Modern Monetary Theory (MMT) is presented as a means to painlessly fund the large-scale infrastructure / alternative energy spending the nation needs to rebuild and modernize.
While most people support the goal of useful fiscal stimulus (as opposed to paying people to dig holes and fill them), the question remains: Will MMT work as advertised?
Rather than dismiss it out of hand, I’m trying to approach the subject without ideological bias.
What Exactly Is MMT?
The basic idea of MMT (as I understand it) is that the economy is not running at 100% capacity–there is capital, equipment, people and resources which could be put to work to better society, and the chief impediment to making full use of our capacity is a lack of funding for projects that would benefit society.
In other words, the only thing standing in the way of broad-based, socially beneficial spending / progress is a lack of money (funding).
The fantasy that a “balanced portfolio” yielding “balanced returns” will fund a stable retirement for decades to come is widely accepted as a sure thing:inflation will stay near-zero essentially forever, assets such as stocks and bonds will continue yielding hefty income and capital gains, and all the individual or fund needs to do is maintain a “balanced portfolio” of various asset classes that yield “balanced returns,” i.e. some safe “value” lower-yield returns and some higher risk “growth” returns.
This fantasy is based on the belief that yields will exceed real inflation for decades to come. That is, if inflation is 2%, and the average yield of a “balanced portfolio” is 6%, then the inflation-adjusted return is 4% annually–not great, but enough to secure retirement income.
What few dare ask is: what happens if inflation is 7% and yields drop to 2%?Then the retirement fund loses 5% of its purchasing power every year. In a decade, the fund’s value will decline by roughly half.
Oops. Analysts such as John Hussman have been pointing out that historically, eras of outsized returns such as the past decade are followed by eras of low or even negative returns. So assuming a “balanced portfolio” of corporate and sovereign bonds, growth stocks, index funds, etc. will yield 6% to 7% like clockwork is essentially betting that this time is different: high growth will never pause or reverse.
But let’s say things really unravel, and inflation is 8% and yields are negative 2% for a few years. Retirement funds will lose 10% of their purchasing power every year. In a few years, the fund will lose half its value.
I’ve been focusing on inflation, which is more properly understood as the loss of purchasing power of a currency, which when taken to extremes destroys the currency and the wealth/income of everyone forced to use that currency.
The funny thing about the loss of a currency’s purchasing power is that it wipes out every holder of that currency, rich and not-so-rich alike. There are a few basics we need to cover first to understand how soaring future obligations–pensions, healthcare, entitlements, interest on debt, etc.–lead to a feedback loop which will hasten the loss of purchasing power of our currency, the US dollar.
1. As I have explained many times, the only possible output of the way we create and distribute “money” (credit and currency) is soaring wealth/income inequality, as all the new money flows to the wealthy, who use the “cheap” money from central and private banks to lend at high rates of interest to debt-serfs, buy back corporate shares or buy up income-producing assets.
The net result is whatever actual “growth” has occurred (removing the illusory growth that accounts for much of the GDP “growth” this decade) has flowed almost exclusively to the top of the wealth-power pyramid (see chart below).
One of the enduring mysteries of the past decade is why inflation has remained tame while the central bank and government have pumped trillions of dollars of newly created money into the economy. Millions of words have been written about this, and so some shortcuts will have to be taken to make sense of it in one essay.
Let’s start with the basics.
1. Adding newly created money but not generating new goods and services of the same value reduces the purchasing power of existing money. To keep it simple: say the economy of a country is $20 trillion. (Hey, the US GDP is $20 trillion…) Say its money supply is $10 trillion.
So banks and/or the government create $2 trillion in new money but the value of goods and services only expands by $1 trillion. the “extra” $1 trillion of newly created money (either “printed” or borrowed into existence) reduces the value of all existing money.
In effect, the new money robs purchasing power from all existing money.Those holding existing money have lost purchasing power while the recipients of the new money receive purchasing power they didn’t have prior to receiving the new money.
Long-time readers may recall the Burrito Index, my real-world measure of inflation. The Burrito Index: Consumer Prices Have Soared 160% Since 2001 (August 1, 2016). The Burrito Index tracks the cost of a regular burrito since 2001. Since we keep detailed records of expenses (a necessity if you’re a self-employed free-lance writer), I can track the cost of a regular burrito at our favorite taco truck with great accuracy: the cost of a regular burrito has gone up from $2.50 in 2001 to $5 in 2010 to $6.50 in 2016.
It’s time for an update: the cost of a regular burrito has now reached $7.50, triple the 2001 cost. That’s a 200% increase in 17 years. According to the federal government, inflation since 2001 has risen about 40%: what $1 bought in 2001 now costs $1.43, according to the BLS Inflation calculator.
The Burrito Index is five times the official inflation rate. As I noted in The Disaster of Inflation–For the Bottom 95% (October 28, 2016) and Inflation Isn’t Evenly Distributed: The Protected Are Fine, the Unprotected Are Impoverished Debt-Serfs (May 25, 2017), the gross under-reporting of inflation (i.e. the loss of purchasing power of “money” and labor) is only part of the distortion: some of the populace is protected by subsidies from the real ravages of inflation, while those exposed to the unsubsidized real-world costs are being savaged by supposedly benign inflation.
Lest you reckon only burritos have tripled in cost since 2001–have you checked out college tuition or rents lately? Consider a typical public university:
Of the many economic policies that are accepted as true yet are absolute nonsense, perhaps none is more achingly nonsensical than the notion that weakening a nation’s currency will magically make that nation prosperous.
Financial and risk bubbles don’t pop in a vacuum–all the phantom collateral constructed with mal-invested free money for financiers will also implode.
If there’s one absolute truism we hear again and again, it’s that central banks are desperately trying to create inflation. Perversely, their easy-money policies actually generate the exact opposite: deflation.
Events, food purchased away from home and live entertainment are increasingly unaffordable to the bottom 90%.
It’s starting to feel like a $5 bill is the new $1 bill: everything that could be purchased with one or two dollars not that long ago is now $5 or even $10. A few days ago I was enjoying the Butte County Fair in California’s farmbelt (the Central Valley), and it seemed like a rural county fair was a price baseline that was far enough away from the urban artifice of $100 meals at fancy bistros to reflect the statistically elusive real-world inflation.
Everything was $5, or close to it: the carnival rides for kids: $5. The games (ring toss, etc.): $5. Funnel cakes, cotton candy, etc.: $5.
Whatever wasn’t $5 was $10: pulled pork sandwich, etc. There was almost no need for $1 bills, except at the admission booth: adults, $8/day, kids/seniors $4.
So why does the government maintain such a transparently inaccurate and misleading metric? For three reasons.
That the official rate of inflation doesn’t reflect reality is obvious to anyone paying college tuition and healthcare out of pocket. The debate over the accuracy of the official consumer price index (CPI) and personal consumption expenditures (PCE–the so-called core rate of inflation) has raged for years, with no resolution in sight.