Modern Monetary Theory — The Dangers and the Impact on Markets
The analytical firepower behind MMT today comes from a number of academics and public policy experts. The most prominent among them is Stephanie Kelton, a professor at the State University of New York at Stony Brook and former adviser to the Bernie Sanders campaigns for president in 2016 and 2020.
Other thought leaders in the MMT movement include hedge fund manager Warren Mosler, former PIMCO economist Paul McCulley, Bard College Professor of Economics L Randall Wray, and Bard College Associate Professor Pavlina Tcherneva. The Levy Economics Institute at Bard College, in Annandale-on-Hudson, New York, is the leading think tank for MMT, although its advocates have many platforms and affiliations.
The political class may be plunging headlong into MMT without knowing what it is, but that’s not good enough for readers of The Daily Reckoning Australia. We have to understand MMT so we can see its impact on markets and the dangers it may present if it is pursued much longer. You shouldn’t support a policy you can’t explain. And you can’t oppose a policy you don’t understand.
Where did MMT come from?
As noted, MMT stands for Modern Monetary Theory. The term ‘Modern’ makes it sound like something new, but it’s not. MMT has its roots in a theory called chartalism, which was advocated and expanded by a late 19th and early 20th century economist named Georg Friedrich Knapp.
Chartalism claims that the value of money comes from the fact that it is issued by the state, not from any spontaneous actions of individuals looking for a medium of exchange. Knapp’s views were contained in his 1905 book, The State Theory of Money, written in German and translated into English in 1924. Although Knapp’s book was published in 1905, it relies heavily on the study of European financial systems from the 19th century.
John Maynard Keynes was a chartalist and that perspective informed his policy recommendations for state deficit spending as a cure for depressions in his 1936 book, The General Theory of Employment, Interest and Money.
In short, MMT as a formal branch of monetary economics is 115 years old and relies heavily on the study of practices that are at least 170 years old. There’s nothing particularly modern about it.
What is MMT?
In its simplest form, MMT says that money has value because it is issued by a state and the state will only accept that form of money in the payment of taxes. Citizens need to earn ‘state money’ because they have to pay taxes. If you don’t pay taxes, you could end up in jail. Therefore, the money has value because the state says so.
In other words, money is a bit like the Monopoly ‘Get out of jail free’ card, which also has value.
MMT argues the state can also issue unlimited amounts of its own money. Of course, inflation is a potential problem. But, unless inflation actually appears, there is no problem with unlimited issuance of the currency.
The same view applies with regard to debt. A state can run unlimited fiscal deficits simply by issuing more debt. The state can pay off the debt (and interest) by issuing more currency, more debt, and so on. There is no limit to the size of deficits, the size of the national debt, nor interest costs, because the state can always print more money to pay the debt and interest.
Who controls the money supply?
There is a corollary to the idea that a country can have unlimited debt. The debt must be in the same currency that the country prints. If you borrow money in a currency you do not print, then you can suffer a serious debt crisis.
This happened to Greece in 2015, which owed debt in euros, but does not print the euro (the ECB does). It has also happened many times in Argentina where they borrow in dollars but print pesos.
In theory, this would never happen in the US because we borrow in dollars and print dollars. The US can always print the dollars to pay the debt, so it can never go broke.
The MMT advocates take this idea of unlimited debt and unlimited money printing a step further. They argue that the US Treasury and the Federal Reserve should be viewed as a consolidated entity. The Treasury exists to spend government money and collect taxes. The Fed exists to print government money. By combining operations, the Fed simply monetises whatever the Treasury spends.
It’s interesting that Janet Yellen is today the Secretary of the Treasury. She was formerly the chair of the Federal Reserve, where she was Jay Powell’s boss. She is practically the embodiment of the MMT idea that the Treasury and Fed should be treated as a unified spend-and-print vehicle. No one is better positioned to implement MMT than Janet Yellen, and that may account in part for her appointment.
In a future edition of the DR, I’ll explain the meaning of debt in a MMT world.
All the best,
Strategist, The Daily Reckoning Australia
P.S: Three Deep Value Stocks Currently Under-Priced: These ASX gems could potentially deliver market-beating returns as the economy recovers. Click here to learn more.