Modern Monetary Theory: Economic absurdism enters the mainstream

Courtesy of Frank R. Suess, Co-Founder & Executive Chairman of Global Gold AG in Switzerland. This excerpt comes of the April edition of their Quarterly Digger.

After the Trump election victory, traditional, conventional politics and politicians have largely fallen out of favor. Middle-of-the-road ideas, proposals crossing party lines and common-ground platforms that once played a prominent role in many campaign playbooks have been replaced with a very different type of strategy. These days, amid sharp political polarization and social division, it is the loudest voices and the most extreme ideas that get the most airtime. In such an environment, where emotional arguments routinely reign over facts and logic, policy platforms have dramatically shifted their focus to style over substance.

 This trend can be spotted in many countries in the West, but it is arguably most apparent in the US, where the next election is already on the horizon. The Democratic party, eager to dethrone Donald Trump, has already produced a small army of candidates that will compete for the nomination. So far, there are 14 confirmed candidates and 3 exploratory committees, while there are even more “suspected” candidates, like former Vice President Joe Biden, that are still keeping their cards close to their chest. With “choice overload” being a real risk, standing out from one’s opponents is clearly a challenge and a strategic necessity in winning the overcrowded primary.

 To achieve this and to increase the contrast with the Trump administration, which is much-reviled within their ranks, some of the candidates and other high-profile young Democrats have embraced strategies ranging from the naively idealistic to the downright populist. Policy proposals like the Green New Deal, support for the Universal Basic Income and other crowd-pleasing, blue-sky pitches have shown a steady deficit of practical consideration and fiscal realism. As is usually the case with political promises like these, the numbers don’t add up. However, today there is the new solution to this old problem: when the numbers don’t add up, simply cast doubt on the numbers themselves. And that’s where “Modern Monetary Theory” comes in.

A brief crash course on MMT

Even though Modern Monetary Theory (MMT) has only recently entered the public consciousness, it has been around for quite a while. Academically, it mostly lurked in the dark alleys of the Economics field, dismissed as a fringe notion and thus largely ignored. The theory would likely have lived out its days in obscurity had it not been for high-profile political figures like Alexandria Ocasio-Cortez dragging it into the limelight.

MMT, commonly derided as the “Magic Money Tree” theory, flies in the face of most basic economic and monetary principles. It is based on the idea that since a country can exert control over its own currency, it really doesn’t need to be concerned over things like debt accumulation, as it can simply print more money to pay it off. Since the “burden” of the gold standard is no longer a problem, the government can print its way out of debt, while deficit spending is not just seen as acceptable, but also encouraged. The only real constraint, according to MMT, is inflation. Even that, however, is not a big problem, as inflation can easily be managed through taxation.

The theory also rejects the widely accepted idea behind the common central bank practice of tweaking interest rates to nudge a country’s economy. Instead, MMT holds that the “natural” rate of interest is zero and anything higher than that is giving an unfair advantage to the rich. Supporters of the theory also claim that this practice is ineffectual too, because companies make their decisions based on growth and not on the cost of money. Once again, MMTers seem unfazed by facts, even in the face of our current predicament, where the historic pile-up of corporate debt, incentivized by artificially low interest rates, is posing a serious threat to the US and global economy.

According to the theory, as interest rates are not an appropriate tool to centrally control the economy, government spending itself should take over this role. Since MMT grants that a government’s printing power is unlimited, deficit spending is seen as having an exclusively positive impact on the economy. Therefore, they should do more of it to solve all kinds of problems. For example, to manage employment figures, MMT proposes a government-funded job guarantee, where the state is the employer of last resort, aiming at full employment. As prominent MMT supporter and Bernie Sanders advisor, Stephanie Kelton, put it: "Unemployment is evidence that the deficit is too small”.

While the political appeal of the theory might already be becoming apparent, the real ace up the sleeve of MMT is that, unlike any other left-leaning economic approach, it does not require enormous tax hikes to pay for all the ambitious political visions of its supporters. For MMTers, since the primary income stream comes from printing money at will, taxation in general is just an offsetting tool to keep inflation under control, when and if it is necessary. As for taxing the rich, in particular, it is not really a fiscal necessity, but a mere social and moral one in order to close the inequality gap. This rare combination of promising both high government spending and low taxes is a political silver bullet. Through the lens of MMT, grand designs, expensive government projects, large-scale benefits programs and even solutions to global problems can be promoted as not only fiscally feasible, but also as a “win-win” proposition to the taxpayer.

The entire MMT framework and all its proposals might seem outlandish and nonsensical at first, yet it all becomes even more bizarre once you look at the core tenets of the theory. For MMTers, the essential question of “what is money” has a largely political answer. They do see fiat money as a mere IOU with its value entirely reliant upon the reputation of the issuer, which is to a large extent a common argument with significant mainstream acceptance. However, they extend this logic to gold-backed currencies and even to actual gold coins too. They argue that even back in the old days, it was still the government or the stamp of the monarch that gave the coins their value, instead of the gold or silver they were actually made of. Of course, such an idea contradicts not only common sense, but historical facts as well, since if gold coins issued by one ruler were worth more than those of another, there would be exchange rates. Yet, quite predictably, the relevant records only mention exchange differentials based on the actual amount of gold in the coins.

A slippery slope

The core MMT belief of the government’s duty and capacity to centrally manage the economy through limitless money-printing quickly crosses over from the harmlessly eccentric to the downright ominous when the theory manifests in actual policies. Once again, there is a distinct political note, rather than economic reasoning, behind most MMT proposals. As advocates of the theory wrote in a recent letter to the Financial Times: “The more actively we regulate big business for public purpose, the tighter the full employment we can achieve”. An extreme degree of interventionism is vocally propagated by many MMTers, with proposals and arguments that place the theory much closer to centrally-planned, socialist models than the free market.

Nevertheless, whatever the motivations of MMTers might be, it is the glaring factual deficit of the theory that makes its recent ascension to a mainstream status highly problematic. As a Bloomberg analysis concisely put it: “mainstream economists argue that the correct parts of MMT aren’t new and the new parts aren’t correct.” To facilitate mainstream acceptance, MMTers have used the 2008 crisis to prove that the current system doesn’t work and to position their theory as the better way forward. While the regulators’ and the central banks’ actions before and after the crash can hardly be defended as sound, enforcing what MMT prescribes as the “cure” would be far more destructive than the disease itself. Also, at this point, where national debt levels have reached unprecedented heights, positing that even more debt is the solution to all our plight is not just absurd, but extremely dangerous too.

Similar concerns over debt accumulation are among the core arguments of most conservative critics of MMT, of whom there are many as one might expect. What is slightly more surprising, however, is the opposition that the theory faces from the liberal camp. Among the detractors, for instance, is Larry Summers, former Treasury secretary and Harvard president, known for supporting stimulative deficit spending by governments and rejecting the usual conservative-led fiscal responsibility concerns. He has attacked MMT in no uncertain terms, as has Paul Krugman, another vocal proponent of government spending, and many other economists and politicians from the progressive field. A likely explanation is that there is a widespread concern that MMT will give a bad name to their own views on deficits, making it difficult for even the more conventional ideas to be taken seriously moving forward.

Economic quackery as a political weapon

As we mentioned before, MMT has already proved its value as a handy political tool by providing a convenient response to the common question, “How are you going to pay for it?”. Alexandria Ocasio Cortez, the young and ambitious new star of the Democratic Party that has ceaselessly been in the news for almost a year now, has already invoked MMT in connection with her “Green New Deal”. While the plan has been the target of much ridicule and ire for its exotic proposals and was ultimately voted down in Congress in a crushing a 57–0 defeat, the core ideas that it was based on are still alive and well. More than that, MMT-derived proposals and plans continue to be propagated and are very likely to end up among the main issues that voters will be called upon to decide in 2020.

While it was Cortez that brought the theory to the headlines, it was Bernie Sanders, widely seen as a frontrunner for the Democratic nomination, that first opened the door for MMT to mainstream politics by hiring the aforementioned Stephanie Kelton as his economic advisor. Kelton, an economist and professor at Stony Brook University, ranked 182nd in the Forbes top colleges list, emerged as a leading and prolific advocate of the theory. As for Sanders himself, he is in the process of crafting a proposal for a “jobs guarantee” plan that would offer jobs paying $15/hour nationwide with benefits and healthcare, with an estimated annual cost between $200 billion and $400 billion.

Yet it’s not only in the left fringes of the Democratic party that MMT has found a home. Even more conventionally positioned candidates, like Cory Booker of New Jersey, Massachusetts Senator Elizabeth Warren, and Kirsten Gillibrand of New York, are supporting a government-funded “jobs guarantee” or universal employment plan. Furthermore, there are many more popular and common-denominator policy ideas promoted by most Democratic candidates that are very likely to increase support for MMT. “Medicare for All”, free college, and other crowd-pleasing and expensive ideas have so far been weakened by the old “How are you going to pay for it?” question nipping at their heels. Now, they have the MMT defense.

Implications for investors

This February, the US posted its largest-ever monthly budget deficit, as the gap widened to $234 billion, while the country’s national debt passed a new milestone, topping $22 trillion for the first time. The issues that divide the two parties in the US might be countless, but government spending does not seem to be among them. And while the fiscal reality and the figures can hardly be argued with, there is a key distinction between the political rhetoric of the old guard of both parties and this new breed of progressive challengers: the understanding that the debt problem needs to be urgently rectified, not gleefully exacerbated.

Although the term “populism” has been in recent years associated with the rise of the political right in the US and in Europe, that seems to be now changing. Young politicians from the other side of the aisle are increasingly promoting policies and ideas in line with what most voters want to hear, without concerning themselves with the realistic aspects of their plans or their long-term impact.

The promise of a “free lunch” is the oldest trick in the political playbook, going back thousands of years, but it has mostly been delivered at the expense of a significant part of the working and voting population. However now, in this post-factual landscape, this promise is much more marketable and therefore much more dangerous.

With an increasing number of economists and analysts expecting the next recession to hit in the next two years, this political trend is only likely to add to the severity of its impact. As the next US election draws near, there is a very real risk that we might see these economically destructive ideas manifest into actual policies. Given the extensive damage that absurd theories like MMT can inflict, especially on a steamed-out economy, a solid precious metals position is necessary, as an essential part of a defensive strategy for investors who seek to protect their wealth.

Given the extensive damage that absurd theories like MMT can inflict, especially on a steamed-out economy, a solid precious metals position is necessary, as an essential part of a defensive strategy for investors who seek to protect their wealth.

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As the Executive Chairman of BFI Capital Group, Frank Suess heads up the group's overall business and strategy. He personally advises a select group of wealthy international investors and families with a focus on cross-border planning and prudent wealth management. He also acts as the Chairman of the Swiss Registered Investment Advisors Association (SRIAA).