Why Is It Important?
If you have not heard of the Modern Monetary Theory, or MMT, you will very soon. In response to the economic impact of the coronavirus pandemic, Congress passed a $2.2 Trillion stimulus package. Large amounts of cash were transferred to people by both direct stimulus funds and an extra $600 in additional unemployment checks. Some would say MMT-lite has arrived.
MMT is an unorthodox macroeconomic theory that says countries that have their own currency (think U.S., U.K., Japan, and Canada) do not need taxes or borrowing for spending. They are monopoly issuers of their currency and can print as much as they want.
MMT challenges conventional thinking about government interactions with the economy – the nature of money (medium of exchange, store of value and unit of account), the use of taxes and the importance of budget deficits. Supporters of MMT say these beliefs – old school and left over from the gold standard – are no longer accurate or necessary.
MMT, used in policy debates, argues for more progressive legislation for universal healthcare, free college education, the Green New Deal, and a “jobs guarantee” that provides government-funded jobs to anyone who wants or needs one, in addition to other expensive public programs governments claim they cannot afford.
The core principle of MMT is that governments with a fiat (government issued) currency system can and should print – or create with a few keystrokes in our digital age – however much money they need to spend because they cannot go broke or be insolvent unless a political decision is dictated. Traditional economic thinking would find this abhorrent as such spending would be fiscally irresponsible as debt and inflation would skyrocket.
But MMT believes a large government debt would not lead to a collapse, which is conventional thinking. These theorists explain that the national debt (total debt or unpaid borrowings of the U.S. federal government) is money the government put into the economy and did not tax back. Another argument is around the comparison a government’s budgets are to an average household or business – the ability to spend means you have to have the money first. MMT says this comparison is a mistake.
MMT enthusiasts do acknowledge that inflation may “in theory” be an outcome from this type of spending; but, it is highly unlikely and can be fought with future policy decisions if required. Japan is often cited as an example. Their general government gross debt is much higher than the U.S. – about 236% of GDP vs 108% of GDP.
According to MMT, the only limit a government has concerning spending is the availability of real resources – labor, commodities, factories, etc. When government spending overwhelms the resources available, inflation can surge if decision makers are not careful – think Germany, Venezuela, Argentina, for example.
The conventional thought on taxation revolves around the idea that taxes primarily provide the government with money to spend to fund social welfare programs, infrastructure building, etc. MMT says taxes create an ongoing demand for currency and are a tool to take money out of an overheated economy. In other words, instead of controlling inflation through interest rates, as the Federal Reserve (FED) does today, MMT would raise and lower taxes (which we currently do about every decade). Bye, bye Internal Revenue Service!
MMT is not a proponent of the government selling bonds to borrow money – they can create money on their own. The government sells bonds to drain (increase interest rates) excess reserves (money held by banks and financial institutions) to keep interest rates within or at their target. MMT says bonds are “savings accounts at the FED”, not a requirement for the government but a policy choice.
According to MMT, unemployment results from a government spending too little while collecting taxes. The theory advocates, for those looking for work and unable to find a private-sector job, should be entitled to minimum-wage, transition jobs funded by the government and local community managed. This labor would act as a buffer to help control inflation in the economy.
So, to conclude this short explanation of MMT, profound changes may be taking place. If all the money being printed now does not eventually lead to inflation, the word inflation might as well be eliminated from the dictionary. The chorus will grow louder for more MMT to be implemented. The only way to stop MMT is a resurgence of inflation. Just remember those immortal words – “there is no such thing as a free lunch”!
Market Commentary:
Volatility is back! This half-year in the markets has been anything but dull. Long dated bonds have done well due to interest rates declining. Stocks, during the first quarter entered a bear market. Even though the second quarter saw the market come back strongly, the S&P 500 with dividends is down -3.08%. The rise in the stock market points to FED liquidity, about 6 stocks driving the averages, and a new phenomenon. Former sports and gaming bettors have opened large numbers of accounts at a brokerage firm called Robinhood. They are speculating wildly on stocks that have no fundamentals (for example, Hertz is going bankrupt). If history is our guide, these things end badly for the speculators. We will continue to watch the fundamentals of the economy and companies. They have been impacted greatly by the coronavirus and the economic shutdown. We will continue to be patient, and we will continue to keep some cash reserves while waiting for clarity on company earnings and economic activity. We are optimistic this will lead to better valuations and better investment entry points.
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