We at NOTES FROM UNDERGROUND have discussed the issue of MODERN MONETARY THEORY. Now, the battle lines are drawn over the possibilities of a benign outcome to the practical basis of the so-called printing press. Yes, the simplification of MMT bothers its disciples, but the printing press is in essence what the theory purports to avow: Don’t worry about debt, because enough money flooding the system will not push interest rates higher but rather lower as banks take on massive reserves to put out the bid that’s pushing interest rates persistently lower.
Until last week the center of the public debate was the FOUR QUESTIONS Paul Krugman asked Stephanie Kelton. The foundation of the MMT school is that the doctrine of the neo-Keynesian school is flawed and the theoretical underpinnings of MMT corrects the flaws. My stance is that if the MMT is correct then Krugman and others OUGHT to return their NOBEL PRIZES.
I will not reprise the argument here because the academic nature of it bears little consequence for the purposes of NOTES FROM UNDERGROUND. Most of my criticisms of MMT have been of the flawed model it seems to revolve upon. After hours of research, my limited understanding of MMT is that it’s based on a CLOSED SYSTEM and leaves no room for understanding the significance of the DOLLAR’s ROLE as the world’s reserve currency.
Again, why would I want to hold an asset that can be devalued through the utilization of massive amounts of debt? Want to go to war? Want to fund every social program ever conceptualized? Want to fund the NEW GREEN DEAL? Just keep issuing debt and the central bank will provide the funds via its printing press. In the closed system there is no firewall between fiscal and monetary policy. The sovereign could merely print its way to prosperity in a similar fashion of the Swiss National Bank, the perpetual wealth creation machine.
The SYNTHESIS of monetary and fiscal policy was the ah-ha moment for Richard Nixon when he gained control over Arthur Burns during his reign as Fed chairman. The same was true when Lyndon Johnson decided to fund the Vietnam War and the War on Poverty without a tax increase and then tried to get Chairman Martin to abstain from raising interest rates to slow the economy. The outcomes from a harmonized fiscal/monetary union did not bode well for the U.S. or the world.
On Tuesday, both Larry Summers and Kenneth Rogoff joined in the chorus of MMT criticism. It was to be expected that Krugman’s brethren from the economics profession would reply as Kelton attempts to reveal the giants of modern economics to be shams. Rogoff’s response is worth reading as he tackles many of the relevant issues confronting MMT:
1. Debt levels do matter in a world in which fiat currency is the coin of the realm and U.S. depends on foreigners purchasing its debt. “The US is lucky that it can issue debt in dollars, but the printing press is not a panacea. If investors become more reluctant to hold a country’s debt they probably will not be too thrilled holding its currency,either.”
This is a critical point for readers of NOTES. A printing press may result in the financial repression of a closed, domestic economy but when the panacea is applied to an open global economy with floating currencies backed by the GOODWILL and FIDUCIARY responsibility of the currency issuer, chaos and pandemonium are certain to follow. MMT wipes out the SYSTEMIC FIDUCIARY, the same result that was accomplished with the repeal of Glass-Steagall in the U.S. With no fiduciary responsibility why would any investor wish to hold U.S. assets?
2. Rogoff notes that the current U.S. situation is treated with benign neglect as the DOLLAR “has become increasingly dominant in global and trade finance. For the moment, the world is quite content to absorb more dollar debt at remarkably low interest rates.” For the moment is the key phrase and brings me back to the wonder theory posited by one of the greatest traders I had the pleasure to know, Richard Dennis. Dennis maintained that investors purchase certain assets based on the SLOWER FOOL THEORY: You will be able to exit before those with lesser knowledge or intuitive skills.
3. Rogoff continues by admonishing the FED for some of its post-financial crisis policies. The criticism make the case for why the yield curves ought to be steepening. Because if the FED were performing in the most efficient manner, they would be funding QE through via issuance of massive amounts of ONE-WEEK DEBT, continually rolling it without the massive balance sheet buildup of long-duration bonds. Rogoff fears that the outcome will result in MMT being the left’s version of the right’s view of Reagan’s supply-side economics. “Misguided ideas may yet drag the issue of US central-bank independence to center stage.” President Donald Trump will morph into Richard Nixon should he decide to run for re-election.
As the political left raises the issue of the irrelevance of deficits, it is smoothing the runway for funding gaps to soar to new heights. Remember, the deficit is roughly A TRILLION and counting in a booming economy. Why would anyone wish to hold U.S. assets with the massive political uncertainty highlighting the public debate on deficits and the utilitarian value of the modern printing press?
In June 2016, I asked then-Fed Governor Jerome Powell who guarantees the debt of the ECB. He casually answered: “They have a printing press.” Political economy indeed.
Tags: Federal Reserve, Jerome Powell, Ken Rogoff, modern monetary theory, U.S. Dollar, U.S. Treasuries
March 6, 2019 at 4:05 am |
“I think that both parties should declare the debt limit as a political weapon of mass destruction which can’t be used. I mean, it is silly to have a country that has 237 years building up its reputation and then have people threaten to tear it down because they’re not getting some other matter.” Warren Buffett
Yra- if the guru of our investment world doesn’t cry out at the importance of debt limits, at the dangers presented by the MMT theorists as you so ably describe, we see the direction we will continue to go. If doubling 237 years of debt in 10 years doesn’t trouble this pundit, who will take the road of rationality? Buffett has forgotten the lessons he learned from his mentor, Benjamin Graham. Even Keynes is misunderstood as he said that in times of a strong economy, debt should be PAID DOWN.
I’m afraid that with the huge buildup in debt in the last 10 years, there is no avoiding having the Piper paid. Powell gave it a shot on October 3, but he got spanked. The problem is too big, and those in charge will keep leading the people of Hamelin to an unseemly end, as future QEs and lowered interest rates will inevitably have its unpleasant conclusion.
Does anyone have a good and painless solution?
March 6, 2019 at 5:37 am |
Yra– some analysts measure the strength of the USD as the world’s reserve currency by its SWIFT ranking as a currency being used in “trade,” currently the USD holds the top position. Seems like AI to me under the MMT or QE? The more you print the higher your trade ranking on SWIFT?
March 6, 2019 at 7:17 am |
Hi Yra
Another terrific overview.
I am reminded of Herbert Stein’s famous maxim that if something could not go on forever, it will stop.
The following ZH article speaks further to your concerns that DEBT really does matter. So, too, does the DEBT SERVICE.
https://www.zerohedge.com/news/2019-03-05/us-budget-deficit-soars-77-interest-expense-hits-record-high
As this article makes clear, the Q1 interest expense is already exploding. What happens when recession ultimately hits and overall debt increases? And who is to say where long term rates settle in if foreigners shun long term US treasuries, forcing the Fed to monetize those, as well. How low does the USD sink at that time?
MMT is literally just a frickin euphemism for rolling the printing press.
Just like the 1986/7 mantra of “portfolio insurance” was a silly euphemism to just sell when the selling begins.
Best
Mike
March 6, 2019 at 7:53 am |
Yra,
Are we in a situation in the long bond where rates could go higher with either scenario — 1) good GDP growth/low unemployment or 2)low GDP growth/higher unemployment??
Currently both scenarios are going to produce massive amounts of debt that will need to be financed – And those 2 scenarios don’t even include any potential MMT debt……
March 6, 2019 at 5:34 pm |
Trader 1—good questions and points—the debt don’t matter crowd can only be sustained in a autocratic or totalitarian regime—suck on that concept Kelton
March 7, 2019 at 12:57 pm
So… how come nobody asks the following: “If MMT is solid theory, why in the world would we have taxes, other than to exert massive control over the masses?” We can just print our prosperity…
March 6, 2019 at 8:22 am |
On the other hand, out in the real investing world, the “dollar end game” (i.e., the loss of USD reserve currency status), as recently laid out by money managers Luke Gromen, Juliette Declercq and Mark Yusko, is gaining traction globally. The superstar trio expect this to occur in a sudden, rapid, non-linear event sometime within 24 months.
We’ve heard this story times before, but the difference is that these folks previously correctly predicted the dollar rise from after 2011 through the peak in 2016, as the first consequence of the dollar endgame which, in their view, will shortly enter its next final phase and unfold rapidly then suddenly.
The replacement? Not another FX. Not SDR’s or anything like that. Rather, a gold-backed digital currency being developed and sponsored by a combo of the world’s largest holders of physical gold, who are all now keenly motivated to globally replace the dollar for all their international transactions whilst satisfying the global thirst for a reliable, stable, non-manipulated, non-weaponized unit of account.
March 6, 2019 at 8:27 am |
Just as internet technology disrupted retail and all other forms of consumption, blockchain technology is going to disrupt banking and all other forms of finance.
March 6, 2019 at 3:23 pm |
David–yes and it will only surprise those wedded to the mineset of New York the most powerful City in the world.I wish that Kelton and others would bother to read the works of Wallerstein,Arrighi and Braudel for another view of economic history
March 6, 2019 at 4:28 pm |
David,
China under Xi have planned to challenge the US for superpower status. Their economy may overtake ours in the next 10 years with a population over four times as large. A rapid military buildup is in progress . An important block in this building process is the goal of having the yuan as a reserve currency, a huge advantage we have and allows us to have unsustainable trade deficits. See today’s numbers. China (and Russia) have been accumulating physical gold and my guess is their gold holdings has far surpassed ours. The suppression of the paper gold price has allowed them to buy the metal cheaply. I think the emergence of a gold backed yuan announcement will have a sudden and dramatic effect. When this will happen no one knows.
The main obstacle to their emergence as a financial behemoth is their debt position. But the US is also in a similar precarious balance sheet situation along with trillion dollar budget deficits. At some point the acceptance of non- metal backed currencies will end.
This has invariably been the epilogue of all fiat currencies throughout history.
March 6, 2019 at 5:33 pm
Asherz—-right on target and as others have opined today on this blog—-something big will be put together using gold and the crypto world.As Bosko above has alluded to in the past as well as the American Limey—-blockchain will provide a protective format for the reemergence of gold.It will become quite ironic when the neo-Keynesians begin pushing for some type of bancor currency backed by some basket of commodities—gold will certainly become part of the discussion
March 6, 2019 at 8:08 pm
“allows us to have unsustainable trade deficits.”
Okay but from my perspective it strikes me as more of a curse than a privilege, IMHO.
March 27, 2019 at 2:17 am
Asherz, I agree with all you write except I’m not so sure there’ll be a gold-backed yuan, as it seems that nobody else wants to be THE reserve currency, despite its “enormous privilege”, due to the overvaluation and competitive disadvantage that brings.
Nevertheless, China and Europe and others want to trade more in their own currency and less with the dollar, especially because the US has weaponized the dollar such as using it to bully Europe into complying with Trump’s unilateral sanctions against Iran with which Europe and the rest of the world disagrees. However, everyone trading in their own currency becomes chaotic and inefficient, like if the US the dollar was replaced with fifty state currencies or barter.
Instead we need a single, reliable, stable international unit of account, and precious metals or a genuine gold-backed digital currency over blockchain (the current emergence of stablecoin over blockchain is a step in that direction, as recently announced by Facebook for example) apparently seems better than the international monetary system at present, which currently seems to be a race to devalue among most central banks. Reference Ben Hunt’s “They’re not even pretending anymore”.
March 27, 2019 at 3:45 am
David,
China is already trading a gold backed petro Yuan. That is a big deal as the petro dollar is what keeps the lofty status of the US currency. After Nixon decoupled the dollar from gold in 1971, it was the petro dollar creation with the US and the Saudis that came up with that currency. If not for the petro dollar the reserve status of the dollar would be greatly diminished.
I have no doubt that China has put its foot in the door with the petro yuan as a beginning challenge to its rival.
As this battle of the Titans progresses, the military rivalry will become much more significant. Historically wars have started with this kind of competition.