Modern Monetary Theory

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.nytimes.com/2022/02/06/business/economy/modern-m…

**Is This What Winning Looks Like?**

**Modern Monetary Theory, the buzziest economic idea in decades, got a pandemic tryout of sorts. Now inflation is testing its limits.**
**By Jeanna Smialek, The New York Times, Feb. 6, 2022**

**....**
**Modern Monetary Theory posits that if a government controls its own currency and needs money — to make sure its citizens have food and places to live when, say, a global pandemic pushes many out of work — it can just print it, as long as its economy has the ability to churn out the needed goods and services. In the M.M.T. view of the world, “How will you pay for it?” is a vapid policy question. Real-world resources and political priorities determine how much lawmakers can and should spend...**

**M.M.T. theorists argue that society should feel capable of spending to achieve its goals to the extent that there are resources available to fulfill them. Deficit spending need not be constrained to recessions, even theoretically. Want to build a road? No problem, so long as you have asphalt and construction workers. Want to feed children free lunches? Also not a problem, so long as you have the food and the cafeteria workers....**

**Without thinking about paying for it, the government quickly passed a $2.3 trillion relief package in late March 2020. In December, it followed that up with another $900 billion. In early 2021, Congress added $1.9 trillion more....** [end quote]

Also, the rivers will ran with wine and the clouds rained chocolate drops.

Seriously, the result of increasing demand (money placed in consumers’ hot little hands) without increasing supply (decreasing supply due to the pandemic) increased prices.

https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=p…

Federal Net Outlays as Percent of Gross Domestic Product spiked to 30%.
https://fred.stlouisfed.org/series/FYONGDA188S

Federal Debt: Total Public Debt spiked to $28 Trillion in a $22 Trillion GDP economy.
https://fred.stlouisfed.org/series/GFDEBTN

With the Federal Reserve intending to stop their emergency bond buying, the bond market will gradually become free again. (It’s been a long time coming.) Treasury bond yields are already beginning to rise and the fun has just begun.
https://stockcharts.com/freecharts/candleglance.html?$IRX,$U…

As Treasury bond yields rise, the cost of servicing all this debt will rise. In the 1970s, when inflation was high, servicing Treasury debt took 1/4 of Federal revenues, displacing many other priorities. And the debt was much lower than it is now.

Modern Monetary Theory pushes policies that put money into consumer hands. It does nothing to increase supply. It’s inflationary. Period.

MMT is a concept invented by “spoiled children” who grew up in a prosperous, low inflation, low interest rate time created by others. But that changed fast. The Macro economy responds quickly to forces that can easily get out of control.

Wendy

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Modern Monetary Theory posits that if a government controls its own currency and needs money

Yep and China end of last year was seeing an annualized 14% inflation rate while the US in the 7% area.

The heart of this is how long will it last. The US FED is stopping the bond buying so it will be temporary. The Chinese Xi is a dictator who can not stop. And he mostly certainly has not stopped.

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“…policies that put money into consumer hands. It does nothing to increase supply.”
But doesn’t money in the hand increase demand which then leads to an increase in supply?

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<“…policies that put money into consumer hands. It does nothing to increase supply.”
But doesn’t money in the hand increase demand which then leads to an increase in supply? >

Eventually, manufacturers will be able to increase supply in order to meet demand. The problem is timing.

In the short term, Congress provided an immense pulse of money at the same time that Covid-19 interrupted supply chains all over the world. The factories in China continued to produce, but the container ships were delayed for weeks at the U.S. ports (such as Los Angeles).

Now that U.S. manufacturers see that just-in-time inventory control can cause production to shut down if only one component runs out of inventory, manufacturers are building up inventories. In fact, a large part of GDP growth in the last report was due to inventory building, not to the purchase of final product by consumers.

There is the potential for a recession to be caused by the mis-timing of supply and demand. This is the classic way for recessions to happen.

  1. A manufacturer builds up inventory due to anticipated future higher demand. (In services, a hotel can add extra rooms or a doctor’s office can add extra nurses, etc.)

  2. For whatever reason, the future actual demand is lower than the anticipated demand. Now the manufacturer (or service) has too much inventory. To lower costs, the manufacturer (or service) lays off employees.

  3. The laid-off employees have lower income. They spend less. This lowers overall demand.

  4. The manufacturer cuts back further. If this is widespread, a recession results. Many businesses may close permanently.

High unemployment during recessions can last a long time (like the Great Recession 2009).

Congress did the right thing in pumping money into the hands of consumers to prevent a long recession from Covid-19. The Fed did the right thing by preventing a credit crunch and financial crisis.

It’s a very hard call to know when and how much to stimulate. Not to mention when and how much to withdraw stimulus.

If you draw two waves on top of each other which don’t match you will see how hard it can be to reach equilibrium.

The Covid stimulus was a one-time pulse in response to an emergency. Modern Monetary Theory is different. MMT proposes constant, unending government stimulus with no emergency and no plan to pay for the spending. Supply will eventually catch up with demand. But the government will become more and more indebted with no end in sight.

Even without MMT, the nonpartisan CBO projects $70 TRILLION in deficits by 2050, mostly from entitlement spending (Medicare and Social Security). At some point, our lenders will stop financing our deficits. The Federal Reserve can buy Treasury debt but sooner or later that will cause hyperinflation. It’s been done before in many places.

Wendy

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I always felt the demand side policies were better than the supply side. Put money in the hands of those that will spend it, the rest will take care of itself. If there is something the JC class like is demand for more product and services. (I’ve always felt the illegal drug trade was the ultimate demand side economy: if people demand the product it WILL be sourced, no matter the expense or the danger.) It seems the problem here was the virus impacting the ability to ramp up the new supply. And yes, we might see JIT fall way out of favor now. Should we look into the REITs that will supply the warehousing to store all this raw materials and parts that will now be procured before they are needed?

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3. The laid-off employees have lower income. They spend less. This lowers overall demand.

Seems to me we could have addressed that but for the greed.

Up to three-quarters of the $800 billion in disbursed Paycheck Protection Program (PPP) funds flowed to business owners instead of workers, study finds
https://www.marketwatch.com/story/up-to-three-quarters-of-th…

Direct payments to workers is always preferable to laundering the money through the banks or business owners. There’s just too much opportunity for theft, and our legal system is soft on white collar crime.

intercst

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<And yes, we might see JIT fall way out of favor now. Should we look into the REITs that will supply the warehousing to store all this raw materials and parts that will now be procured before they are needed? >

That’s an interesting idea!
Wendy

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Modern Monetary Theory pushes policies that put money into consumer hands. It does nothing to increase supply. It’s inflationary. Period.

MMT is a work in progress and so definitions will vary, but MMT does control inflation. Mainstream Keynesian uses Fed interest rates to control inflation. MMT uses taxes and guaranteed employment (NAIBER) to control inflation. The US is clearly still using Mainstream Keynesian in practice.

The US helicopter money was a Keynesian response to the pandemic. MMT would have offered guaranteed employment. The pandemic response says little about if MMT is practical for a large economy.

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Which MMT books that you have read would you recommend we read so we can gain an understanding of your conclusions?

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Chapter 3 of Stephanie Kelton’s book The Deficit Myth is available at this link.

https://www.milkenreview.org/articles/the-deficit-myth

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Today, I read this article on the increasing demand for warehouse space.

https://prospect.org/economy/warehouse-space-race/
The Warehouse Space Race
With warehouse capacity at a premium, businesses try to get goods and move them out as global economic chaos disrupts long-held ideas about stocking stuff just in time.

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When I read about MMT it just makes me more determined to go out and buy gold and silver!

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Thank you for recommending this post to our Best of feature.

When I read about MMT it just makes me more determined to go out and buy gold and silver!

What no Bitcoin? }};-@

Anymouse

https://www.theguardian.com/technology/2022/feb/08/us-marrie…

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When I read about MMT it just makes me more determined to go out and buy gold and silver!

Gold and Silver don’t procreate. Buy the producers of wealth available on the stock market.

The Captain

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Gold and Silver don’t procreate.

They don’t need to as they have been round for thousands of years and never ‘die’.

Buy the producers of wealth available on the stock market.

Got pleanty already. Just spreading it around. In the words of Francis Bacon:

Money is like muck, not good except it be spread

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Silver is down roughly 20% YOY. Gold is effectively flat YOY. If 7% YOY inflation can’t get either to make money, I have my doubts that anything in the near future will.

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Silver is down roughly 20% YOY. Gold is effectively flat YOY.

I’m not too worried, nor are these institutions:

Central banks accelerate shift from dollar to gold worldwide

https://asia.nikkei.com/Spotlight/Datawatch/Central-banks-ac…

Butler’s calculations show that JPMorgan (JPM) has piled up the largest holding of physical silver in modern world. Since the silver price peak in May 2011, the bank has accumulated between 100 and 200 million ounces of physical silver (if not more). The equivalent in metric tonnes is between 3,110 and 6,220 tonnes.

https://mikesmoneytalks.ca/jp-morgan-holds-highest-amount-of…

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Hawkwin,

Yep the FED’s printing or monetary policy is temporary. This not a bull market for gold and silver.

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Diviatias,

Everyone’s a saleman.

Caveat emptor

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They don’t need to as they have been round for thousands of years and never ‘die’.

While that’s true, it’s not convincing.

Here, with the approximate ratio, is gold vs. the DOW.


Year     Gld/oz.    DOW      Ratio
1930      21        131      1:6
1940      34        141      1:4
1950      55        235      1:4
1960      35        616      1:18
1970      36        839      1:23
1980     614        963      1:1.5
1990     384       2633      1:7
2000     280      10800      1:39
2010    1226      11580      1:9
2020    1770      30000      1:17

https://www.thebalance.com/gold-price-history-3305646

I looks to me as though “stocks” (as imperfectly represented by the DOW) have also never died. It likewise appears that gold has only done well at times of the most severe economic crisis: the Great Depression, the Arab Oil Embargo, the financial collapse of 2008. Otherwise stocks have performed better, longer, richer.\

That may not always be true, of course, but going by history you’re way better off putting your dollars into stocks than into gold.

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