On MMT and Munis

Bruce Krasting's picture

If you have any interest in the topic of Modern Monetary Theory (“MMT”) there is a good discussion in this article at the Harvard International Review. (Link) Bill Mitchell, the Research Professor of Economics at the University of Newcastle, Australia, is interviewed. He provides his take on what is going on.

MMT is not a theory about what should be done. It’s a roadmap of how the global fiat money system works. From the article:

 

MMT just describes the system that most countries in the world live under and have lived under since 1971.

There’s a whole bunch of things in this that I don’t agree with. But who am I to question an eminent economist. The final conclusion by Mitchell is a case in point. His words:

Budget deficits, independent of any monetary operations, drive interest rates down, not up. This is the complete opposite of what orthodox economists claim is the case, and it’s confirmed by the present combination of record low interest rates and very large budget deficits.



I think this is completely wrong. Yes we have low interest rates and huge deficits. But the reason for this is that the Fed is controlling interest rates at artificial levels.

Does Mitchell really believe that .25% Federal Funds rate is a fair market rate given that CPI-W is over 3.5% for the past year? Do MMT’ers think that 5 year T-Notes at 1.1% are reasonably priced looking at Core Inflation north of 2%? Do these deep thinkers not understand that the Fed bought $2 trillion of paper and in the process wrote the check that covered the massive deficits that are occurring? These folks don’t get the fact that the entire credit curve is a measure of manipulation? Maybe they should start reading the Blogs.

To me, there is no evidence to support the MMT assumption that deficits drive interest rates lower. It's coincidental that the Fed is driving interest rates to zero while deficits are exploding. The “orthodox economists” have this one right. The MMT’ers are looking at the facts and drawing the wrong conclusion.

MMT is a 4-legged stool. One of the legs is wobbly (I would say missing). If you sit on it, you’ll fall.

 

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Saving the Taxpayers

The IRS issued the state of California a private letter ruling. They allowed Cali to re-market $132mm of 2010 BABs bonds. This wasn’t supposed to happen. Congress has let the BABs legislation lapse. But no one can argue with the IRS, so the bonds will be sold in the near future.

This is a, “no big deal”. But there was one aspect that gets me to comment. Tom Dresslar, a spokesman for Cali Treasurer Bill Lockyer had this to say about the IRS decision: (Bond Buyer link)

 

“The best part is that we are going to be able to save taxpayers money.”

Well, good old Tom is right. It will save the “taxpayers” money. The question is which taxpayers? The ones in Cali will pay less. But the taxpayers at the federal level will have to foot the bill. Uncle Sam will pay 35% of the interest on the re-marketed bonds.

The business of subsidizing Muni debt issuance with tax breaks or subsidies (BABs) has to end. The rallying point for this should be Dresslar’s words. I can’t think of better proof that the system is screwed up.