What's Wrong with Modern Monetary Theory?

With the disclaimer that I'm not an economist or an expert in any way, let's discuss US fiscal policy. Currently, the way that our government controls inflation and liquidity is through interest rate manipulation (setting interest rates) and monetary policy (spending). Traditionally, a national budget was supposed to be balanced, meaning if you wanted to spend a specific amount of money,  you needed to have a surplus in your budget or you needed to fund your projects in some way for them to be possible. Many Democrats now tout Modern Monetary Theory (MMT) as the answer to funding constraints. 

What is Modern Monetary Theory? It is an economic theory that states that an issuer of a fiat currency can never run out of money or default on its bills because it is the issuer of that currency. One can always issue more currency when one needs it, so essentially a government with a fiat currency could spend as much as it wants without adverse consequences. The only constraint with this type of spending is inflation, or the devaluation of the currency. Since our current government seeks to control inflation by the manipulation of interest rates, why not instead control inflation (and fund new needed projects) with monetary policy instead and have unlimited funds? 

Now on paper this theory seems like it might make sense. In that case, what's wrong with modern monetary theory? The biggest flaw I see with Modern Monetary Theory is that it disregards human nature. This is a huge oversight. In MMT when inflation starts to rise out of the target zone as it inevitably would, taxes need to rise and spending has to be cut. By taxing at higher rates and cutting spending, money is removed from the economy and inflation would be reduced. 

Why do I see a problem with this? Well, there are a few reasons and all of them have to do with human nature. First, what politician is going to raise taxes and cut spending right when the general public starts to feel the pinch from inflation? None. Our politicians are not disciplined enough to hurt the people for their own good. If they did they'd never be re-elected. Second, MMT would make it so that the response to inflation would be legislative. How effective are politicians at working together when facing a crisis? How good are politicians now at agreeing about taxes and budgets? Third, MMT would basically give politicians free reign to implement projects without regard to cost. How effective are our governmental officials at using funds wisely now with supposed budget constraints? Are you willing to give Trump and his cronies the keys to the treasury? If not, you shouldn't be willing to trust Biden and his minions. If power corrupts, and absolute power corrupts absolutely, we shouldn't give our government even more power in this area. One could even make an argument that they should have less influence here than they already do.  

One of the biggest problems with our government today is that it appears to be practicing MMT without admitting to it. Why do I think this is happening? Well, we've been doing some form of QEing or stimulus  monetary policy since Bush, all through Obama, and it's only accelerated under Trump and the pandemic. What's up with this? Why is our government so afraid of market cycles and deflationary periods? I believe it's because deflation would literally cripple the United States economy and have drastic impacts on the world economies all because of record amounts of debt.

Part of what made the stock market crash in 1929 so bad was the accompanying deflation that followed it. Tons of people were in debt because they'd speculated and borrowed money to invest. When the whole thing came crashing down, those with debt were economically crippled. They had borrowed little cheap dollars, but the debt that they had to pay back was with big expensive dollars. Why is this relevant now? Irresponsible borrowing and spending has been the hallmark of bubbles in the economy since the 1600s with the first recorded bubble, the Tulip Bubble. It seems like every bubble since then has been similar. The stock market in 1929. The dotcom bubble in the 90s. The Housing Market bubble in 07. Some people speculate that we're now in an "Everything Bubble" or a "Bond Bubble." I can see where they're coming from. Government debt is at the highest it's ever been. Consumer debt is the highest it's ever been. Corporate debt is the highest it's ever been. Student loan debt is the highest it's ever been. What happens when people can no longer service their debt? Deflation would destroy most of America. 

Inflation, which has been described as the only tax you can pass without legislation, would be the cure. The government has no intention of "paying back" the debt. It appears that the only logical way out of the current predicament is through inflating our way out. The only casualties of this would be savers, the people trying to be responsible and plan for the future. Our entire economy is based on consumer spending to the degree that we are encouraged to spend, even if we can't afford it. We are actually incentivized to accrue debt. The government does everything it can to accommodate this, from keeping money artificially cheap with constantly low interest rates, to injecting money into the economy. When the Fed tried to reduce its balance sheet in September of last year (2019), the Repo Market (a complicated thing that entities use to borrow cash for government securities overnight), which is referred to as the heart of the economy, almost broke. Our economic system couldn't handle having the constant liquidity dry up. 

Why does it matter to us? It matters because our government is in such a tangled mess it can't get out. They've used up all of the ammunition it has in its interest rate arsenal. The only place to go now is negative. They've quietly been experimenting with MMT and calling it Quantitative Easing and Stimulus, while passing out Corporate Handouts to keep the entire system from imploding. Meanwhile, with interest rates perpetually low forever, savers lose spending power to inflation, but debtors end up better off as inflation eats away at what they owe. With interest rates so low, people who are trying to be responsible and save for retirement are quietly taxed without it being official. There's no yield in savings (did you know that in the early 80s you could get like, an 18% yield on 6 month CD?). If people want to invest or save or have any kind of yield, there's only three places to get it now: The stock market, real estate, or opening a business. Let's face it, not all people are cut out to be traders, landlords, or entrepreneurs, and in the past they didn't have to be. People could invest according to their risk tolerance, but now with no yield anywhere, what is anyone to do? They flock to stocks and real estate, and we wonder why there's a housing shortage and why stocks are so high and divorced from the actual fundamentals of the economy. 

So, if the government has been practicing MMT for a while now, and the only constraint is inflation, why haven't we seen it yet? Well, technological advances might have made providing food and clothing cheaper, but we sure can't trick other costs into remaining artificially low. How are those housing costs working out for you? How's the cost of education working out for you? How about the cost of healthcare? The price of stocks? Are these examples of inflation? I think they very well could be. I think the implementation of MMT would be a disaster because it would require everyone to go against human nature if it were to be implemented successfully, and I don't think that is something we can feasibly do.