MMT, Debt, and Tax — The Bond Market Frenzy is Coming
The market frenzy is coming, says Callum Newman.
My digital desk buddy and I jumped on a Teams call earlier in the week.
Despite the physical distance between us, we like to stay in touch. Shuffle our ideas around on the market. What’s hot, what’s moving, what’s failed to live up to the hype.
Throughout our chat, we both kept commenting on how cashed-up Aussie gold miners are. How the markets behaved during the pandemic have treated them well. The next question we wanted to know is, what are these miners going to do with all that cash?
Make sure you hear what Callum has to say, because as Jim points out below, central banks and governments aren’t done meddling with the markets just yet. So, it’s up to you to take control of your wealth.
Right, now it’s over to Jim.
Editor, The Daily Reckoning Australia
The Meaning of Debt in a MMT World
Isn’t excessive debt a bad thing? The MMT crowd say that too much debt can be bad if you’re a household. Individuals and families who spend more than they earn and make up the difference with debt can go bankrupt. This may apply to families, but it does not apply to countries according to MMT. Individuals cannot print money, but governments can. So everyday personal finance rules simply do not apply.
In fact, debt is a good thing if you’re a government. Governments incur debt and deficits because they are spending money. But every dollar the government spends goes into someone’s pocket. A government deficit is an individual’s surplus.
MMT supporters ask: How would individuals get money if the government didn’t spend it? For MMT, government spending is the real source of money supply and the source of individual incomes and wealth.
Lending and taxing money that can be printed
What if the bond market balks at all the debt issuance? What if interest rates skyrocket? MMT has easy answers to these concerns. MMT says that the government bond market is practically irrelevant.
MMT takes the view that the government is doing investors a favour by having a bond market at all. Treasury notes and bonds are a convenient way for savers to put their money to work in safe investments. They are not needed to finance deficit spending. The Fed can simply put money in the Treasury’s account at the Fed and wire the money directly to any government contractors, vendors, or entitlement accounts on instructions from the Treasury. No bonds are needed for deficit finance. The government bond market is just for show.
What if individuals lose confidence in the US dollar because of the money printing and deficit spending? MMT says, ‘Too bad — it doesn’t matter what you think.’ You need dollars to pay your taxes and you have to keep working for dollars for that reason. Your level of confidence is irrelevant. You either pay taxes or you go to jail. And, since you need dollars to pay the taxes, you have to accept dollars whether you like it or not.
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By the way, taxes have nothing to do with government deficits according to MMT
Just as the Fed can pay the Treasury’s bills with direct transfers and no bond market, the Treasury can also pay its bills without any tax collections. Again, the Fed can just print the money and wire it out. No actual tax collections are needed.
If taxes are not needed to pay government bills, what is the point of the tax system? MMT says there are three reasons for an income tax system. The first is that it forces you to accept dollars because you need them to pay the taxes. The second is that progressive taxes can reduce income inequality by taking from the rich and giving to the poor. The third is that taxes are a good way to fight inflation if it should emerge. If inflation happens, a large tax increase will cool the economy and end the inflation.
That’s the overview. Once you accept the ideas that spending and money printing can be unlimited (I don’t, but MMTers do), then it follows that there is no social need that has to go unmet. Money is literally no object.
The progressive political wish list hasn’t changed much in the past 90 years since FDR. Politicians want income security, Medicare for all, childcare for all, aid to education, aid to farmers, support for housing, free tuition, aid to minorities, stronger defence spending, money to fight climate change, and so on. The list of spending priorities is endless.
In past decades, there was a simple answer to the big spenders: We can’t afford it. Congressional leaders would point to budget deficits and say that spending was too high, and more spending was not possible in the short run. The entire Tea Party movement, which helped Republicans beat the Democrats and take the House of Representatives in 2010, was based largely around such budget concerns.
As a result, Congress and the Senate enacted safeguards to prevent excessive spending. But, since Congress imposed all of these spending limitations, Congress can also waive them or eliminate them. That is exactly what MMT supporters propose. Since spending and borrowing can be unlimited (as long as you borrow in your own currency), then there is no need for debt ceilings or pay-as-you-go. Today, when spending opponents say, ‘We can’t afford it’, the MMT advocates answer, ‘Yes, we can.’
That’s the bottom line for the MMT crowd. If taxes and borrowing don’t matter and if spending can be unlimited (except for inflation if it happens) then there is no social policy issue that cannot be addressed with spending. The real goal for MMT is not to spend money for the sake of spending, but to eliminate unemployment with guaranteed jobs paid for by the government and address all of the other social policies noted above. It’s a spending nirvana for social justice warriors without the shackles of debt or deficits.
If you’d like a more detailed analysis of the main tenets of MMT, with examples and helpful graphics, the best source is Stephanie Kelton’s book, The Deficit Myth.
What comes next?
MMT is already the dominant mode of operation in Washington’s fiscal and monetary policy today, even if the policymakers don’t know what MMT stands for and don’t understand the theory. What matters to markets is not the understanding but results.
Unprecedented money printing and deficit spending are the norm today, and they are exactly what MMT supports. What comes next are the social policies the free money is intended to support. Investors must grasp MMT — and understand its shortcomings — in order not to be blindsided by the economic disasters in store.
The story of MMT’s failings, and how they will lead to economic collapse, will be described in a future edition of the DR, so keep an eye out for that.
All the best,
Strategist, The Daily Reckoning Australia
P.S: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.