your pocket represents a debt owed you by the federal government. Money isn’t a lump of gold but rather an IOU.

This mildly metaphysical distinction ends up having huge practical consequences. It means the federal government, unlike you and me, can’t run out of cash. It can run out of things money can buy—which will drive up their price and be manifest in inflation—but it can’t run out of money. As Sam Levey, a graduate student in economics who tweets under the name Deficit Owls told me, “Macy’s can’t run out of Macy’s gift certificates.”

This is the platform that AOC and Socialists like Bernie Sanders is running on. In fact it’s Stephanie Kelton who was Sanders financial chief when he was running for President, that’s recently been on Bloomberg and other channels preaching it.

So, is it pie in the sky? Or is it the Holy Grail? As I’ve said folks, this isn’t new. The idea of a nation printing up all the money it wants to pay debts and create economic activity is as old as the hills. It just has a new name. For instance I mentioned Japan earlier.

For years on end, some of the brightest people I’ve ever met, had said that when a nations debts to GDP approach 100%, it’s pretty much “lights out” and it’s going to implode. Well something happened along the way. Japan is running at 235% debt to GDP. Yet Japan still functions. They’re not in the depths of a murderous depression. They’ve still got citizens that pay 4000 dollars for a tuna loin, and a middle class that enjoys 10 dollar latte’s. What’s the deal, I thought they were supposed to implode? Didn’t they get the memo?

I’ve mentioned to you all many many times, that debts that cannot be paid, will not be paid. It’s simply impossible via “normal” means. But if you control your central bank, and you simply print money to cover the debts that are already there, you can go along like nothing is wrong. ( for a time, and yes that time still expires)

So, what’s the flaw here? Well let’s try and understand the theory a bit better. They ( MMT proponents) will tell you that any unemployment, or lack of living standards, is not a result of debts, but a result of not enough buyers of product. In essence, if we’re a consuming nation, it’s not that we have too many goods, it’s that not enough people have enough money to buy the goods. Hence, if we gave everyone a big shot of cash, they’d go spend it and the GDP would rise and everything would come up roses.

But the issue, and it’s been the issue since the dawn of time, is that eventually prices go hyperbolic. Inflation roars. For instance, let’s suppose that Uncle Sam decided right this minute to give every man, woman and child 25, 000 dollars. Yes they’d run out and spend it like mad. Certain items would be “sold out” almost instantly. Well, the replacement stock of those items would surely come with a higher price tag.

Or consider this. Say you own a service business, and you currently pay your employees 10 dollars an hour, and charge your customers 20. The 10 bucks you take in over the salary of the employee goes for insurance, rent utilities, postage, workers comp, etc. Now they jump you from 10 dollars an hour to 15 minimum. Can you still stay in business charging 20 to the customer? No. So your entire industry hikes prices to 25 dollars. Can they, or will they still buy your service? Some will, many “can not.”. Business closing’s come hand in hand with handouts such as this.

I’m not even considering the idea of trade, and what the results would be to the currency. That would be dramatic to say the least. What if you’re not one of the lucky nations that has its own central bank and you can’t print all the money you want? You’d be stuck. But again that’s a different subject. For now, let’s just keep it “at home.”

Every nation that has attempted to pull this off in any “major” way has experienced massive issues. From the Weimar Republic of the German 30’s, to Zimbabwe, or even our neighbors Argentina and Venezuela. Give the politicians a printing press, and there’s a 100% shot at hyper inflation.

Even Paul Krugman, himself a liberal-left economist, finds MMT lacking. "When people expect inflation, they become reluctant to hold cash, which drives prices up and means that the government has to print more money to extract a given amount of real resources, which means higher inflation, etc.," he wrote last month. "Do the math, and it becomes clear that any attempt to extract too much from seigniorage (printing money) — more than a few percent of GDP, probably — leads to an infinite upward spiral in inflation. In effect, the currency is destroyed."

It doesn’t surprise me at all, that MMT is gaining in popularity among the left. They want to run on free healthcare, a 15 dollar an hour minimum wage, and a host of other give-aways. The response has always been ‘How are you going to pay for it?” Well in their mind it’s simple, just print the money. They’re convinced that if things get inflationary, they can just slow the printing and hike taxes to reign things in. History shows us, that this doesn’t work.

But that said, I am NOT naïve enough to think they won’t try. They’ve got to try something, because again, in normal economic policy, we’re stretched to the limit. The debts are unpayable. They’ve either got to discharge the debts via a complete reset, or they’re going to try and adopt some form of MMT to keep us moving along.

Which once again brings me back to Japan. They have the highest debt to GDP level in the world. How are they still standing? By 1) keeping interest rates ridiculously low, thus keeping the debt burden manageable, 2) by taxing business at a fairly high rate, 3) import duties ( tariffs) etc. But guess what? Even the best and most liberal pundits suggest that by 2040, Japan defaults on everything.

Something’s coming our way folks. You all know that this happy game we’re playing with unpayable debts will end in some fashion. The choices are pretty slim as to how they play this. A debasement “reset” isn’t out of the question. A Zimbabwe type MMT that leads to hyper inflation isn’t out of the question. But eventually there’s going to be pain, one way or the other.

Pay attention over the next year and a half and you’re going to see MMT become a main stream talking point. Then, as the proponents of it explain how it’s going to be the savior of all, just keep asking in the back of your mind, “why would it work now, when it didn’t work in Rome, it didn’t work in Weimar Germany, it didn’t work in Zimbabwe, Argentina, or Venezuela, but it will work now?” It won’t, but they’re sure going to sell it to you.