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.

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6 thoughts on “Harley Bassman: ‘Be Prepared For MMT To Be Implemented’

  1. The problem with MMT is that deficits become structural, and thus excessive debt issuance cannot be turned off when rising rates and inflation signal that debt capacity limits have been reached.

    Federal debt service is currently about $480BN annually (FY20) or about 10% of the current federal budget, and represents about 2.65% of the $18.09TR federal debt (not including intra-government obligations). The federal deficit is currently about $1.3TR per year, during what passes for an economic boom, suggesting the deficit may average around $1.6TR per year over a cycle.

    In ten years, at a constant deficit level, the debt may be $34TR = $18TR + ( 10 x $1.6TR ). At current rate 2.65% that implies $900BN annual debt service. If rates are a historically more typical 4.00%, we’d be looking at $1.36TR annual debt service, which would be 29% of the current federal budget. The increase in debt service, about $880BN, is greater than the military budget or the Medicare budget, and is not far from the entire Social Security budget.

    Since the US is not likely to eliminate the military, Medicare or Social Security, the deficit level will not be constant. The deficit will have to rise rapidly, debt service will also rise faster than shown above, and rates are likely to be higher than assumed above.

    Conclusion: within less than a decade, MMT will blow up the federal government. it is not possible for today’s government and electorate can enjoy the alleged benefits of MMT and leave the consequences to the next generation. The consequences will become disastrous in less than two election cycles.

    1. The problem with MMT is that deficits become structural, and thus excessive debt issuance cannot be turned off when rising rates and inflation signal that debt capacity limits have been reached.

      So, I guess the first order of business would be to reverse the 2017 tax cut that made structural deficits far worse. Or maybe it is not the fact there is a deficit, but only the “right” people should prosper from it.

  2. Critiques of MMT that don’t acknowledge that the fiat currency regime it describes have ALREADY been in effect in monetarily sovereign nation states for over 40 years deserve summary dismissal, particularly those which show zero recognition of the difference between its descriptive power and the policy prescriptions offered by some of its adherents.

    1. What we are seeing is the inevitable consequence of what you just described. Forty years ago they made it such that money was meaningless, and they expected everything to continue indefinitely being okay.

      They claim there is no “inflation” because they keep looking at the wrong metrics. Wages haven’t risen in those same 40 years…

      …and there’s no “inflation”? What do we call it when your money doesn’t go as far as it used to?

      My asshole there’s no inflation.

  3. MMT rips away all pretense responsible Government; Party on, Garth

    You can’t dis MMT without totally despising supply side economics. At least MMT is unproven, supply side is proven horrible.

  4. How did QE differ from MMT? Fed bought bonds that were issued to fund deficits. MMT started a while ago and after this pause will continue. Does anyone really think a politician will not be tempted to “look at inflation in a different light” rather than take a Volcker moment??? Oh, and how did QE/MMT really work? Half the country still can’t pay an emergency $700 bill and the wealth/income inequality only got worse. Education/productivity is the only answer and more govt spending in education hasn’t worked that well.

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