Is the U.S. about to become
the next Zimbabwe?
With the Presidential election less than 5 months away, it’s time to understand MMT.
The first Presidential debate is scheduled for Tuesday, September 29tth at the University of Notre Dame, in Indiana. It remains to be seen if this could be carried out in person. But before that, Labor Day is on, September 7
th
, setting up the next day as the day that the Presidential contest goes into high gear.
The economy will be center stage. That’s always the way it is in Presidential elections, but this time we’re in a deep recession and a pandemic. Record highs in unemployment and in the national budget deficit should bring acute interest to each of Trump’s and Biden’s economic policies.
At the heart of traditional economic policies, it’s accepted that there is one common choice, scarcity or surplus. Taxes must be collected and spending must be adjusted according to tax receipts. Deficits are supposed to be temporary; eliminated once the economy strengthens. It is a common sense approach that all households should follow. But the Government isn’t a household. There’s huge difference.
The Government can print money and it has the power to demand that citizens pay taxes with U.S. Dollars. These two things form the basis of our currency.
It’s hard to think of our Government losing access to credit, a fancy way of saying “borrowing”. When your household income doesn’t cover your expenses, you dip into savings and then hit the credit cards or HELOC, with limits. But the Government, through the Federal Reserve, prints money, most commonly in the form of Quantitative Easing (QE), that is nearly limitless.
When the Federal Reserve does QE, it buys Treasury securities from banks. It pays the banks by crediting their accounts on file with the Federal Reserve “central bank reserves”. This reserve credit is created out of thin air, which is why it is called “money printing”. These reserves given to the banks are a liability of the Federal Reserve, which in turn is a liability of the Government. So, by that definition, money printing does raise the national debt commitment. The Government promises to accept these reserves as payment, which makes it
OK
because the Federal Reserve could print/create money to pay those obligations. In reality, everything has to be backed by someone or something, so if need be, the Federal Reserve could just print paper money to give to a debt holder of the Government, as opposed to just an electronic credit in the same amount of money.
Between the Great Recession of 2008/09 and the current recession, Trillions of Dollars have been printed by the Federal Reserve and borrowed by the Government in order to help heal the economy. There are four ways to lower the debt:
1.
Raise taxes a lot.
2.
Cut spending a lot.
3.
Do a combination of 3 & 4.
4.
Adopt MMT.
I think it’s fair to say that there is no political will for items 1, 2, & 3.
MMT, Modern Monetary Theory, is a neat way to say that we could have what we want, when we want it, without ever having to pay it back until inflation goes up to a certain level. I cannot find anywhere what an acceptable inflation rate would be under a MMT regime. So, let’s just say “an acceptable level’ is one that's not so high that it hurts the economy.
MMT combines a few things:
1.
A Government budget surplus is the private sector’s deficit and vice versa.
2.
Printing money will not be a problem as long as the country has the productive capacity to produce the goods and services to absorb the newly printed money.
3.
Inflation won’t be a problem until a country’s demand for resources and access to resources (think imports), such as labor and materials,
sufficiently
exceed
supply,
sending
the inflation rate to a point where it harms the economy.
4.
When inflation is “too high”, whatever that level is, it means money supply is too high and it has to be reduced via tax hikes or increased interest rates.
5.
National debt is not consequential as long as the above items are met.
In other words, inflation should be the key metric in determining money supply; how much more money should be printed to soak up excess resources (labor), up to the point when we reach full employment, or how high taxes need to be raised to reduce money supply if inflation gets too high. Deficits don’t come into play with this reasoning.
If you think about it, that’s what we've had for the last 10+ years; budget busting tax cuts and money printing have led to an unemployment rate of about 3% just before the pandemic induced recession. And with all of the money printing that the Federal Reserve is currently doing and with all of the money, like the CARES ACT, that the Government is spending, inflation and interest rates are still at rock bottom lows.
Japan is a perfect example of MMT in the modern era. It met all of the above criteria.
The Weimar Republic, however, did not. It was required to pay massive war reparations from World War I and it didn’t have the goods producing capacity to soak up the newly printed money. So when it did print currency, it created hyper-inflation, which helped bring about a Second World War.
Zimbabwe, another example of a country with hyper-inflation, also didn’t satisfy the above items. The Mugabe government forced white farmers off their land and gave the farms to the soldiers who fought to gain Zimbabwe’s independence from Great Britain. Turned out that the new owners were not good at farming. The food supply plunged. Since this country, once considered Africa’s break basket, lost its production ability, it lost item 2, above.
I could come up with more examples, but the point here is that we are already in MMT up to our eyeballs, regardless if anyone wants to admit it or not.
Leading progressives Senator Bernie Sanders and Rep Alexandria Ocasio-Cortez have been vocal proponents of MMT, which is why it’s closely associated with progressives. Their thoughts, in my interpretation, could be summed up ‘Since we all know we are never going to pay back all this money, let’s all just admit it and use MMT to create social and economic equality”.
The big negative to MMT is that just like now, it is doubtful any politicians will have the political will to raise taxes in order to tamp down the money supply if inflation hits a certain level that hurts the economy. While Japan has a national debt ratio over 200% with low inflation, we haven't yet seen how things there would work out if Japanese inflation rose to the point of becoming harmful to its economy. Additionally, are we saying that we don't care about the national debt we leave to future generations? Jumping all in for MMT today sounds great today because we could have what we want now, but future generations may have to live with inflationary constraints from our consumption today.
The current situation is that politicians have gotten used to going to the FED whenever the country’s money supply was, well, in short supply. No matter who is President next January 20th, I don't see how that will change.
Please share this with a friend.
Thanks and have a great weekend,
Mitch