“The way money is created reveals a fundamental truth – money is free and infinite. BUT only one class of institutions (and their patrons) gets to experience money for what it really is.
The rest? They must play Hunger Games for their scraps. They must treat money as a rare and precious commodity and pray the checks clear – or that Angelina Jolie adopts them.”
- The Prosperity Paradox, 2014
It finally happened. The Atlantic just published a piece called “Stop Worrying About Budget Deficits: Red ink isn’t a problem as long as the country is spending on the right things‘. It’s really important for every American to understand how mainstream economists are steering the US towards MMT (“Modern Monetary Theory” or “Magic Monetary Theory“), which is printing unlimited money to solve all our problems. Because it’s magic! I’ll explain the good, bad and ugly of the new rules of macroeconomics – and how we should use this magic.
First, some context…
Until now, we’ve been living under perverted Keynesianism, where government spends during busts but fails to save during booms. The prevailing alternative, stingy Austrian economics of limited debt and balanced budgets, get hot air, but no liftoff.
Even perverted Keynesians once feared inflation. Print too many dollars and prices go up, interest rates skyrocket, debt servicing becomes impossible, and we default. This has not happened for many reasons. The biggest is debt and dollars are our number one export.
The more countries, companies, institutions and individuals use dollars and hold dollar-based debt, the less they want these assets to fail. Reserve currency status, without more stable alternatives, gives the US a singular chance to spend **virtually** unlimited cash – and run huge defects.
Just like OPEC nations and Russia lived off oil, failing to develop real diversified economies, the US’s reserve currency status lets us live off limitless printed and borrowed dollars without fixing deep structural issues. This glitch is what props up our economy.
The New Rules of Macroeconomics
Now, EVERYONE – even slowpoke economists, who missed ALL the BLATANT signs of the Great Recession (or were actively complicit in its crimes), woke up to our magical reality. So they’ve re-written the rules of macroeconomics, captured in the Atlantic piece. I’ll break down all four rules…
Rule #1: Run a Deficit
It’s true, we can run big deficits for as long as dollars are the reserve currency.
This masks a slow-motion economic collapse: Aging, hollowing out of the middle class, trade deficits, borrowing to fund basic expenses and failure to address root causes. This postpones needed structural, economic and tax reforms.
Rule #2: “Forget about Debt as a share of GDP”
Yes, Japan has dragged along with a dying population and stratospheric debt-to-GDP ratio for decades (albeit with more domestic creditors). If they can do it, we can too. But surviving isn’t thriving. It is a disincentive to fix underlying problems.
Rule #3: “Instead measure interest owed as % of GDP
This is the macroeconomic equivalent of going from a balance sheet to a cash flows statement. As long as rates stay low, we can make our monthly payments and buy groceries.
Rule #4: “Use deficits to fuel growth”
This I agree with. We should have been investing in revenue-generating activities for decades. So why haven’t we?
Because our capital is wasted. We’re barely making the rent, so to speak. Most of our spending goes to entitlements (Medicare, Medicaid, Social Security) and military. Very little goes to address poverty, healthcare, education, drug addiction or GROWTH.
We also give away billions a year in tax breaks and loopholes to politically-connected corporations and rich people with no justifiable upside. The 2017 tax cuts did more of that (but did reduce mortgage and state tax deductions, which were regressive).
Reality is, we manage money like a meth-head plays Jenga. Not well. I broke down our government’s spotty history of stimulating industry in Episode 3 of my healthcare podcast series, Would You Trust A Schizophrenic? (With Your Healthcare).
So where’s this going?
As much as I hate to say it, towards MMT.
Modern Monetary Theory basically argues that the US can solve all problems through money printing. An in a strange way, they’re right…
Here’s former Federal Reserve Chairman Ben Bernanke explaining how dollars are created.
For those who might be wondering, “Where did the Federal Reserve get the $1.5 trillion they just committed to injecting?”
A blast from the past explanation of how it all works. ???? pic.twitter.com/wCQUwni8El
— Stephanie Kelton (@StephanieKelton) March 12, 2020
It’s hard to vilify MMT believers when our actual monetary system creates dollars with keystrokes. Magic is magic, whoever holds the wand.
And they’re right, our dollar-voodoo offers a rare opportunity to fix our ills. But whether we try or not, eventually a reckoning comes. And trust me, you won’t want to be there when it does…
There’s a litany of other problems with MMT. I captured five big ones in this thread:
I'll let @paulkrugman handle MMT's explicit problems. Mine are with its implicit presumptions:
1—We know how to manage long term vs short term
2—Global interdependencies don't matter
3—permission for uncapped spending
4—ignoring effect of aging
5—We can control inflation post-MMT
— Steve Faktor (@ideafaktory) February 26, 2019
What should we do? A 14 point proposal
The good news is we have the time and resources to fix our problems. What we don’t have is the sense of urgency or talent to do it. Our current system is bogged down with mismanaged programs, corrupt cronies and a lack of vision.
But if we could…
Here’s my (draft) proposal:
- Massively increase immigration and assimilation. We’ll need a massive population to compete with China’s economic might. Read ‘One Billion Americans‘ by Matt Yglesias
- Create pro-family policies and birth incentives
- Incentivize private job training and apprenticeships
- Co-fund entrepreneurs (with professional investors)
- Fund and create huge prize competitions for R&D and innovation.
- Simplify the process
- Use deadlines, like we did with our Coronavirus response
- Ensure Americans benefit financially from resulting discoveries
- Untether healthcare from jobs. Listen to my awesome (no, really!) podcast series on this
- Unlock wasted human capital with prison, poverty and rehab programs/reforms/incentives
- Distribute abandoned land and homes in dying cities (like Detroit) for path to citizenship (with 5-7 year residency commitment)
- Align financial interests of big businesses and US citizens (more on this soon)
- Globally, re-envision NATO as a trade entity to rival China
- Create path for other nations to join the new NATO. I wrote up how to do it here.
- Create trade and infrastructure spheres of influence with emerging nations
- Intra-NATO labor market fluidity – workers can easily move from one member to another
- Repatriate strategic industries from abroad
Note: not all of these ideas explicitly use printed money, but all of them indirectly benefit from the borrowed time printed money buys us.