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Modern Monetary Madness

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When I think about MMT — Modern Monetary Theory — I visualize an odious miscreation squatting in its squalid swamp for decades, waiting only for an opportunity to erupt from the scum and devour the world’s economies.

Okay, maybe I should be taking my meds…

MMT’s main postulate, and it’s only raison d’être, is that a government that borrows in its own currency — i.e., the U.S. — can print as much money as it likes because it can never default — it merely needs to print even more money to pay its bills.

Oscar Wilde once said of Dickens’ maudlin character, Little Nell, that “One must have a heart of stone to read of the death of Little Nell without laughing.” Similarly given the vast history — at least 3,000 years — of governments printing huge amounts of money, causing runaway inflation and destroying themselves, one would have to have a brain of stone to read of MMT without crying.

MMT has raised its loathsome head today for two, and only two, reasons, each of them more awful than the other.

First, high inflation hasn’t been around for many years, and silly people have short memories. The folks behind MMT, some of whom are not even economists, are all too young to remember the terrifying days of the mid-​to-​late 1970s, when the combination of slow growth and high inflation (dubbed “stagflation”) threatened to nip the American Century in the bud. Still, you would think they would bother to read a history book or two.

Second, a presidential campaign season is upon us, and all the Democratic candidates have put forth policy proposals that cost trillions of dollars. Whatever we might think of the policies themselves, any sane person would have to wonder where the money for them is going to come from.

MMT to the rescue! $37 trillion (not a misprint) for Medicare for All? No problem! The U.S. Treasury will simply print all the money you need!

Like the “odious miscreation” described above, MMT has lurked beneath the public consciousness for almost a century, squirming around like a toad in the minds of a few fringe characters populating the nether regions of economics.

It all began, rather as many heterodox ideas began, with a gross misunderstanding of a sensible idea. In this case it was the core idea proposed by John Maynard Keynes in his magnum opus, “The General Theory of Employment, Interest and Money,” published in 1936.

Keynes argued that, during recessionary periods, governments should become, in effect, the buyer-​of-​last-​resort, printing and spending money during a period of time when everyone else was cutting back. Keynes believed this type of fiscal policy would mitigate the worst effects of negative economic cycles.

As an aside, one problem with Keynes’ theory is that, at least in a democracy, a government can’t just press a button and start spending. Government spending happens at the tail end of a long process of legislative debate and compromise, and requires the signature of the President (or enough votes to override a veto).

If the presidency and the legislature are controlled by different political parties, a whole lot can go wrong with the spending process. And if one party controls the presidency and both houses of Congress, a whole lot of other things can go wrong (especially pork barrel spending instead of productive spending).

Monetary theory arose in part to deal with the practical problems associated with Keynesian fiscal policy. Instead of having to rely on sketchy political horse-​trading, monetary policy simply requires the Fed to lower interest rates during weak economic cycles and raise them during boom times.

Alas, into this sensible economic theorizing strode an obscure fellow named Abba Lerner, who said to himself, “Wait a minute! If high government spending during recessions is a good idea, then even higher government spending all the time must be a great idea!”

Fortunately, this malarkey was largely ignored until there arose another obscure fellow, this one not even an economist but a hedge fund manager, to perform artificial resuscitation on MMT. Among other weirdnesses, Warren Mosler is a serial failure as an office seeker, having run at least six times without success. He also lives in the Virgin Islands so he doesn’t have to pay tax.

Mosler likes to tell the story of how he cleaned up on Italian lira back in the early 1990s. Italy was spending like a drunken sailor and many people assumed it was only a matter of time before the country defaulted on its massive debt.

But Mosler knew, per MMT, that countries can’t default, since they can just keep printing money. He went long the lira and made a bundle when, in fact, Italy didn’t default. (It didn’t default, but the lira collapsed. Eventually, 200 million lira would buy you half a banana. I know, I was there at the time.)

A story Mosler doesn’t like to tell is what happened a few years later. Toward the end of the 1990s, Russia took a page from Italy’s playbook and spent wildly. The smart money believed Russia would default, but Mosler, knowing, per MMT, that it couldn’t happen, went long the ruble. In 1998 Russia did in fact default and Mosler didn’t just lose some money, his hedge fund blew up and had to close. (Long-​Term Capital Management also blew up at this time.)

But the sorry example of Russia notwithstanding, Mosler proselytized for MMT incessantly, and soon a group of impressionable post-​Keynesians (L. Randall Wray, Bill Mitchell, Stephanie Kelton) found themselves convinced. They in turn, especially Kelton, glommed on to a few radical political candidates like Bernie Sanders and Alexandria Ocasio-​Cortez (both avowed socialists) who saw in MMT the solution to all their spending problems.

But is it? Next week we’ll continue with “This Is Your Life, MMT.”

Next week: Modern Monetary Madness, Part II


Greg Curtis

Gregory Curtis is the founder and Chairman of Greycourt & Co., Inc., a wealth management firm. He is the author of three investment books, including his most recent, Family Capital. He can be reached at . Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.

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