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The ‘cosmic’ forces leading the US to Modern Monetary Theory

One of the important debates of today is whether or not inflation will become a problem as the global economic cycle rebounds post-virus, aided by significant fiscal spending in many of the world’s large economies. This question of inflation or no inflation is part of a larger ongoing debate on the merits or otherwise of an increasingly popular idea called Modern Monetary Theory (or MMT).

MMT is redefining government debt and deficits

The core idea of MMT is that governments who issue debts in their own currency can never default. They can always print money to repay their debts, if need be. (An interesting corollary of this idea is that taxes are not required to fund government budgets, though are still a useful tool to drain money from the economy should it overheat). Indeed, the only limiting constraint on government spending is inflation. And so, as long as inflation remains low, then governments should spend on projects and schemes that are productive.

Should the world’s largest economy adopt a true MMT framework to govern fiscal spending, the investment implications would be enormous. On the one hand, expected economic growth would be materially greater due to significantly increased government consumption. But on the other hand, the rate of inflation and the level of interest rates would also be much higher. Importantly, the probability of policy mistakes would arguably much higher, creating possible scenarios of inflationary spirals and subsequent balance sheet recessions.

With President Biden announcing a proposed US$1.7 trillion infrastructure spending programme before the ink had even dried on his US$2 trillion Covid-stimulus package, many are asking if MMT has already arrived in the US.

Of course, it has not. Despite controlling the White House, the House of Representatives and the Senate, Democrats do not have the power to enact any government spending they deem appropriate. Under the arcane rules of the US Senate, Democrats have a limited number of simple-majority-only budgetary measures, called Reconciliation. Limited budgetary changes to law can be made under this process which requires only 51 votes. It was under this Reconciliation process that Biden’s US$2 trillion Covid stimulus was passed.

But by and large, most other substantial legislation requires 60 votes (out of 100), not 51. The probability of either party controlling 60 votes in the Senate is very low for the foreseeable future. As such, long-term political gridlock, not MMT, is the most likely fiscal scenario going forward.

The 'filibuster' allows Senate opponents of a proposed law to prevent a vote by speaking for as long as they wish on any topic unless 60 out of 100 vote to close the debate.

Enter the 'cosmic' forces of filibuster changes

However, the filibuster rules may change and lead the US to a truly MMT-enabled economy. In July last year, legendary civil rights activist and House Representative from Georgia, John Lewis, passed away. As part of his lifetime service to the civil rights movement, he had also spent many years writing proposed legislation for the expansion of voting rights. Today, this legislation is included in H.R.1, also known as “For the People Act of 2021”, which aims to:

Expand Americans’ access to the ballot box, reduce the influence of big money in politics, strengthen ethics rules for public servants, and implement other anti-corruption measures for the purpose of fortifying our democracy…

This legislation – which, on its face, has nothing to do with MMT – is widely supported by Democrats but carries little support from Republican lawmakers. Indeed, since the US general election last November, Republican lawmakers in 43 states have proposed at least 250 new laws that would “limit mail, early in-person and Election Day voting with such constraints as stricter ID requirements, limited hours or narrower eligibility to vote absentee.” So the chance of H.R.1. legislation making it through the Senate is effectively zero.

That is, of course, unless the filibuster were to be removed.

Before November’s general election, the probability that Democrats would take control of the Senate was less than a coin toss. But then something extraordinary happened in John Lewis’ home state of Georgia: Democrats flipped two Republican Senate seats to reach 50 seats which, with the Vice President’s vote as the tiebreaker, gave Democrats an effective majority in the Senate.

And this gives Democrats the power – assuming all were in favour – to remove the filibuster and pass any legislation they like. And their first priority is H.R.1. As some Democrats believe, this is John Lewis continuing his 'cosmic' civil-rights work from the grave.

Opening the door for MMT

Under a filibuster-free scenario in which all laws could be passed with a simple majority in the Senate, one could safely assume that long-term US government spending, deficits and borrowings would expand significantly. That is, MMT.

It remains far from clear, however, if Democrats will proceed down this path. Multiple Democratic Senators do not support the removal of the filibuster. The probability is not zero, however. A vote on H.R.1. in the Senate is being slated for late June. And this comes after a momentous vote in May, in which Senate Republicans used the filibuster to block the establishment of an independent commission to investigate the 6 January Capitol riot. Democrats were furious.

In the broader Democratic party, a sense of desperation appears to be building. There are fears that under new voting laws established by Republican-controlled state legislatures, minority rule in the US could be enshrined into law indefinitely. Multiple Obama-era advisors have been vocal recently, framing the filibuster as an existential issue for the future of American democracy.

That said, even if Democrats were to proceed along this path over the coming weeks and months, we are likely to remain a long way from a truly MMT-enabled US economy. While the principles of MMT have been warmly embraced by left factions of the Democratic party, there are plenty of more moderate Democratic Senators (as well as a Democratic President) who remain sceptical of the idea that government debts are irrelevant in the face of contained inflation.

MMT is an idea that probably remains a long way off from widespread adoption. But it is far from impossible. Some Democrats believe there at cosmic forces at play which are laying the foundations to expand voting rights in America. If so, these same cosmic forces are paving the way towards an MMT-enabled US economy. We will know more by the end of this month.

 

Andrew Macken is Chief Investment Officer at Montaka Global Investments. This article is general information and is based on an understanding of current legislation.

 

14 Comments
Steve Gomory
June 13, 2021

To quote the former Chair of the U.S. Federal Reserve Alan Greenspan "The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default." The only (real) conflict b/n MMT & mainstream economics is the "issue" of Bonds. Rather; Bond issues are a monetary policy device, not a funding device. MMT says that governments create new money by using fiscal policy and that the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes to reduce the spending capacity of the private sector.

Doug
June 16, 2021

So there really is such as thing as a free lunch! Government prints bonds, RBA exchanges them for cash which the government spends. Adding to real demand in the economy. At some point excess demand emerges (not seen often lately, true) and government taxes private sector reducing private spending releasing resources to the government. Government increasingly becomes a larger absorber of real resources at the expense of the private sector. Is this what we want? Is government spending ultimately more productive than private spending? How does government spending reflect the desires of private consumers -- for whom the economy actually exists? When does government know inflation is getting too large as a signal for raising taxes? Coupled with the astonishing level of liquidity in the system today, how does the central bank restrain inflation, except for increasingly higher taxes from the government? How well has this worked in the past? I never ceased to be amazed at the reverence in which policy makers are held, notwithstanding decades of cockups in the past.

Jack Frisch
June 20, 2021

Is government spending more productive than private spending? How does government spending reflect the desires of private consumers? The second question should precede the first and the answer is sometimes "yes" and sometimes "no", but we humans are so stupid that we feel that everything is "this or that" rather than "sometimes this and sometimes that". Doug should go past elementary simplistic Demand-Supply models relating to "economic man" to catch up on economic concepts such as Asymmetric Information, Strategic Interaction, Public Goods, Externalities and Network effects then read up on the "behind a veil of ignorance" and Citizen. He might then acknowledge that government sometimes is more productive than private spending. Private spending is better at managing apples and oranges, but life is technologically more complex than it was in 1776.

Dave
June 10, 2021

The US has had only 11 budget surpluses since 1932. Keynes was correct. Why the notion of zero govt debt over the long term has persisted for so long after the Great Depression of the 30s is a mystery to me.

Ruth
June 12, 2021

Having low/no government debt is what has positioned us to deal with previous economic crises better than other western democracies. We should return to surplus when we can. There is only one good reason to go into debt, and that is to produce something of greater value than the cost of the money borrowed/created. Creation of currency out of thin air via the Magic Money Tree may seem like a good trick, but there is no free lunch; our currency will weaken. It has been done as an emergency measure. The reason why China is now a serious threat to the USA economically is because it produces, and when paid, invests in hard productive assets. We have to compete, not live in fantasy land.

Jeremy Cooper
June 10, 2021

Really thoughtful and interesting article. Thanks Andrew.

Adrian
June 10, 2021

There is a lot of misinformation re: MMT and it is painted as a bogeyman, but the MMT folks have always been clear that the true limit on government spending is inflation. They have never said governments can borrow and spend indefinitely. They have just exposed the political myth that a Government's with a sovereign currency is similar to a household and must run a balanced budget. The current ruling party in Australia has long perpetuated this storyline, yet now seems to have dropped it completely and in practice is adopting MMT.

Other MMT ideas such as the job guarantee are also painted as left wing or communist but in reality they are excellent ideas to help people stuck in the hardship of long-term unemployment. Even for those purely focused on financial outcomes, it is a good idea to utilise labour towards the many opportunities that are out there for work to be done if we just walk around our neighbourhood with open eyes. The MMT folks have always been thoughtful to say the job guarantee should be pitched somewhere above unemployment benefits and below the minimum wage, so as not to interfere with safety nets or the labour market. The cost of long-term unemployment including health/family/caring/etc as well as the opportunity cost far outweighs the cost of a job guarantee. IMHO, it would be a good thing if MMT becomes more widely adopted.

will stuart
June 14, 2021

By logical extension, the really good news is that there is no need for levying taxes, other than draining off liquidity.I doubt we will ever see left wing governments adopting low or no tax environments.

Ruth
June 17, 2021

Yes Will no need for any taxes at all. Just print the money! They will retain taxes as a form of wealth redistribution. No wonder no-one wants US bonds anymore, talk of MMT is putting them off. Russia has already ditched all US currency reserves in favour of Euros, PMs, etc. China is doing the same. I guess that's because they have learned the hard way that govt allocation of resources is not the way forward, except in the minds of academics.

Adviser
June 09, 2021

"On the one hand, expected economic growth would be materially greater due to significantly increased government consumption. But on the other hand, the rate of inflation and the level of interest rates would also be much higher" Not necessarily, inflation can still be low in an MMT-informed world as long as you have the automatic stabilisers and tools/regulations to deal with inefficiency in certain sectors. MMT's view on inflation is that it is either supply-side issue or a monopolist force setting the prices. With regards to monetary policy, MMT's view (and consistent with the long history of Japan), it is useless and therefore rates should in fact be 0, hence the focus should be on fiscal policy. The central bank sets the interest rates and cannot be dictated by market forces/bond markets. All this commentary on inflation misses an important point that MMT reveals - as long as there is spare capacity in the real economy (think unemployment, underemployment, hidden unemployment, gig economy), then you would not get out-of-control inflation. Much of the inflation paranoia are coming from failed economists of the past who's prediction about Japan's fiscal position (widow-maker's trade) was unsustainable, etc which they have been entirely wrong entirely (increasing rates, default on Japanese government bonds, etc).

Adrian
June 10, 2021

Agreed Adviser, good comment. Recent years events are a validation and vindication of MMT. It should cast doubt on the credibility of those who have side-lined or ridiculed it for so long, but then in a crisis Governments have had to acknowledge in practice it is the correct and necessary approach.

asdf
June 11, 2021

nothing wrong with mmt ??
- all good as far as inflation, tax, deficit, debt and default are concerned.
very neat theory. so what is the real problem ?
why isn't every government doing this ?
after all it is great to spend and get voted in for your generosity to the voters

japan's experience of this is a reasonable example - probably ?
what did we see in japan ? what is predicted by MMT?

Answer = low/zero/negative interest rates.
what are the implications of artificially low interest rates to the price of money and therefore allocation of resources ?
Misallocation of resources and money > zombie companies, less than optimal outcomes for growth i.e. poor economic growth/GDP.
What are we seeing ? zombie companies keeping employment down but not as profitable as it could be if the price of money was set by market forces. outcome: poor profitability and weak stock markets ( Nikkei index )

yes with mmt we have the following:
- the government does not go bankrupt ( japan)
- interest rates are low ( japan)
-unemployment is low (japan)
-profitability is low ( underperforming stockmarkets in japan)
- lots of infrastructure ( just check out the great bullet trains in japan)
-self funded pensioners who run out of money (low returns on deposits, shares, property) - just check out the number of old people driving taxis, sweeping streets and stealing food in japan.

DISTORTING THE PRICE OF MONEY(INTEREST RATES) MAY NOT BE A GOOD IDEA ??

Stephen
June 11, 2021

As long as you have spare capacity you will not have out of control inflation….. Are you sure? What about the stagflation on the 1970’s? The notion that unemployment/underemployment will prevent inflation assumes a perfectly free and responsive labour market. This is simply not the case. All labour markets have some barriers to entry/unskilled workers/inflexibility caused by a variety of factors, meaning that spare capacity is a panacea for labour shortages. Hence the argument that spare capacity can prevent inflation is flawed.

Sam Richards
June 16, 2021

How many countries in the world can truely do MMT? The key point you left out is “who issue debts in their own currency”?

The USA can do so, few other countries can do so in very large amounts. And if they can, for how long will foreign lenders lend money to countries in the currency as their debts ballon?

In the end, the non USA countries will have to resort to borrowing money in another currency and there lies the road to Venezuela. The same will apply eventually to the USA if debt gets out of hand.

As far as your off hand support for a “job guarantee” that only works if people want to work. It falls down massively when people don’t want to work so game the system. And they will game the system, they always do.




 

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