The Great American Financial Experiment

“Be not the first by whom the new are tried, nor yet the last to lay the old aside.” – Alexander Pope

Last year there was quite a bit of chatter about a new economic model called Modern Monetary Theory (“MMT”), a theoretical change from traditional economics that could have profound implications for the interplay between the government and its populace.

Simply put, MMT suggests that a government essentially print as much money as needed until its economy reaches full employment. MMT does not see deficits (whereby a government spends more than tax revenues) as a problem, but rather a solution. Advocates believe MMT would not only create jobs and wealth, but also make for a more globally competitive country. Detractors believe increased and/or persistent deficit spending would weaken that country’s currency (the dollar here in the U.S.) and create inflation, if not hyperinflation.

MMT theorizes that inflation is not fueled by increased money supply, but rather by a lack of productive supply or goods coupled with increased demand (possibly due to money creation); if there is unused capacity, i.e. supply, in the form of unemployment, then inflation is not likely to occur. Thus, proponents say governments should increase spending (by printing more money) to not only achieve full employment but also to provide universal services (think free college, free health care, etc); only when the supply of goods starts to become scarce and/or there is little to no unemployment should the government then back off and lower spending. Proponents rationalize that since a government can control the price of its currency, any debt denominated in that currency can be settled with the new creation of that same currency. Accordingly, the U.S. may have a unique advantage relative to other countries since our currency is the de facto global fiat, and most countries own our debt; so MMT believers maintain that we can easily manage our own debt, while other countries would refrain from liquidating our debt (even if the dollar weakens) since that would hurt their U.S. debt holdings.

Traditional economists argue that printing money is incredibly dangerous in that it will most likely cause inflation, if not hyper-inflation, as well as distort the free markets. MMT detractors ask, how can the private sector hire much less motivate employees when everyone is essentially guaranteed a public (government) sector job? And if the private sector is forced to increase wages to lure people away from guaranteed jobs, how does that not cause inflation? Additionally, MMT detractors insist that if the government is manipulating its currency and flooding the system with money, then the natural rhythm of the business cycle will be continually interrupted, which in turn puts free markets and capitalism at risk; this is not unlike the situation we had a few months ago when, albeit to counter the effects of a global pandemic, we had a majority of people on unemployment making more money than when they were working – right or wrong, a definite disincentive for people to return to work.

Please understand that we are not advocating for or against MMT; in fact, I can argue the advantages and disadvantages of both sides (a true lawyer, I guess!). What keeps us up at night is that there is no good historical precedent to employing MMT, but more importantly, that we are probably in the middle of this MMT experiment as we speak! Think about it; right now the U.S. government is spending, fiscally (by Congress) and monetarily (by the Federal Reserve), literally trillions of dollars more than it is collecting. And aside from the massive 2020 spending due to the pandemic, we are already spending much more money on so-called entitlements like Medicare and Social Security than those programs are collecting, not to mention proposed programs like universal healthcare and free college.

Some say that we have done this before in the 1930s with the New Deal, or in the aftermath of World War II; but we have never done it on such as a large scale as where we are now and seem to be headed. Others point to Japan as an example and country to emulate since they have run massive deficits relative to their GDP for years and have almost zero inflation. But don’t forget that Japan has also had little to no growth for just as many years. Further, the U.S. may be different due to our debt. You see, MMT theorizes that a deficit is necessarily the flip side of a surplus; in other words, if there’s a public deficit (where government spending outpaces tax receipts) then the private sector must be running a surplus and not be in debt. But the U.S. has both right now; we have a massive federal deficit and massive consumer debt (according to the Federal Reserve Bank of New York, even before the pandemic Americans had amassed almost $4.2T in consumer debt excluding mortgages).

As I said, we are not advocating for or against MMT; we just need to realize that this is truly an experiment. On the pessimistic side, we may only be in the fourth or fifth inning of this recession and/or experiment, and things may get worse before they get better. On the optimistic side, the trashcan fire that is 2020 will be over soon, we will get a grip on Covid, and this financial experiment will be a success in time. But make no mistake, this is an experiment, and one that we will only know in hindsight (10, 20, 30 years from now) if it was worth the risk. But as the saying goes, being the first to try something may not be the best way to go, but being last to try something can be just as bad.

As always, thanks so much for your friendship and trust – and try to stay healthy and happy!

TN #1-05067484