Philip Greenspun’s Weblog

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.

We’re told that house prices across the U.S. are up by 20 percent compared to a year ago (see Inflation would be 10 percent per year if house prices were included). Yet in our neighborhood here in the Florida Free State, both prices and rents are up closer to 50 percent. A community built for middle class (town houses) and upper middle class (single-family homes) now has single-family homes listed for more than $2 million (would have been $1 million two years ago).

Vast areas of the U.S. are blighted and undesirable, yet one could still buy a house in those areas and those house prices presumably feed into the statistics. What if we looked at areas that have at least some of the following characteristics:

• good public schools
• convenient to jobs
• walkable
• low crime
• convenient to services for the middle class and above

Would the inflation rate still be only 20 percent?

Separately, maybe nominal prices don’t matter if one is sufficiently clever. “Long Island man dodges eviction for 20 years, living in house he doesn’t own” (New York Post):

A Long Island man who only ever made one mortgage payment has deftly used the courts to stay in the house for 23 years — for free, according to legal papers.

Guramrit Hanspal, 52, has filed four lawsuits and claimed bankruptcy seven times to avoid being booted from the 2,081-square-foot East Meadow home he “bought” for $290,000 in 1998.

So far, it’s worked: Two different banks and a real estate company have owned the three-bedroom, 2.5-bath home since Hanspal was foreclosed upon in 2000. But Hanspal remains.

Hanspal’s not the only occupant of the home leveraging the US Bankruptcy Code’s “automatic stay” rules, which give debtors a temporary reprieve from all collection efforts, harassment and foreclosures.

At least three other people listing the home at 2468 Kenmore St. as their address have also filed for bankruptcy in Brooklyn federal court, winning the “automatic stay,” only to have the claims eventually dismissed, court records show.

And a good deal: Hanspal, who had an initial 7.375 percent interest rate on the $232,000 adjustable-rate mortgage, likely saved himself upwards of $440,000 by not paying his bills.

Meanwhile, in 2004, Hanspal transferred the deed of the home to a friend, Rajender Pal, even though he had no legal right to do so, according to court papers. Pal, using the Kenmore Street address, filed for bankruptcy in 2005, staving off eviction yet again.

By May 2018, Chase unloaded the property to Diamond Ridge, which offered Hanspal $20,000 to leave. He didn’t take the deal, and instead, filed for bankruptcy again in 2019 and 2020. Another purported occupant of the house, Boss Chawla, filed bankruptcy four times in 2019, as did another resident — allegedly named John Smith — who filed once.

“The history of this case going on for approximately 20 years must come to an end,” Nassau District Judge Scott Fairgrieve wrote in a December 2019 housing court proceeding.

The last one is my favorite! The judge says “it must end”, but Messrs. Hanspal, Pal, and Chawla are still there two years later.

Loosely related… the happening downtown neighborhood of Delray Beach, Florida (I stopped there for dinner after teaching a class that ends at 9:20 pm):