Harley Bassman: ‘Be Prepared For MMT To Be Implemented’

On Tuesday, in the course of making a light-hearted (I swear) joke about the extent to which Carl Icahn’s recent derisive comments about modern monetary theory are seemingly at odds with what he told CNBC three(ish) years ago about deficits, I lamented the demonstrable laziness inherent in many MMT critiques.

It’s not so much that MMT’s (many) critics are silly people. Indeed, many of the biggest names in economics and finance have assailed the theory and, one hopes, most of those people can accurately be described as competent (if not, we’re all in a lot of trouble, because the list includes Jerome Powell, Warren Buffett and Christine Lagarde).

Here’s what I said on Tuesday evening:

What the cacophony of criticism lacks in veracity, it tries to make up for with hyperbole, ad hominem and allusions to the Weimar Republic. In other words, critics have simply resorted to fearmongering, in part because the theory has found an audience with the likes of Alexandria Ocasio-Cortez who, along with other progressives, are threatening to upend capitalism, a system that works for virtually nobody and is injurious to many, but which is nevertheless worshipped uncritically by almost everyone (capitalism is a lot like religion in that regard).

Wall Street has adopted a more academic approach to things, eschewing doomsday prophecies for actual debate and intelligent analysis (the nerve of those people).

To be clear (and I certainly hope this has come through in my various MMT musings), it’s not that I believe the likes of Jeff Gundlach, Carl Icahn and Lacy Hunt are somehow clueless about economics or even that they’re wrong to make dour prognostications about what would happen should MMT escape from the lab and become a guiding light for policy.

Rather, it’s my contention that when you are someone who people listen to, it’s imperative that you make an effort to seriously engage with the subjects you address – with name recognition comes responsibility, and you cannot abdicate that responsibility if you choose to weigh in on something that’s important. That’s not to say that Gundlach, etc. are somehow obligated to opine on every topic du jour, it’s just to say that if they do decide to speak up, it’s incumbent upon them to make an honest effort to say something that’s some semblance of meaningful. So far, I haven’t seen much of that when it comes to the MMT discussion.

Well, in his latest commentary, Harley Bassman weighs in and, thankfully, he does so in a thoughtful way that suggests he’s willing to try and add something to this discussion.

“For the record, I do not believe that MMT is viable over the long-term; although as stated prior, it is unlikely my personal horizon will overlap its eventual denouement”, Bassman writes, employing a bit of eloquence and subtlety that’s generally missing from the public discourse.

“While debt can be additive to a functioning Government, I tend not to trust politicians to turn off the money spigot when inflation finally arrives”, he continues, in a commentary dated May 1, adding that he’ll “defer to Reinhart and Rogoff for advising on debt efficiency.”

Below find additional excerpts from Bassman’s May 1 letter (incidentally, these are essentially footnotes – his latest commentary is mostly dedicated to, quote, “shed[ding] a harsh light on the over-reliance of the various performance ratios that are supposed to indicate a superior investment process).

Via Harley Bassman

MMT has been plastered across the financial press; but for those of you living in a cave, MMT postulates that a Government can borrow so long as there is spare capacity in the economy. In a nutshell, deficits do not matter until the debt capacity is reached, which will be signaled by rising inflation.

There are quite a few respected Wall Street names that support the concept of MMT, and they are not wholly incorrect. When the US Government can borrow for thirty years at a 2%-handle, a lot of infrastructure projects are appealing. However, pointing to Japan is Three-card Monte economics. Japan is an aging demographic, with a negative birth rate that borrows in its own currency mostly from domestic net savings.

While the U.S. can also borrow in the currency we print, almost 40% of our debt is owed externally. Moreover, we have a positive birthrate and a Millennial cohort that will soon be entering their peak consumption years.

Nonetheless, be prepared for MMT to be implemented since it balms so many short-term problems. While it may take the election of a progressive Democrat for MMT to become policy in 2020, I can assure you both parties will support MMT by 2029 when the entire Baby Boom generation finally reaches age 65 and demands their Social Security and Medicare benefits. There is no viable Plan B to fund these popular entitlements.

In a nutshell, MMT supporters know that the benefits from a powerful implementation will accrue early, and that the costs will be realized at a distant horizon. MMT rips away all pretense responsible Government; Party on, Garth.

Over the course of 5,000 years of recorded history, I do not recall a society that printed its currency at a rate faster than the productive power of its economy and not encounter a rapturous inflation which soon ended in tears.

Maybe it will be different this time……not likely.