Modern Monetary Theory (MMT)

I have seen more and more discussion about this topic of late, wondering what the thoughts of others are. The central tennant is that essentially a government can never go bankrupt unless it borrows in another currency as it controls the supply of money. The only constraint is inflation, which post GFC, despite low rates and QE actually hasnt really eventuated to a great extent.

Key points:

• governments cannot go bankrupt as long as it doesn’t borrow in another currency
• it can issue more dollars through a simple keystroke in the ledger (much like the Fed did in the Great Financial Crisis)
• it can always make all payments
• the government can always afford to buy anything for sale
• the government can always afford to get people jobs and pay wages
• government only faces two different kinds of limitations; political restraint and full employment (which causes inflation)
• The government can keep spending until they begin to crowd out the private sector and compete for resources

I am no economist, but read a good summary here:

EVERYTHING YOU WANTED TO KNOW ABOUT MMT (BUT WERE AFRAID TO ASK)

I think there is a chance this will continue to build momentum to some extent. Too many countries with massive deficits as well as private sector debt. No-one wants to pay it back, much easier to just inflate it away. Japan have been doing it for years, US quite successfully did it post GFC. It probably works best when governments don't explicitly say that is what they are doing. It would punish savers, bond holders of course. Would benefit asset/debt holders provided interest rates stayed under control

Like I said I am no economist and it seems like a very divisive topic, curious to hear what others think?

 

Bad news for assets. There’ll be more publicly scrutiny over central bank stimulus of markets if they’re not going to inject money into gov spending also. They got away with it over the last 30 years because lowering interest rates is nothing like printing money but QE is virtually printing money for banks to lend out.

It’s reached the point of the plebs wanting a piece of the pie. This is where they’ll have to let all crash imo.

 

Its like corporate debt. Its a debt until they cant pay. Its an asset. When they cant pay its a simple issue.... Then its a loss. But when the govt in the US bailed them out it funded bonuses not paying off the debts. Its going that way again.

Amazon, Tesla etc all too big to fail right ? They said that about banks.

 

Or print money and distribute to the plebs..... QE for the people.

This has been pushed universal income for people who can't or don't want to work.

 

Which won’t happen which is why the central banks might be forced to end the QE program which has kept markets propped for 7 years now.

 

I think they will do peoples QE. We had a mini one after GFC thanks to Rudd, it was one of the reasons they quoted as helping our economy along.

It will also help political class and central bank to remain in power.

 

I think that is one of the main different points to MMT over straight QE. QE the way the US did it inflated asset prices without generating growth in the wider economy. I think one of the principles of MMT is that the funding is directed more towards direct government spending on infrastructure, job creation etc. Asset price growth would come as a secondary effect.

 

Another article on the topic, highlighting Trump stance is pretty closely aligned to MMT

TRUMP: THE FIRST MMT PRESIDENT

I think for me the takeaway is don't assume credit expansion must come to an end anytime soon. The world is addicted to credit and paying back debt the old fashioned way is just too boring (and politically unpopular)

 

Fed balance sheet vs S&P 500

 

Fin Review not convinced:

Modern monetary nonsense

 

I think ‘universal’ income is for everyone, not just the unemployed. That’s how it gets it’s name.

 

Resurgence of interest in MMT of late:

We are all Modern Monetarists now

 

The Government is not a corporate entity, do not make the mistake of making that comparison.

Watch & Learn

 

Nice simple explanation.

I think the coronavirus pandemic is going to force the hand of some governments towards things that look a lot like MMT, even if they don't want to come right out and say it.

 

The Conservative 'Liberal' Party has become a Socialist Party overnight. Who would have thought?