The Economist tackles MMT today:
That perspective is not always clear; there is no canonical mmt model. But there are some central ideas. A government that prints and borrows in its own currency cannot be forced to default, since it can always create money to pay creditors. New money can also pay for government spending; tax revenues are unnecessary. Governments, furthermore, should use their budgets to manage demand and maintain full employment (tasks now assigned to monetary policy, set by central banks). The main constraint on government spending is not the mood of the bond market, but the availability of underused resources, like jobless workers. Raising spending when the economy is already at capacity can lead to rapid inflation. The purpose of taxes, then, is to keep inflation in check. Spending is the accelerator, taxation the brakes. Fiscal deficits are irrelevant as long as unemployment is low and prices are stable.
To those versed in orthodoxy—in which governments must eventually pay for their spending through taxes—these ideas sound bizarre. This strangeness is partly a result of mmt scholars’ unconventional idiom. Speaking with mmt’s adherents is sometimes like watching a football match with friends who insist the ball remains stationary while every other element in the game, including the pitch and goalposts, moves around it. Communication is made harder still by mmters’ sparse use of mathematical models. To economists who consider heavy-duty maths a mark of seriousness, such reluctance to use equations is either evidence of intellectual inferiority or a way of avoiding scrutiny.
It may instead reflect the fact that mmt is less a rival theory than a qualitative critique. Yes, central banks can use interest rates to achieve full employment, if rates are not too close to zero. But mmters think governments are better equipped. Monetary policy works via banks and financial markets, but when markets panic, this mechanism is weakened. Rate cuts stimulate the economy by encouraging firms and households to borrow, but that can engender risky levels of private-sector debt. Government spending sidesteps these problems. Similarly, rate rises can slow inflation. But they often work by inducing indiscriminate involuntary unemployment. The state could instead tame an unruly boom, mmters argue, by breaking up monopolies—thus loosening supply constraints—or by aiming tax increases at fossil-fuel firms.
Economists recognise that their models have shortcomings, and that monetary policy is not all-powerful. But most economists have long held that macroeconomic policy should stabilise the economy with the lightest possible touch, the better to let markets allocate resources. Other means can then be used to tackle reckless lending, market failures or inequality. mmt’s supporters question this—and believe that recent economic history bolsters their case.
Meh. Monetarist die hards like to paint MMT as some kind of rival ideology or theory. At base that is rubbish. All it is is a recognition of GDP accounting identities. Thus printing money for public use is neither good nor bad, it is simply a tool with consequences. Deal with those and it is well worth doing in a world of secular stagnation.
Meanwhile, at Bloomie:
As the debate about modern monetary theory rages on amid swelling U.S. deficits, Deutsche Bank AG’s Alan Ruskin says to keep an eye on currencies.
…Exchange rates offer a clean read on whether those policies are reaching unsustainable levels, Ruskin argues. A nation’s currency would likely “flash red” should financing costs outstrip growth, and its interest payments spur a “snowball” in the debt burden as a share of the economy, according to Ruskin.
Meh. MMT reduces the debt burden not increases it. Whether or not it causes the currency to fall will depend on many different factors:
- Are other nations doing it too?
- What are the relative growth rates?
- What impact does the spending have on the interest rate outlook.
Let’s say, for example, that the US did MMT alone post election in 2020. The monetarists among us will scream blue murder and demand markets sell the USD owing to debasement of the currency. But why would they? Given the MMT pulse would lift US growth, profits and interest rates more than elsewhere, I reckon markets would buy the USD. I would go long US stocks.
That, in turn, would create all kinds of funding problems for everybody else, most especially the emerging market and commodity complex, and they may be forced to go the MMT rout in stimulating domestic demand as an offset to external funding pressures.
The net result would ultimately be zero for currencies but much higher global growth and inflation.
A more interesting question is how this might impact US politics in the short term. If the MMT debate gains more traction then it presents Republicans with a major problem going into the 2020 election. Dems will rightly be able to claim that they are the pro-growth party as various Tea Party loons fight over budget deficits.
Enter Donald Trump. There’s surely a Republican that will love MMT. Free money for everyone if the stuff of Trumpian wet dreams. He’s got trillions in unfunded walls and infrastructure projects ready to go. Add a little MMT to that and boom! That’s before we even mention the benefits of outflanking the Dems politically.
I’m not sure what kind of legislative maneuvering would be required to launch US MMT. Perhaps a project specific MMT program could be rammed through the Federal Reserve Act. Republican resistance would be intense in some quarters but the Dems could be rolled to support it instead.
If that happened then the MMT experiment could become chaotic and be stillborn given how tight the US labour market is.