Wall Street Journal agrees that Modern Monetary Theory is our new religion (so don’t hold bonds!)

Me, in October… Does raging inflation prove or disprove Modern Monetary Theory?

… is it fair to say that MMT is actually the mainstream economic philosophy in the U.S. and has been since at least March 2020? (In other words, the folks who run the U.S. economy profess belief in neoclassical economics, but their actions reveal a belief in MMT.)

November 21, 2021 WSJ… “Modern Monetary Theory Isn’t the Future. It’s Here Now.”

The infrastructure act signed into law last week marked a defeat for the faction of progressive economists in ascendancy in 2020. For these advocates of modern monetary theory, the insistence by both political parties that all the $550 billion of new spending be matched by offsetting revenue, known as “payfors,” goes against their belief that money is merely a tool for government.

This is a temporary rhetorical setback. The reality is that MMT’s ideas have insinuated themselves deep into government, central banking and even Wall Street—and the infrastructure act is in fact deficit-financed anyway.

MMTers detest payfors as wrongheaded thinking about money. Money only exists because of government spending, and under MMT, the government should just create as much as it needs to finance its projects. In a tight economy—like we have now—MMT might want offsets to new spending. But higher taxes or lower spending elsewhere would be aimed at avoiding inflation, not at balancing the budget.

The government hasn’t embraced MMT. But important elements of it are now accepted by much of the economic and financial establishment, with major implications for how the economy is run.

“Governments have lost their fear of debt,” says Karen Ward, chief market strategist for EMEA at JPMorgan Chase’s asset-management arm. “They were terribly worried about bond markets and investors punishing them. What they saw last year was record high levels of debt at record low levels of interest rates.”

Central banks that had struggled for a decade to boost inflation using monetary tools found that fiscal tools were far more powerful. Government spending does far more for inflation than quantitative easing, it turns out, and central-bank calls for more fiscal action to boost the economy are more likely to be accepted next time deflation looms.

In the next downturn it is going to be very difficult for governments to resist calls to provide huge support, now that it has been shown that bond markets don’t care. That should mean recessions are shallower, debt is higher, the government is more involved in the economy and, assuming the Fed doesn’t accept that its tools are useless, interest rates are higher on average than in the past. Bond markets aren’t pricing in anything of the sort, though. The 30-year Treasury yield is only 2%, well below the 3.2% average of the 10 years up to 2020.

MMTers mostly aren’t worried about President Biden’s spending plans causing inflation anyway. But MMT prescribes that if tax rises are needed to slow demand, billionaires wouldn’t be the target: The rest of us would.

This guy predicts a future of higher interest rates and higher tax rates for the upper-middle class! (on the other hand, how can the bond markets be so wrong?)

Note that MMT doesn’t have to be correct for the WSJ article to be right and/or relevant. MMT just has to be the prevailing belief among those who direct the U.S. economy (roughly 50 percent of which is now direct government spending or government-controlled (health care, arguably banking)).

Speaking of inflation, some Bitcoin enthusiasts with whom I spoke at a Miami Beach party recently estimated that the inflation rate as perceived by a middle class American is 10-14 percent and closer to 22 percent for a high-income or wealthy individual. The house is on a side street, which became littered with exotic cars (you could be parked in by a Ferrari and a Mercedes G-Wagon), many of which had California plates and/or dealer insignia from California. One California refugee had recently moved into a condo that is part of high end hotel. A Web search revealed a price range of $7-50 million for the various condos, but it is unclear if those were pre-Biden prices or current. “Did you sell some of your Bitcoin to buy the condo?” I asked. “No,” he replied. “I sold a bunch of Sh*tcoin.”

The crypto enthusiasts disagreed about various technical topics (trust in financial transactions is problematic if you can’t be 100 percent confident that certificate authorities won’t be hacked into or grabbed by a central government), but one thing that they all agreed on was that it was insanity to hold dollars. “You’ve lost at least 20 percent on any cash dollars that you held this year,” one pointed out. (See above for the 22 percent inflation estimate. Consistent with this estimate, the S&P 500 is up roughly 23 percent over the past 12 months.) I don’t think they’d be any happier to hold a U.S. Treasury bond, even one that is pegged to the official CPI.

14 thoughts on “Wall Street Journal agrees that Modern Monetary Theory is our new religion (so don’t hold bonds!)

    • Here’s the brief introduction to MMT: “Government can fix everything by printing money. If that didn’t work print even more.”

      Seriously, MMT is a bolus of total insanity. I couldn’t find any logic in it, it’s just a bunch of assertions which clearly contradict the reality.

    • MMT asserts that there is no practical limit to government spending as the central bank can always print the money. Therefore any downturn can be cured by more spending.

      MMT acknowledges the possibility of inflation, but says that can be cured with higher taxes. The tax money collected by government is effectively reduces money supply, at least relative to the prior of printing the deficit.

      The secular disinflation of recent decades has convinced an entire political party that the otherwise insane idea of MMT is workable. The drivers of this disinflation, including technology, demographics, and global trade, have been so powerful that small fiscal stimuli have been unable to dislodge the longer term trend.

      We are currently in a transition period, wherein the market doesn’t believe the MMT crazies will have the political power to implement their ideas outside of one isolated year of coronavirus. The bond market doesn’t believe one year of MMT can dislodge the longer term disinflationary trends. This belief could change if the Fed panics before “transitory” inflation is squashed.

  1. The post would be more coherent if it included a coherent explanation of MMT. The supposed 20% decline in the value of the dollar as an argument in favor of bitcoin is not very persuasive since the value of bitcoin declined that much in a single day a day or two ago. Dubious that the cost of living of a substantial number of Americans has increased by 20% over the last year – or anything even close. Though if you are trying to flog bitcoins i guess trying to stir up hysteria and distrust of the USD is probably a good strategy.

  2. Interest rates are determined by fear. They can stay 0 indefinitely as long as bonds are viewed as slightly more secure than stonk. Only the government has any real control of interest rates & they have no incentive to go above 0 if nothing counts as inflation.

    The big change since the age of fiat money is no-one accepts credit anymore for what doesn’t count as inflation. Houses now have to be bought in cash. The government offers all this interest free credit, but it’s not accepted anywhere because prices are rising too fast.

  3. Isn’t crypto really the same as MMT? Whether its the Fed or crypto-miners creating trillions$ of new “money” in an economy whose real output grows at maybe 3%, the net effect on inflation is the same.

  4. “interest rates are higher on average than in the past.” What’s the logical basis of this assertion? Interest rates have been at historic lows for an extended period. The government, business and household sectors are all massively indebted. How are central banks going to raise interest rates without causing a depression that would make the 1930s look like a walk in the park?

    • Colin: I think that is part of the WSJ’s writer’s confusing hypothetical: “That should mean recessions are shallower, debt is higher, the government is more involved in the economy and, assuming the Fed doesn’t accept that its tools are useless, interest rates are higher on average than in the past.”

      I think that he is saying that, assuming his predictions come true, interest rates in the future will be higher than they are now and were for the past 5 or 10 years. (i.e., don’t buy a Treasury bond right now because the market is wrong, thus contradicting my theory that the market is always right, but supporting my theory that I am always wrong about everything)

  5. I seem to recall that the only thing James Carville ever feared was the Bond Market. He once quipped that if he could come back to life after death as anything, that would be it – presumably because it was the ultimate final limit in his mind to what Democrats could do through spending. Well, not any more.

  6. Just got a PO and a quote from a supplier on a product I’ve sourced for more than 10 years:

    The price just jumped 16.4% in the past DAY. This is a printed product and what they’re doing is requiring me to purchase smaller quantities. I used to be able to order 10,000 or 20,000 up to 100,000. Now I have to order everything in multiples of 5,000 which effectively raises the price 16.4%.

    Happy New Year!

    • This way, they can claim they haven’t raised any prices, unless you’ve done all your business in the past ordering 10,000 or more at a time, in which case you are screwed and Jen Psaki can stand up in front of a microphone and say that the prices have not gone up!

      Heavy duty Blue State shop here, this is how it’s done.

    • Alex, and they also virtue signal by implying that you are a hoarder who does not want to suffer inconvenience for the Common Good.

  7. We did this in the ’70s to rejigger our debt. Except this time the Chinese own it and they’ll just take Taiwan in exchange. “Hey American hanky panky with iflation! We see you bet, raise and take Tawian! What you gonna do, Uncle Joe? Cry Kamala?”

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