The Disaster of Modern Monetary Theory — MMT, China and the Moon

The Disaster of Modern Monetary Theory — MMT, China and the Moon

Dear Reader,

*slow clap*

We made it.

We got to the end of 2020.

Of course, that doesn’t mean that all of our problems will go away when the Gregorian flicks over to a new year.

We’ll be a little bit better prepared though.

2020 has been one of the most exhilarating I’ve witnessed in the markets. A 35% near global crash in stocks in less than four weeks. Followed by a sharp rebound. Some companies have gone onto make new highs. Some haven’t even regained what they lost.

The 48-hour good for delivery gold futures market showed its fragility. A few months later, the gold spot price cracked above US$2,000 for the first time in history. Leaving us with a new high of US$2,069.

What could possibly come next? Jim below talks about some of the things that will impact the US market over the next couple of years.

Australia is likely to have more run-ins with China. I reckon on our commodities sector is just starting to heat up.

But before we start predicting future events in too much detail, we need to take a break from this year.

The Fat Tail Media office shuts shop tomorrow. Like you, I’m very excited to take a break and get ready to start the new year fresh. But keep an eye on your inbox, because we’ll still be writing to you over the break with some of our favourite articles of the year.

From me and everyone here at the Fat Tail Media office, I wish you and your family a very Merry Christmas and a happy and safe New Year.

I look forward to seeing you in 2021.

Now, it’s over to Jim.

Cheers,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

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For those unfamiliar with the term MMT, it stands for Modern Monetary Theory. This is a subject I have covered extensively both in my 2019 book, Aftermath, and in my new book, The New Great Depression.

The ‘theory’ is not much of a theory because it lacks evidence, and there’s nothing ‘modern’ about it because it has been around for over 100 years. Still, it is all the rage in Washington, DC these days. Investors need to pay attention to it, whether they agree with it or not, because it will influence fiscal and monetary policy in a new Biden administration.

MMT has three basic tenets

The first is that you can merge the operations of the Fed and the Treasury. Legally, the two institutions are completely separate, but you can coordinate their policies if you want to. Appointing former Fed chair Janet Yellen as the new Secretary of the Treasury is a clear sign that that’s what a Biden administration plans to do.

The second idea is that citizens must accept dollars (whether they like it or not), because you need dollars to pay taxes. And if you don’t pay taxes, you’ll go to jail. In effect, the dollar is supported by the barrel of a gun (to paraphrase Mao Zedong).

The third idea is that there is no practical limit to how much debt the US can issue. The US debt-to-GDP ratio today is about 130% (up from 106% last year). But MMT cheerleaders point to Japan’s ratio, which is over 250%, as proof that the US can borrow a lot more.

These ideas are all badly flawed

Japan is not a good test case because the Japanese buy their own debt (the US relies on foreign investors) and the Japanese economy has barely grown for 30 years (try that in the US).

You can operationally merge the Fed and Treasury, but once it becomes apparent to markets that you are monetising all the new debt, then confidence will erode, rates will climb, and this pyramid scheme will collapse. And, once confidence is lost, citizens can turn to land, gold, silver, natural resources, and other hard assets as dollar alternatives.

You don’t owe taxes on unrealised gains, so the MMT tax police will have nothing to keep them busy.

A disaster in the making

Modern Monetary Theory is a disaster in the making (although it may take a few years to play out). This article explains why.

It’s OK to borrow money if you invest in highly productive assets. But if you just spend the money to support a stagnant economy with handouts, you’re simply digging a deeper debt hole for yourself. Eventually you end up with default, inflation, higher interest rates, higher taxes, or all of the above.

It’s not quite the rosy scenario that the MMT crowd would have you believe. Still, it may be coming soon.

Meanwhile, much further afield…

China has landed on the Moon. How long before it plants weapons?

A Chinese spacecraft made a soft landing on the Moon on 1 December. It was not the first Chinese spacecraft to reach the Moon; the Chinese did that in March 2009 with the Chang 1. But this was a soft landing, not a crash landing like the 2009 effort. And this is the first Chinese mission to the Moon that will be able to take rock and soil samples and return them to Earth.

The Chinese are just the latest to arrive with a mission of this type. The Soviet Union staged a crash landing on the Moon in 1959. Other nations that have landed on the Moon, either as crash landings or soft landings, are Japan, India, Israel and the European Space Agency. Of course, the US is the only country to send manned missions to the Moon and return them safely, in six Apollo missions between 1969 and 1972.

Still, the Chinese mission is significant both because it will return soil samples, but also because it advances Chinese technical understanding of soft landings, ascender launches, space docking, and a return to Earth.

China has the luxury of simply setting a goal and going for it. It is not hindered by budgets and competing spending priorities as is the case in the Western democratic developed economies. In China, social welfare and poverty programs can wait for another day if that’s what the Communist Politburo decides. If China wants to go to the Moon, it just goes.

What is China’s long game?

In the years ahead, we can expect more soft landings, more manned missions, docking exercises, and finally a Chinese-manned mission to the Moon. It’s just a matter of time. The question is: What is China’s long game?

Given its behaviour in the South China Sea, the Straits of Taiwan, and the Himalayan border region with India, it is reasonable to expect that China’s lunar goals are not limited to pure scientific research. It will have some geopolitical (or should I say luna-political) end in mind.

China could well foresee a military mission to the Moon including a permanent settlement and radiation weapons designed to disrupt Earth-based and satellite-based defence systems of the US and its allies. This is one more reason to insist that US technology not be made available to Chinese labs or firms working together with the Chinese military and the Communist Party leadership.

China may achieve its goals in the long run, but there’s no reason why the US should help it along the way. The best way to slow down a future Chinese military presence on the Moon is to stop technology transfers to China today.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia

PS: Australia’s Great COVID Recession — Learn which investments to accumulate and which ones to avoid in order to give you the best chance of preserving your wealth during the recession. Click here to learn more.