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Book Review: The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy

In January, the Congressional Budget Office (CBO) released its Budget and Economic outlook for 2020 to 2030. It is horrific reading. Federal budget deficits are projected to rise from $1.0 trillion this year to $1.3 trillion over the next 10 years.

Federal debt will rise to 98% of GDP by 2030, “its highest percentage since 1946,” the CBO says. “By 2050, debt would be 180% of GDP—far higher than it has ever been.” And that was before Covid-19 hit. Now those numbers will be much, much worse.

On top of this, politicians have been announcing grand schemes for further spending: $47 billion on free college tuition, $1 trillion for new infrastructure, $1.4 trillion to write off student loan debt, at least $7 trillion on the Green New Deal and $32 trillion on Medicare for All. By one estimate, these new proposals total an estimated $42.5 trillion over the next decade.

Adding these new spending proposals to the flood of red ink the CBO projects just from following the current path, the federal government is set to face a serious fiscal crisis in the not-too-distant future.

KEEP PRINTING

Or, perhaps not. There is an idea afoot in economics that, as Bernie Sanders’ former economic advisor Stephanie Kelton argues in her new book The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, could revolutionize the field in the same way that Copernicus did to astronomy by showing that the earth orbited the sun.

Modern Monetary Theory (MMT) states that “in almost all instances federal deficits are good for the economy. They are necessary.” That being so, we don’t have to worry about this coming deluge of red ink, indeed:

…click on the above link to read the rest of the article…

Blain’s Morning Porridge – 21st August 2020 – John Law’s MMT revisited

 

Blain’s Morning Porridge – 21st August 2020 – John Law’s MMT revisited

“Earlier today apparently a woman rang the BBC and said she had heard that there was a hurricane on the way. Well if you are watching, don’t worry, there isn’t.”

It’s blowing a full hooley out there this morning, which is very bad news for my olive trees as the storm is shaking the ripening fruit off. Shame. It’s the first time our little olive grove has produced what looked likely to become full-sized olives. I was going to add them to Dirty Martinis. Meanwhile, mink farms are being wiped out by coronavirus which is proving 100% fatal to the well-dressed ferrets. Interesting, but what does it mean…?

It’s Friday, which means I am allowed to go off on something of a tangent – so let’s not worry about how long this tech rally continues, the rising tensions in Europe, Apple spending $17bln on stock buybacks, China vs US, or the US election.

What’s got me worried this morning is the headline in the FT: UK Public Debt tops £2 trillion for first time on Covid Spending Boom.

Should we worry or should we not? (Clue: the first one…)

Let me ask the question: how long can governments continue to spend their way out of the Coronavirus crisis? The bills for long-term furlough programmes and sectoral bailouts and support, increased social services as unemployment rises, and the urgent need for health spending are going to come due at some point. Is it going to be a problem, and if yes, how big?

Government debt is rocketing higher – but does it matter? Conventional thinking, based on Reinhart and Rogoff, is when debt/GDP exceeds 77% there will a significant slowdown in growth.

…click on the above link to read the rest of the article…

US Facing Mounting Debt Amid Global Pandemic – ABC

US Facing Mounting Debt Amid Global Pandemic – ABC

Good interview with Professor Barry Eichengreen of UC Berkeley, a good friend of GMM, and odds on favorite to be a Nobel laureate one day.   We agree with him that now is not the time to worry about the public debt as we are already down this rabbit hole and the economy is on the verge of complete implosion, risking plunging our society into anarchy without another rescue package.

We also hate what we see: large well-capitalized corporations and entities getting PPP loans, which will be forgiven, some dead beats using their PPP loans to buy Teslas, trade stocks, and gamble in Las Vegas, not to mention the lack of planning and total incompetence of the policymakers.    He quotes Voltaire’s famous exhortation,  used many times here at the Global Macro Monitor,  “do not let the perfect be the enemy of the good.”

Voltaire

No MMT Discussion? 

Did you also notice not one peep about the Fed buying up all the Treasury debt and effectively monetizing the deficit…err MMT…and supporting other debt markets?

We heard some bozo on CNBC today saying the Treasury is having no problem floating its debt to the market.  Are. You. Fricking. Kidding. Me?  What market?

Nobody really knows for certain,  but our priors are if the U.S. Treasury was completely dependent on the markets to finance itself – that is no central bank (Fed and foreign) buying of its marketable debt — the 10-year yield would be well north of 6 percent, and that is very generous, in our opinion.

Do Your Homework

Folks, do your homework.   Granted, it’s impossible to completely grasp all the intricacies of the global economy and markets with their infinite feedback loops, and futile to even try,  but at least try and grasp the basics.

…click on the above link to read the rest of the article…

Will MMT Trigger the Collapse of “Money”?

Will MMT Trigger the Collapse of "Money"?

Will MMT Trigger the Collapse of “Money”?

If the supply of money in an economy is $1 billion, each unit of currency buys X (the purchasing power of each unit of currency).

If the money supply is doubled without any expansion in the consumers’ pool of goods and services, the purchasing power of each unit of currency falls in half. This reduction in the purchasing power of each unit of currency is called inflation.

Governments facing soaring demands and limited tax revenues are naturally tempted to meet these demands with “free” new currency, since the political and financial pain caused by skyrocketing taxes leads to governments being tossed from power.

This temptation explains the regular occurrence of hyperinflation and debt default, as the temptation to over-borrow and pile up interest payments leads to governments defaulting on their debt. In both cases — hyperinflation and debt default — there’s a currency/ governance/ financial crisis that upends the status quo.

This is one common objection to MMT: the freedom to issue new currency is difficult to limit, as there will always be more demands for government spending. Without some “governor” to limit the issuance of new currency to align with the expansion of goods and services, then governments tend to issue new currency far in excess of what the real economy is creating.

This generates inflation, which impoverishes everyone using the currency.

MMT advocates claim that since MMT generates goods and services, it won’t generate inflation. But rebuilding a bridge doesn’t actually create any new goods and services, or increase productivity: it generates wages and consumes materials and energy.

Since it doesn’t generate more consumable goods and services, the expansion of wages and demand for materials will drive prices higher.

 …click on the above link to read the rest of the article…

What the Hell is the ECB Doing?

What the Hell is the ECB Doing?

Danielle DiMartino poses an interesting question regarding the ECB. I have a set of answers.

What is the ECB Doing?

I started thinking about that question weeks ago.

I have a set of answers and even started writing this post before DiMartino brought it to the forefront.

There are only two answers. One of them is very unsettling.

  1. Ignorance
  2. On Purpose

Occam’s Razor

Occam’s razor is a principle from philosophy. Suppose there exists two explanations for an occurrence. In this case the one that requires the least amount of assumptions is usually correct. Another way of saying it is that the more assumptions you have to make, the more unlikely an explanation.

Occam’s Razor typically eliminates most conspiracy theories. It’s not that conspiracies don’t happen, but that simpler solutions are far more likely.

My corollary to the theory is very easy to understand: If stupidity is one of the possible answers, it is the most likely answer.

I am a normally a big fan of Occam’s Razor.

But this is so bizarre that I have my doubts.

Importantly, this may not be a conspiracy at all. Mario Draghi can easily be acting alone.

My Lead Question

How stupid can things get before one starts believing something else is in play?

I had already been thinking about that question when not only did ECB president Mario Draghi further push interest rates into negative territory but he also said it was a good idea for the ECB to think about MMT.

Shocking ECB Dissent

Dissent at the Fed happens all the time. It is rare at the ECB. The ECB builds a consensus and it is typically unanimous.

 …click on the above link to read the rest of the article…

Debasing the Baseless–Modern Monetary Theory

DEBASING THE BASELESS – MODERN MONETARY THEORY

  • Populist politicians are turning to Modern Monetary Theory
  • Fiscal stimulus has not led to significant inflation during the last decade
  • MMT is too radical to be adopted in full but the allure of fiscal expansion is great
  • Asset markets will benefit over the medium-term

A recent post from the Peterson Institute – Further Thinking on the Costs and Benefits of Deficits – follows on from the Presidential Lecture given by Olivier Blanchard at the annual gathering of the American Economic Association (AEA) Public Debt and Low Interest Rates. The article discusses a number of issues which are linked to Blanchard’s speech: –

  1. Is the political system so biased towards deficit increases that economists have a responsibility to overemphasize the cost of deficits?
  2. Do the changing economics of deficits mean that anything goes and we do not need to pay attention to fiscal constraints, as some have inferred from modern monetary theory (MMT)?
  3. You advocate doing no harm, but is that enough to stabilize the debt at a reasonable level?
  4. Isn’t action on the deficit urgent in order to reduce the risk of a fiscal crisis?
  5. Do you think anything about fiscal policy is urgent?

Their answers are 1. Sometimes, although they question whether it is the role of economists to lean against the political wind. 2. No, which is a relief to those of a more puritanical disposition towards debt. The authors’ argument, however, omits any discussion of the function of interest rates in an unfettered market, to act as a signal about the merit of an investment. When interest rates are manipulated, malinvestment flourishes. They propose: –

 …click on the above link to read the rest of the article…

Not Modern, Not About Money, and Not Really Much of a Theory

NOT MODERN, NOT ABOUT MONEY, AND NOT REALLY MUCH OF A THEORY

“Ignoring MMT’s rising popularity would be about as smart (and effective) as a dog barking at the waves in the ocean.”
–KEVIN MUIR, author of the avant garde financial newsletter, The Macro Tourist

“I believe that all good things taken to an extreme become self-destructive and that everything must evolve or die. This is now true for capitalism.”
–RAY DALIO, founder of hedge fund behemoth, Bridgewater Associates

______________________________________________________________________________________________________

INTRODUCTION

The final lap. It’s hard to believe that as recently as February, when I first brought up the concept of a new economic model that was poised to radically alter the world we’re living in, MMT was as obscure as an extra in an old Cecil B. DeMille bible film. Yet, a mere two months later, you have to try extremely hard to ignore Modern Monetary Theory and its swelling number of disciples.

Perhaps at this point, some of you who have read the three previous installments of our month-long series on MMT wish I’d never brought it your attention. You might even think it’s such a zany idea that it will never see the light of day. If so, you could be right—but I doubt it.

Prior issues of this series have made the point that ultra-low and, even, negative interest rates have led to a boom in asset prices at the expense of the real economy. This has created the most lop-sided income distortion since 1929.

Source: Grant Williams, TTMYGH (2/10/2019)

Even after 10 years of a long and sluggish expansion—which happily has driven unemployment down to 50-year lows–there is an unmistakable whiff of outrage in the air. The non-1% or, perhaps more accurately, the non-5%, are coming to believe they’ve been stiffed by the reality revealed in the above chart.

 …click on the above link to read the rest of the article…

Lacy Hunt Blasts MMT and Speaks of Hyperinflation If Implemented

Lacy Hunt Blasts MMT and Speaks of Hyperinflation If Implemented

In the Hoisington First Quarter Review, Lacy Hunt blasts MMT as “self-perpetuating” inflation.

Please consider the Hoisington Investment Quarterly Outlook for the first quarter of 2019.

MMT Leads to Hyperinflation

Under existing statutes, Fed liabilities, which they can create without limits, are not permitted to be used to pay U.S. government expenditures. As such, the Fed’s liabilities are not legal tender. They can only purchase a limited class of assets, such as U.S. Treasury and federal agency securities, from the banks, who in turn hold the proceeds from this sale in a reserve account at one of the Federal Reserve banks. There is currently, however, a real live proposal to make the Fed’s liabilities legal tender so that the Fed can directly fund the expenditures of the federal government – this is MMT – and it would require a change in law, i.e. a rewrite of the Federal Reserve Act.

This is not a theoretical exercise. Harvard Professor Kenneth Rogoff, writing in ProjectSyndicate.org (March 4, 2019), states “A number of leading U.S. progressives, who may well be in power after the 2020 elections, advocate using the Fed’s balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates.” How would MMT be implemented and what would be the economic implications? The process would be something like this: The Treasury would issue zero maturity and zero interest rate liabilities to the Fed, who in turn, would increase the Treasury’s balances at the Federal Reserve Banks. The Treasury, in turn, could spend these deposits directly to pay for programs, personnel, etc. Thus, the Fed, which is part of the government, would be funding its parent with a worthless IOU.

 …click on the above link to read the rest of the article…

MMT Is a Recipe for Revolution

MMT Is a Recipe for Revolution

Historian Stephen Mihm recently argued that based on his reading of the monetary system of colonial Massachusetts, modern monetary theory (MMT), which he cheekily referred to as PMT (Puritan monetary theory), “worked — up to a point.”

One can forgive him for misunderstanding America’s colonial monetary system, which was so much more complex than our current arrangements that scholars are still fighting over some basic details.

Clearly, though, America’s colonial monetary experience exposes the fallacy at the heart of MMT (which might be better called postmodern monetary theory): the best monetary policy for the government is not necessarily the best monetary policy for the economy. As Samuel Sewall noted in his diary, “I was at the making of the first Bills of Credit in the year 1690: they were not Made for want of Money, but for want of Money in the Treasury.”

While true that colonial governments controlled the money supply by directly issuing (or lendin)  and then retiring pieces of paper, their macroeconomic track record was abysmal, except when they carefully obeyed the market signals created by sterling exchange rates and the price of gold and silver in terms of paper money.

MMT in the colonial period often led to periods of ruinous inflation and, less well-understood, revolution-inducing deflation.

South Carolina and New England were the poster colonies for inflation, in part because they bore the brunt of colonial wars against their rival Spanish and French empires. Relative peace and following market signals eventually stabilized prices in South Carolina. 

In New England, however, Rhode Island for decades was able to act as a “money pump” that forced inflation on other New England colonies until they abandoned MMT entirely in the early 1750s.

 …click on the above link to read the rest of the article…

The Real Problem With Modern Monetary Theory

The Real Problem With Modern Monetary Theory

The Real Problem With Modern Monetary Theory

MMT supporters will point to 2008 and say, “Just look at QE. In 2008, the Federal Reserve Balance sheet was $800 billion. But as a result of QE1, QE2, and QE3, that number went to $4.5 trillion. And the world didn’t end. To the contrary, the stock market went on a huge bull run.We did not have an economic crash. And again, inflation was muted.”

Fed chairman Jay Powell has criticized MMT, for example. But its advocates say Powell and other Fed officials hoist themselves on their own petard. That’s because they are the ones who actually proved that MMT works. They point to the fact that the Fed printed close to $4 trillion and nothing bad happened. So it should go ahead and print another $4 trillion.

This is one of the great ironies of the debate. The Fed criticizes MMT, but it was its very own money creation after 2008 that MMT advocates point to as proof that it works.

Their only quibble is that the benefit of all that money creation went to rich investors, the major banks and corporations. The rich simply got richer. MMT advocates say it will simply redirect the money towards the poor, students, everyday Americans, people who need healthcare and childcare. It would basically be QE for the people, instead of the rich.

And it will go into the real economy, where it will boost productivity and finally give us significant growth.

When I first encountered these arguments, I knew they weren’t right. Both my gut feeling and my more rigorous approach to my own theory of money told me MMT was wrong. But I must admit, their arguments were more difficult to answer than I expected. I had a tough time uncovering the logical flaws.

 …click on the above link to read the rest of the article…

A Major Bank Capitulates: “This May Be The Time For Helicopter Money Drops”

A Major Bank Capitulates: “This May Be The Time For Helicopter Money Drops”

Long before the Fed was humiliated into reversing its hawkish rate hike policy in January and then again in March, we published – back in June 2015 – “The Blindingly Simple Reason Why The Fed Is About To Engage In Policy Error“, in which we predicted, correctly, that the neutral rate of interest is far too low to allow a lengthy tightening campaign by the Federal Reserve, as the real Fed Funds rate would promptly rise above the neutral rate, further depressing demand, resulting in a policy error.

More importantly, instead of some arcane calculation of the infamous, convoluted r-star (or neutral rate of interest) we said that one might argue for low “implied” equilibrium short rates via debt ratios. For example, if nominal growth is 3 percent and the debt GDP ratio is 300 percent, the implied equilibrium nominal rates is around 1 percent. This is because at 1% rates, 100% of GDP growth is necessary to service interest costs.

So to help the Fed and pundits calculate just where r star is in an economy where total debt/GDP is 350% and rising, and where GDP is 2% and falling, we presented – all the way back in 2015 – a sensitivity table which looks at just two simple variables: nominal growth, or GDP, and total debt/GDP. Assuming the current leverage of the US and assuming 2% in nominal growth, the short-run equilibrium real interest rate is just about 0.57%, something which the Fed now appears to have discovered on its own. 

%.

As an aside, we also said that such a policy error could reinforce itself by causing structural damage that puts additional downward pressure on the equilibrium real rate adding that “in this case the yield curve would flatten meaningfully, at least until the Fed actually reversed course by cutting rates.” This is precisely what happened.

 …click on the above link to read the rest of the article…

Exposing the Myth of MMT

Exposing the Myth of MMT

Exposing the Myth of MMT

Yesterday I discussed modern monetary theory (MMT) and how it’s become very popular in Democratic circles.

That’s because it allows for much greater government spending without having to raise everyone’s taxes. And everyday citizens could get behind it because it promises to fund lots of programs without seeing their taxes raised.

What’s not to like?

If MMT were just a fringe idea with a few fringe followers, I wouldn’t waste my time or your time on it. But it’s coming your way, so it is important to understand it.

If you missed yesterday’s reckoning, go here for a refresher.

The people who are thinking about MMT, who understand it at least in some superficial way, are the people who are driving the policy debate or running for president.

Many mainstream economists and money managers have attacked MMT, including Fed Chairman Jay Powell, Larry Summers, Paul Krugman, Kenneth Rogoff, Larry Fink, Jeff Gundlach, Jamie Dimon and Ray Dalio.

But much of their criticism is unjustified (see below for more). I’m an opponent of MMT — but for different reasons. As far as I know, I’m the only analyst who’s raised the objections I list below.

Today, I’m going to show you what I believe to be the real problem with MMT.

Again, it’s easy to see why so many politicians on the Democratic side would be such big supporters of MMT.

Some or all of them have come out in support of the following programs:

Free college tuition, student loan forgiveness, Medicare for all, free child care, universal basic income (UBI) and a Green New Deal. Some support them all.

Needless to say, that’s going to cost a lot of money. Just consider the Green New Deal alone.

 …click on the above link to read the rest of the article…

Federal Borrowing Crosses the Rubicon

Federal Borrowing Crosses the Rubicon

A year ago, Republicans in control of Congress suspended the cap on federal borrowing. The limit was automatically re-imposed on March 1st. Politicians now have a few months to hammer out legislation to raise the cap as the Treasury employs “extraordinary measures” to fend off default.

The federal deficit is mushrooming once again. The 2017 tax cuts have taken a bite out of receipts at the IRS and economic growth has not met expectations.

This year’s borrowing to fill the gap between government tax revenue and expenditures may reach a trillion dollars for the first time since 2012.

If Washington politicians follow the usual script, we can expect Republicans to posture as fiscal conservatives and then relent either just before or just after a federal shutdown.

Congressional Debt Ceiling

Democrats will chastise the GOP for playing politics with America’s sacred responsibility to pay its bills.

This drama has played out dozens of times over recent decades and is therefore likely to repeat once more this fall.

Perhaps it won’t, though. The Associated Press notes that there just aren’t many people in the Capitol who even pretend to care anymore when it comes to deficits.

The AP quoted former senator Judd Gregg from New Hampshire on Sunday: “The president doesn’t care. The leadership of the Democratic Party doesn’t care.” He should also have included Republican leadership, including Senate Majority Leader Mitch McConnell, who have reliably supported metastasizing federal debt.

Meanwhile, the socialist Left has touted so-called “Modern Monetary Theory” (MMT) as the mechanism to fund the economy-killing Green New Deal and any and all other government boondoggles. At its core, MMT advocates for perpetual money printing to fund government spending.

 …click on the above link to read the rest of the article…

Weekly Commentary: Dudley on Debt and MMT

Weekly Commentary: Dudley on Debt and MMT

December’s market instability and resulting Fed capitulation to the marketplace continue to reverberate. At this point, markets basically assume the Fed is well into the process of terminating policy normalization. Only a couple of months since completing its almost $3.0 TN stimulus program, markets now expect the ECB to move forward with some type of additional stimulus measures (likely akin to its long-term refinancing operations/LTRO). There’s even talk that the Bank of Japan could, once again, ramp up its interminable “money printing” operations (BOJ balance sheet $5.0 TN… and counting). Manic global markets have briskly moved way beyond a simple Fed “pause.”

There was the Thursday Reuters article (Howard Schneider and Jonathan Spicer): “A Fed Pivot, Born of Volatility, Missteps, and New Economic Reality: The Federal Reserve’s promise in January to be ‘patient’ about further interest rate hikes, putting a three-year-old process of policy tightening on hold, calmed markets after weeks of turmoil that wiped out trillions of dollars of household wealth. But interviews with more than half a dozen policymakers and others close to the process suggest it also marked a more fundamental shift that could define Chairman Jerome Powell’s tenure as the point where the Fed first fully embraced a world of stubbornly weak inflation, perennially slower growth and permanently lower interest rates.”

And then Friday from the Financial Times (Sam Fleming): “Slow-inflation Conundrum Prompts Rethink at the Federal Reserve: Ten years into the recovery and with unemployment near half-century lows, the Federal Reserve’s traditional models suggest inflation should be surging. Instead, officials are grappling with unexpectedly tepid price growth, prompting some to rethink their strategy for steering the US economy. John Williams, the New York Fed president, said on Friday that persistently soft inflation readings over recent years could damage the Fed’s ability to convince the general public it will hit its 2% goal.

 …click on the above link to read the rest of the article…

Weekly Commentary: Dudley on Debt and MMT

Weekly Commentary: Dudley on Debt and MMT

December’s market instability and resulting Fed capitulation to the marketplace continue to reverberate. At this point, markets basically assume the Fed is well into the process of terminating policy normalization. Only a couple of months since completing its almost $3.0 TN stimulus program, markets now expect the ECB to move forward with some type of additional stimulus measures (likely akin to its long-term refinancing operations/LTRO). There’s even talk that the Bank of Japan could, once again, ramp up its interminable “money printing” operations (BOJ balance sheet $5.0 TN… and counting). Manic global markets have briskly moved way beyond a simple Fed “pause.”

There was the Thursday Reuters article (Howard Schneider and Jonathan Spicer): “A Fed Pivot, Born of Volatility, Missteps, and New Economic Reality: The Federal Reserve’s promise in January to be ‘patient’ about further interest rate hikes, putting a three-year-old process of policy tightening on hold, calmed markets after weeks of turmoil that wiped out trillions of dollars of household wealth. But interviews with more than half a dozen policymakers and others close to the process suggest it also marked a more fundamental shift that could define Chairman Jerome Powell’s tenure as the point where the Fed first fully embraced a world of stubbornly weak inflation, perennially slower growth and permanently lower interest rates.”

And then Friday from the Financial Times (Sam Fleming): “Slow-inflation Conundrum Prompts Rethink at the Federal Reserve: Ten years into the recovery and with unemployment near half-century lows, the Federal Reserve’s traditional models suggest inflation should be surging. Instead, officials are grappling with unexpectedly tepid price growth, prompting some to rethink their strategy for steering the US economy.

 …click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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