To be honest, I had no intention of inserting myself into the increasingly vociferous debate over modern monetary theory.
It wasn’t terribly difficult to discern that the discussion would rapidly descend into incriminatory farce once the battle lines were drawn. MMT was embraced by progressives in part because the theory can be used to rationalize (economically speaking) spending vast sums on ambitious programs that would otherwise be impossible to finance. On the flip side, MMT was chastised by some mainstream economists and also by a who’s who of the finance universe for being prima facie absurd.
Whenever you have that kind of polarization of opinion, it’s generally advisable to avoid wading into the debate, unless you’re a masochist who enjoys seeing your own views distorted beyond recognition by readers who, convinced there can be no middle ground, take it upon themselves to place your musings into one camp or the other, your protestations notwithstanding.
Ultimately, though, I was perturbed at the demonstrable lack of effort (i.e., the glaring absence of academic rigor) on the part of many MMT critics. You cannot simply shout “hyper-inflation“, assert that MMT would make “nearly 100% of people miserable” and/or tell “old riddles” about dishonest bellhops and call the matter closed. But that’s just what some critics have attempted to do.
Although his take was couched in more diplomatic terms (compared to some of the bombast emanating from other critics), Jerome Powell’s February comments about MMT also veered into logical fallacy territory. “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong”, Powell famously told Congress earlier this year. He went on to deliver a series of familiar talking points all of which rely, in one way or another, on the initial premise being valid.
In addition to my generalized disdain for lazy argumentation, there are two aspects of the MMT debate that piqued my interest. The first is the intersection between MMT and what central banks have already done with QE. Relatedly, it’s curious (or not) that GOPers delight in equating Alexandria Ocasio-Cortez with MMT, but fail to mention the fact that in the context of Donald Trump’s increasingly shrill calls for the Fed to restart large-scale asset purchases, the president’s penchant for debt-funded fiscal stimulus is conceptually similar to a version of MMT, albeit with a bank middleman.
There’s an obvious tie-in between all of this and the burgeoning debate about whether capitalism in America has worn out its welcome. That makes Trump’s accidental MMT leanings all the more ironic given that part of his strategy for 2020 seemingly entails equating all Democrats with socialism (and all Democrats with AOC, by the way). Ray Dalio (whose criticism of capitalism has grabbed all manner of headlines this year), wrote a lengthy piece on MMT this week and in it, he said the following about QE as we know it today:
We don’t believe that monetary policy is producing adequate trickle-down. QE and interest rate cuts help the top earners more than the bottom (because they help drive up asset prices, helping those who already own a lot of assets). And those levers don’t target the money to the things that would be good investments like education, infrastructure, and R&D.
In other words, it benefited capital. And that’s hardly new territory. I’ve variously argued that the trade-off was worth it – that is, central banks undoubtedly knew that post-crisis monetary accommodation would exacerbate inequality, but because the alternative (an outright collapse of the global financial system) was a non-starter, they chose the lesser of two evils.
But MMT potentially offers a third alternative and one that’s palatable to progressives and potentially a boon to labor.
“QE, the buying of assets (mainly bonds) by central banks issuing base money, has kept asset prices higher than they would be, and a boon for asset-rich people, mainly older folks, and for borrowers (mainly CFOs) [while] the young, the asset-poor and depositors lost”, BofA’s Ajay Kapur writes, in a sweeping assessment that seeks to provide a roadmap to navigating the impact of peak Plutonomy, identity conflict and heterodox policies.
Again, QE feeds into inequality. The benefits of post-crisis monetary policy do not accrue in a linear fashion. Rather, they accrue exponentially due to the concentration of financial assets in the hands of a relative few. If one assumes we’ve reached peak plutonomy, QE will have to be augmented or, more to the point, explicitly linked to fiscal policy, to ensure that the benefits of stimulus do not continue to increase the wealth divide.
“Fiscal scolds could soon become politically incorrect”, Kapur goes on to write, before delivering the following assessment:
The government debt and deficits scolds are just plain wrong, in our view. Could former VP Dick Cheney have been right all along? Running government deficits (at a near zero percent real cost), below real GDP growth, counters the fetal-positioned over-saving private sectors. If the spending goes to infrastructure, defense, education and healthcare, enhancing future productivity, all the better for future economic growth. This is one of many reasons why we haven’t believed the consensus gloom & doom brigade on China’s rising debt. Yes, we have heard that government spending is “unproductive”. In our view, this is just jaundiced thinking, given the power of defense-driven research, and government infrastructure, public education, healthcare breakthroughs and spending on space and energy. The list is long. It is a short bridge from greater fiscal deficits to Modern Monetary Theory (MMT). We think investors need to take this seriously. The investment implications of MMT going mainstream are important, just as those from QE were. And they are different.
The crucial bit (from a political strategy perspective, anyway) comes when Kapur suggests that MMTers are effectively using one of the oldest tricks in the book when it comes to securing concessions and bringing people around.
After noting that conventional economists “are apoplectic” at the prospect of MMT, Kapur writes that in his opinion, “MMT is a Robert Cialdini move to influence voters and politicians to normalize larger fiscal deficits – ask your friend for 100 dollars if you want only 10.”
The never-MMTers might well argue that when Alexandria Ocasio-Cortez says she wants a 100 dollars, she means she wants exactly that (and more), but AOC humor aside, Kapur is probably correct. The idea among progressives and MMT champions is to get the conversation started, bring the debate to the public’s attention and, hopefully, draw attention to the demonstrable lack of convincing counterarguments.
As we’re wont to do, we’ll leave the final judgement on all of this to readers. Some portals insist on closing each post with a punchline which often doubles as a forceful suggestion that readers should interpret the world in a certain way. By contrast, we’ll close with another thought-provoking excerpt from Kapur’s note:
Take a look at Figure 42. It shows another country which has its own currency, and the benefit of a closed capital account (unlike 1970s UK and Italy). That line you see is the net extension of lending from the PBoC to the financial sector in China, mainly government-owned policy banks to finance growth. It went up by USD1 Trillion (yes, trillion) from 2016 onwards. Have the Chinese already been practicing a version of MMT?