While there has been much disagreement among the financial elite about the ultimate consequences of central bank activism and market manipulation, with some - usually those who do not manage money for a living and are not paid by investors - predicting fire and brimstone, while a separate, far more optimistic group expects the world's greatest experiment in monetary policy to somehow have a happy ending, when it comes to socialism disguised as monetary policy, besides a certain, politically-influenced fringe, the condemnation against "helicopter money" wrapped in a convenient political wrapper has mostly been uniform.
We are talking, of course, about MMT, which stands for Modern Money Theory, but would make far more sense if it stood stand for Magic Money Tree, as the theory effectively espouses unlimited money printing and skipping central banks as intermediaries in money creation which, however, the theory claims does not result in hyperinflation because, somehow, taxation manages to limit the amount of money in circulation and the result is monetary utopia.
It is therefore hardly a surprise that MMT has emerged as the pet financial theory for such socialist politicians as Bernie Sanders and Alexandra Ocasio-Jones (the biggest proponent of MMT is finance professor Stephanie Kelton who previously worked on Sanders' presidential campaign and was a "chief economist for the Dems on the Senate Budget Committee"), who get to promise their potential voters pretty much everything while also vowing not to worry about the insane costs that delivering "everything" would entail (AOC's Green New Deal is said to cost over $6 trillion and according to some, the bill would be north of $20 trillion).
And while MMT's occasional appearances on the official economic arena result it in getting laughed off the stage unceremoniously and quickly, this time it appears to have some sticking power, perhaps as a result of a collapse in deficit funding concerns as both republicans and democrats havegiven up on keeping US spending under control (the fiscally conservative Tea Party is now a distant memory). As such it was inevitable that the MMT discussion would extend to its logical, and absurd, extreme where one or more politicians apply it to funding every possible spending request by politicians.
And at a time when the electorate is especially angry at the growing wealth divide between the ultra rich and everyone else- an outcome of decades of flawed monetary policy and central banks blowing ever greater asset bubbles, there is no faster way to get elected for political office than promising everything. Indeed, woe to the pol whose campaign is based on austerity and reduced spending when most now promise Magic Money Trees and unlimited funding for everything.
Well, not so fast. Because as MMT gains popularity, and in fact MMT has never been more popular according to google trends...
... the establishment is starting to get worried. To wit, last week it was one of the world's richest men, Bill Gates, who slammed MMT as "Crazy talk" saying that the theory's core principle of "not worrying about the deficit" and that "we’ll just print the money and do it” is "Well crazy. I mean, in the short run actually because of macroeconomic conditions, it’s absolutely true that you can get [debt] even to probably 150 percent of GDP in this environment without it becoming inflationary. But it will come and bite you. The people you owe the money to, you will have a problem."
And now, it's the turn of former NY Fed president Bill Dudley, who has written a Bloomberg op-ed which while espousing the benefits of deficit spending, especially in recessions, which "can also be self-funding, because it engages unused resources — for example, by employing people whose abilities and skills would otherwise be wasted", lashesout at Modern Monetary Theory, which "goes one big step further" as it "suggests that a government like the U.S. needn’t worry about debt at all. As long as it borrows in its own currency, there is no risk of default or bankruptcy. It can spend as much as it wants on any projects, such as education and health care, and just create additional IOUs to cover the cost."
There is just one problem with this "theory":
Alas, there is no free lunch. For one, the economy might not have enough resources — in the form of workers and industrial capacity — to meet the combined demand from the government and the private sector. The result would be inflation, as too much money chased too few goods and services.
And not just inflation, but hyperinflation. However, to the socialists who pitch MMT, the fact that inflation hasn't broken out yet - largely due to the relentless monetization of debt by central banks which has kept inflation in check so far, taking the experiment to its surreal extreme should not result in any dire outcome. And yet, that's nothing but lunacy for two reasons. First, assume the current model remains in place indefinitely - the outcome would be as follows:
America as a whole consumes considerably more than it produces — and depends heavily on foreign investors to lend it the money needed to keep doing so. But they don’t have to make dollar-denominated loans or buy U.S. Treasury securities. If U.S. debts were to keep growing, at some point the Fed would face a dilemma. It could increase interest rates to maintain foreign (and domestic) demand for dollar assets, at the cost of damping U.S. economic growth. Or it could keep interest rates low and allow the dollar to weaken, which would push up inflation as imported goods and services became more expensive. Neither outcome would be pleasant.
And then there is the historical record of money printing, chartalism, 'helicopter money', MMT, or however one would like to call it, which is hardly encouraging:
MMT hasn’t worked out well for other countries. Consider Germany in the 1920s, or Venezuela and Zimbabwe more recently. The U.S. tried a milder version in the 1960s and 1970s, when the government tried to pay simultaneously for the Vietnam War and Lyndon Johnson’s Great Society programs. The result was inflation, America’s withdrawal from the gold standard and the demise of the Bretton Woods system of fixed exchange rates. The Fed had to increase interest rates to double digits in the late 1970s and early 1980s, at great economic cost, to get inflation back under control.
MMT insanity aside, Dudley does point out a key issue: when it comes to political slogans, it is far easier to promise everything, than demanding austerity or cutting spending. In fact, as Ron Paul so vividly recalls, anyone who takes on a realistic approach to the US economy now and in the future sees their political aspirations ended quickly and mercilessly. Here's Dudley:
It’s no fun to be a budget scold. If you worry about deficits, you have to choose between increasing taxes or cutting spending. Desirable social goals such as better roads and universal health care are much more attractive if you can argue that they don’t need to be paid for. But the constraints are real. The U.S. economy is operating pretty close to capacity — especially in the labor market — and the government is already running a sizable deficit that is projected to keep getting bigger.
His conclusion: MMT is nothing more than a crackpot theory...
So, if we want to spend more and, at the same time, keep our economy in good health, we need to find sustainable sources of revenue to do so, not engage in wishful thinking.
... which however in a time of great populist upheaval and social discontent makes it all the more attractive to the greater population, and is the reason why it is only a matter of time before "helicopter money" disguised as MMT becomes the norm. For what happens next, keep a close eye on gold.
Read Bill Dudley's full op-ed here.