Will Modern Monetary Theory Work?*

MMT provides a textbook illustration of Stein’s Law: “If something cannot go on forever, it will stop.” MMT will work – in fact, it is working, and it will continue to work – until at some point it will stop working. When it stops, the consequences will be hellacious. Now is an appropriate time for the U.S. government to address and deal with what is proverbially an oncoming train. The alternative is to await the type of all-American crisis warned by Winston Churchill: “Americans can always be trusted to do the right thing … [only after] all other possibilities have been exhausted.”

MMT posits that, because the U.S. government owns the printing press, the U.S. can spend as much money as it would like to amass virtually unlimited debt simply by printing Dollars. No matter how much debt the U.S. runs up, and no matter how high a price it has to pay in interest, it can always payoff its obligations simply by printing more Dollars. Therefore, unlike an individual borrower, the U.S. can’t spend too much money and can’t have too much debt. This perpetual motion printing press works, say MMT fans, not only because the U.S. government owns the printing press, but also because the Dollar is the world’s accepted medium-of-exchange – its fiat currency. That too is not going to change, they say. They add that the U.S. has the world’s largest and most durable economy and the Dollar is backed by the largest quantity of gold held by any country. It therefore has the capacity to spend far more than it historically has spent.

Interestingly, the MMT-ers have a point … up to a point. That is, how much more can it spend?

The U.S. would have a problem with an out-of-control printing press if (1) its currency is replaced as the world’s fiat currency – for example, by another country’s currency or by cryptocurrencies or gold, or (2) people lose faith in the value of the Dollar – for example, because people in other countries stop accepting the US Dollar at its face value as payment for goods and services, (3) its money-printing creates excessive inflation, or (4) its money-printing ceases to add value to the economy. None of these potentialities appears imminent today. There are no heavyweight challengers to the US Dollar, the US Dollar is universally accepted as the world’s secure medium-of-exchange, there presently is too little inflation, not too much, and U.S. productivity continues to increase, albeit at a slow rate. As a result, printing Dollars for any and all reasons appears to be a riskless workable policy.

Well, almost.

The loudest boosters of MMT are Democrats who see a need to spend Dollars to reduce poverty and create a fairer, more balanced society by providing Medicare for All, a Green New Deal, relieving the student debt problem, reducing inequality, potentially providing a guaranteed minimum income … and paying for their pet projects. And Republicans despite ridiculing the concept are the silent practitioners of MMT by running up enormous deficits. They’re printing Dollars by cutting taxes, increasing spending on defense, increasing border security … and paying for their pet projects. Put another way, both parties are intent on spending “whatever it takes” to inflate the stock market boost the economy persuade their constituents that they should be re-elected (though each with a different agenda and rationale). Therein lies the problem. Even those of us who are not economists understand that there’s no such thing as a perpetual motion machine – as Jeffrey Gundlach commented, “It sounds good for a first-grader.” Forever is an illusion.

Some of the biggest detractors of MMT are … well … some of the biggest names in the world of economics: Larry Fink labeled it “garbage”; Bill Gates called it “crazy talk”; Jeffrey Gundlach said that it’s “complete nonsense”; former New York Fed president Bill Dudley called it a “crackpot theory”; Larry Summers called it “fallacious at multiple levels”; and liberal economist Paul Krugman and Fed Chair Jerome Powell have both rejected the economics underlying MMT, Powell calling it just “wrong.” All also decry America’s large and swelling deficits. Moreover, when the University of Chicago’s Booth School of Business asked top scholars about a couple of MMT’s claims, they split between 28% who disagreed … and 72% who strongly disagreed.

Nevertheless, MMT has a good many supporters, some of whom view its ideas as timely and worthy of execution.

Whether or not MMT has validity as a theory, it most certainly has legs! It would be foolish to believe that Congress is not going to continue deficit-spending whatever label anyone attaches to that spending. America’s debt is going to increase. That increase might possibly can be constructive in the near-term, but the long-term consequences are potentially disastrous. And yet, it’s worth noting that America’s debt has grown enormously over the past 10 years, and yet America’s GDP has continued to grow, jobs have increased, employment has increased, inflation has been tame, and the US Dollar has strengthened against all major currencies. That lends support for at least some of the assumptions underlying MMT … and for continued deficit spending.

What analytical support might there be?

The fact is that government expenditures, even those that create massive deficits, can increase a country’s wealth and productivity … if appropriately targeted. If those expenditures increase job opportunities and/or job creation, that will add to the country’s wealth by being recycled through the economy. If those expenditures increase Americans’ spending, that will have a multiplier effect by creating jobs and prompting further spending. If those expenditures lead to increased corporate research and development, that will create technology and a national competitive advantage, adding to the country’s wealth. If those expenditures cause companies to build new plants and put more equipment into service, that will add jobs and income. If those expenditures reduce environmental damage and incentivize new industry, that too will increase productivity as well as reduce health-care costs, create jobs and add to the country’s wealth. Unfortunately, those have not been the ways either Democrats or Republicans have been looking at or authorizing government expenditures. They have not been targeting productivity gains. Medicare for All does not claim to put more Americans to work or spur consumer spending. It has laudable goals, but those are not two of them. The Republicans’ 2017 tax cuts have not been used by companies to increase their R&D or build plants or buy equipment; instead, they have been used primarily to buy back corporate stock, which has increased stock market valuations and benefited wealthier Americans without being funneled back into productivity.

Government expenditures that increase wealth and productivity will enable the U.S. to pay off the increased debt that those expenditures incur as well as finance further expenditures … for both parties’ purposes. If not, however, trouble lies ahead!

Finally (from a good friend)

Have you ever asked yourself whether hell is exothermic or endothermic?

The tale on the internet is that this was the final exam question asked by an Oklahoma thermodynamics professor known for asking questions such as “Why do airplanes fly?” The alleged question was: “Is hell exothermic or endothermic? Support your answer with a proof.” As the legend goes, most of the students wrote proofs of their beliefs using Boyle’s Law or some variant, while one student wrote the following. You be the judge of authenticity:

“First, we postulate that if souls exist, then they must have some mass.

Second, at what rate are souls moving into hell and at what rate are souls leaving? I think that we can safely assume that once a soul gets to hell, it will not leave. Therefore, no souls are leaving.

Third, let’s look at the different religions that exist in the world today. Some of these religions state that if you are not a member of their religion, you will go to hell. Since there are more than one of these religions and people do not usually belong to more than one religion, we can project that all people and all souls go to hell. With birth and death rates as they are, we can expect the number of souls in hell to increase exponentially.

Fourth, let’s consider the rate of change of volume in hell. Boyle’s Law states that in order for the temperature and pressure in hell to stay the same, the ratio of the mass of souls and volume needs to stay constant. Two options exist:

If hell is expanding at a slower rate than the rate at which souls enter hell, then the temperature and pressure in hell will increase until all hell breaks loose.

If hell is expanding at a rate faster than the increase of souls in hell, then the temperature and pressure will drop until hell freezes over.

So which is it? If we accept the quote given to me by Theresa Manyan during Freshman year, “that it will be a cold night in hell before I sleep with you” and take into account the fact that I still have NOT succeeded in having sexual relations with her, then Option 2 cannot be true…. Thus, hell is exothermic.

The student, Tim Graham, got the only A.”

*© Copyright 2019 by William Natbony. All rights reserved.

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