Modern Monetary Tomfoolery

There’s a great scene in the movie “Too Big to Fail” where the powers that be are staring financial Armageddon in the face.

Lehman Brothers had just failed… Which created a loss of faith in the financial system and sparked a run on capital at investment banks. Markets around the world were freezing up.

With nowhere else to turn, Treasury Secretary Hank Paulson goes to Congress to basically ask for a taxpayer bailout. 

The question back then was how much to ask for? They knew the number had to be really big. It had to make a statement and reassure financial markets around the world. But they also knew that it would be an extremely hard sell. 

What was the final tally?

$700 billion. 

Now don’t get me wrong… $700 billion is a lot of money. But today, when the Federal Reserve is printing and adding TRILLIONS to its balance sheet in record time, that number seems like chump change.

In a span of just over 10 years our tolerance (and appetite even) for deficit spending has grown exponentially. Ordinarily this would be a problem in any normal economy. Fortunately the U.S. has a secret weapon to justify all that spending?

Today we’re taking a look at the not-so-new (but definitely under the radar) economic theory known as Modern Monetary Theory (MMT)…

MMT: Free Prosperity for Everyone

One of the chief proponents of MMT is economist Stephanie Kelton. One of her official bios says: “She served as chief economist on the US Senate Budget Committee in 2015 and as a senior economic adviser to Bernie Sanders’ 2016 and 2020 presidential campaigns.” 

That should tell you a thing or two from the get-go…

Anyway, the basic tenets of MMT go like this:

First, deficits don’t matter — for a couple reasons. 

According to MMT proponents, government balance sheets aren’t like a family’s. When you spend more money than you earn and save eventually you go broke. Not so with governments. 

That’s because any sovereign country (one that controls its own currency) can never go broke… because it can always print its own currency to pay its debts. (To be fair, you could do that but then you’d be arrested for counterfeiting.)

Plus, they say, deficit spending is the only way to drive growth. 

MMTers actually believe deficit spending by the government is a good thing because the government’s deficit is someone else’s surplus.

The second point is that the bond market (the way our government borrows money to finance its deficits) is basically unnecessary. 

Bonds only provide a place for people to safely invest their money. (How they’d determine yields is a mystery to me.)

Instead, MMT would propose merging the Federal Reserve with the Treasury department so the Fed can print and the Treasury can target where the money goes. 

Nevermind that the Treasury is part of the executive branch reporting to the president and the Fed isn’t even a part of the government. We’ll just cut out the middleman…

Finally, while the bond market is unnecessary, TAXES are totally necessary — for three reasons.

First you need to have taxes to make your currency relevant. In other words, U.S. dollars are necessary because you have to pay your taxes on dollars. So you’re basically a captive of your country’s currency. 

Second, in the rare event that the economy should overheat (due to all the rampant surpluses the government is doling out) and inflation starts ramping up, taxes are a means to drain liquidity out of the system to cool the economy. (Why anyone thinks it’s a good idea to raise taxes on folks as their cost of living is skyrocketing is beyond me!) 

Finally (and this may be the most important reason), taxes are a means to redistribute wealth. 

Dollars (or any currency for that matter) are supposed to be a means of exchange. More importantly, solid currencies are units of account (economic yardsticks) and stores of value. MMT basically detaches the dollar from any sense of productive value (essentially making it worthless).  

Today the Fed is regularly doing what it considered unthinkable only a decade ago. And what’s even more unnerving is that Wall Street and the media talk about it like it’s perfectly normal.

The concept of MMT is essentially where we are headed right now. Although no one in Washington is willing to say it out loud.

The BIG Problem with All This…

The problem with this theory is the same problem that has plagued any nation since the dawn of civilization that has debased its currency…

You end up going broke.

And what’s worse — you never realize it. 

It’s like feeling fine and then going to the doctor for a cough only to find you have stage four lung cancer.

By the time the symptoms start showing, it’ll be too late to fix.