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Economists are good for one thing, and that is creating theories. The
trouble is, those theories are often wrong. This is why economics
is often called “the dismal science”. Such is the case with the latest
economic soup-de-jour, Modern Monetary Theory, or MMT for short.
In this article we take a deep dive into MMT: What is it? Who’s behind it
or against it, whether it could work, and what it would mean for gold.
What is MMT?
Modern Monetary Theory is a new way of approaching the US federal budget
that is both unconventional and absurd. It posits that rather than obsessing
about how large the debt has grown (over $2 trillion) and the ongoing annual
deficits that fuel debt, we should focus on spending, specifically, how the
government can target certain spending programs that will cause minimal
inflation. Fiscal policy on steroids is, according to its proponents, to be
the new engine of US growth and prosperity.
Government is therefore given a free pass on spending, because the only
thing that we have to worry about with the national debt is
inflation. Curb inflation and the debt can keep growing, with no
consequences. This is because the US government can never run out of money.
It just keeps printing money, because dollars are always in demand (with the
dollar being the reserve currency, and commodities are traded in dollars).
One of MMT’s main proponents is Stephanie Kelton, an economics professor
who advised Bernie Sanders’ 2016 presidential campaign. Among the statements
she makes in a video
explaining MMT, Kelton says “The US dollar is a simple public monopoly.
In other words, the United States currency comes from the United States
government.” That means the federal government doesn’t need to “come up with
the money” in order to be able to spend. It just prints money and spends it.
 
From this follows the logical conclusion that deficits don’t really
matter; the only thing that matters is inflation. According to Kelton, “The
only potential risk with the national debt increasing over time is inflation.
To the extent that you don’t believe the US has a long-term inflation
problem, then you shouldn’t believe the US has a long-term national debt
problem.”
It is no surprise that this economic theory is gaining traction now, given
that the Trump Administration has been hacking away at social programs, while
heaping on national debt even more than Trump’s predecessor, President Obama.
At the same time, many Americans are feeling left behind in an economy that
has done quite well. While Trump promised better times for the average
citizen through his campaign, and the $1.5 trillion tax cut at the end of
2017, in fact only the richest Americans have seen the benefits through the
stock market rally that lasted three-quarters of 2018, and massive share
buybacks. In September 2018 another $3.8
trillion in cuts was passed. The top 20% of earners got 40% of the Tax
Cuts and Jobs Act and the top 1% received 34%; the banks made record profits
of $28.8 billion in 2018.
The financial pages and websites are predicting a recession within the
next year to two years. If a recession occurs and Trump is dumped from
office, many will blame his demise on making inequality in America worse.
Modern Monetary Theory is seen as a way of redressing such vast disparities
between wealth and poverty, writes Brian Maher, the managing editor of The
Daily Reckoning:
[The existing system] has enriched the 1% for these many years, while
every man Jack has scratched by on the leavings.
We will be instructed in the need for an economic system that meets
the needs of real Americans...
An economy of the people, by the people...and for the people.
There is certainly a touch of justice in this view. The existing
arrangement leans heavily toward Wall Street...and "the rich".
Meantime, real wages for most Americans have scarcely improved for
decades – if not actually fallen.
Is it coincidence that Modern Monetary Theory (MMT) is receiving a
hearing these days in Democratic circles?
It pledges to fund Medicare for all, free college tuition, guaranteed
employment – at a $15-per-hour minimum, no less – and a Green New Deal to
rescue Earth from man.
Something for everyone. Or rather everything for everyone.
And do not worry about paying for it.
Others say MMT
is the left’s answer to supply-side economics, a theory picked up by
American conservatives, most recently Trump. Supply-side theory says that tax
cuts will invigorate the economy by “trickling down” to the masses, encouraging
them to spend, thereby reducing or eliminating deficits, even if spending
went up. We can see that hasn’t gone so well for Trump. The 45th
president’s budget
deficits as a percentage of GDP are likely to exceed any other president’s during
an economic expansion, Forbes reported last year.
MMT believers think that taxes aren’t even needed to fund the government;
all the Treasury Department needs to do is print more money.
AOC-inspired
Modern Monetary Theory and the ideas of the Democratic Party’s far left
fit like hand and glove. Pleas for universal medical coverage, free college
tuition and a minimum $15 per hour wage can all be paid for by setting the
money presses free.
The theory has become a vehicle for far-left spokesperson Alexandria
Ocasio-Cortez (AOC) to pay for her “New Green Deal” - a 14-page manifesto of
climate change-related spending costed at up to $1 trillion.
MMT is clearly a Democratic-driven initiative with apparently few, if any,
adherents on the Republican side. In contrast, the GOP is favoring a return
to the gold standard.
Since President Nixon removed the link between the US dollar and gold in
1971, the idea of reviving the gold standard has been kicked around in
response to the humungous pile of debt the US has accumulated, particularly
after quantitative easing (QE) shifted hundreds of billions worth of US
treasury bills and mortgage-backed securities, onto the Federal Reserve’s
books.
President Ronald Reagan established a gold commission in 1981 with the aim
of studying a return to a dollar backed by gold.
In 2012 the Republican Party mused about setting up a commission to
re-establish the link between the greenback and bullion, before its party
convention in Tampa Bay, Florida.
And Trump is quietly a big supporter of gold, reportedly saying during the
2016 presidential campaign, “Bringing back the gold standard would be very
hard to do, but boy, would it be wonderful. We’d have a standard on which to
base our money.”
Some of Trump’s rivals on the Republican ticket in 2016 were also bullion
bulls. Ted Cruz, Mike Huckabee and Ben Carson, “have all implied some degree
of support for the gold standard,” states a Motley
Fool article.
The idea was even given a thumbs up in a 2015 Gallup poll, says Fool
contributor Sean Williams. Thirty-nine percent of respondents said they
approved of the gold standard versus 15% who disapproved, although that
leaves 46% undecided - people who probably were either born after 1971 or
have little to no knowledge of it.
I just mention that because it’s interesting to see such a stark division
of views lining up between Democrats and Republicans over economics. Trump
recently said he wants
to fill two open seats on the Federal Reserve Board of Governors with two
gold bugs.
Stephen Moore and Hermain Cain have both said they support a
return to a US dollar backed by gold.
On the other side of the political spectrum though, it appears that MMT is
gaining credibility. Trump lately has been pressuring the Fed to do an
interest rate cut, maybe another round of quantitative easing (Q4), despite
the lack of urgency, the financial crisis, that precipitated the first QE.
Zero
Hedge reports that Trump’s “exhortation that the Federal Reserve
usher in QE4 by cutting interest rates stoked a frenzy of speculation that
the world's most powerful central bank might be closer to outright debt
monetization - aka 'helicopter money' - than mainstream economists had
realized. Of course, debt monetization is a central plank of the MMT
program.” The term helicopter money was popularized by former Fed chairman
Ben Bernanke. It refers to the government supplying large amounts of money
directly to the public, as though scattered from a helicopter, versus
quantitative easing, whereby the central bank prints money and then purchases
assets (bonds or securities) with that money.
One more point here.
While Republicans favor fiscal austerity - something that would be
demanded of the Treasury under a gold standard - and the Democrats, at least
the most left-leaning, want the opposite, complete freedom to run deficits,
it’s also fascinating to see that both parties have added spectacularly to
the debt.
Trump and Obama have both budgeted
more for defense than any adminstration since World War II. And
according to a Marketwatch graphic of which
presidents added most to the federal debt, numbers 44 and number 45 are among
the six biggest debt accumulators. Obama is first at $8.59 trillion.
How to
A recent Hoisington Investment Management Co. report imagines how MMT
might work in practice. First the Federal Reserve Act would have to be
rewritten to allow the US central bank to directly fund government
expenditure. Second the US Treasury then issues zero maturity (some
proponents are calling for a trillion dollar, hundred year bond) and
zero interest rate debt to the Federal Reserve. Third the Fed then credits
the proper government accounts.
Would it work?
That’s the two-trillion-dollar question. The answer, after conducting a
web search of the chances of MMT’s success, of course is NO. Below is a
smattering of criticisms pulled from a number of news sites, blog
posts, etc.:
- The commonly agreed-upon tenet that a functional
financial system depends on an independent central bank to set monetary
policy free of political influence … is one reason why economists have
been aghast at President Trump for publicly demanding that the Fed lower
interest rates. “To think that if there’s massive inflation that
Congress and the president will be able to act is completely whacko,”
says Marc Goldwein, policy director at the Committee for a
Responsible Federal Budget, which advocates for lowering the national
debt. - The
Hill
- MMT is a revival of an early 1900s idea
called chartalism. Now it is influencing the thinking of new
socialist-like movements in the US and other places and cited by
politicians… The Federal Reserve, even if a new president could pack the
board with members philosophically attuned to a new president’s desire
to increase public spending through monetary creation, does not have the
legal authority to directly create money. That is a right reserved
strictly for the federal government and specifically the US Treasury.
For the Federal Reserve to create money as MMT advocates want, you would
have to amend the Federal Reserve Act. Certainly a
possibility, but not easy. - Goldcore
- Imagine MMT assumes force of law. Imagine further that
it yields a vast inflation with no corresponding growth. Is it your
belief that Congress would raise taxes on the suffering classes in such
a season of need? The economy would be already at a stall. A tax
increase would only sink it into recession – or worse. Is not the entire
point of MMT to stimulate the economy? But assume the tax hikes go
through. The economy goes upon the skids. But the government must keep
the printing press whirring to service the expanding deficit. That is,
the presses run reveille to taps, seven days of the week. A dreadful
stagflation is the result - Bullion
Vault
- Simply put, there is an old economic adage: there’s no
such thing as a free lunch. “That expression doesn’t come with an
asterisk next to it that says, of course, unless you have a printing
press and you can print money. Printing money doesn’t give you a free
lunch. You cannot print wealth.” - SchiffGold.com
- Doug Casey: “Inflation” isn’t caused by greedy butchers,
bakers, and gasoline makers. It’s caused by an excess of purchasing
media. MMT will give the State total control of its quantity and
quality. If the government increases the money supply by, say, 10 times,
general prices will go up by 10 times. The value of your dollar savings
will drop 90% – perhaps most Americans won’t care, because they have no
savings, just debt. - Bonner
& Partners
Top
IMF Economist Says No Free Lunch From Modern Monetary Theory
The Upside-Down World
of MMT
MMT and gold
The link between inflation and gold is well-known and can be historically
traced. From all the above-mentioned analysis, it seems clear that, despite
what MMT’s advocates say, there is no getting around the fact:
continual spending without matching taxation must create inflation. And
inflation is always good for gold. Another central tenet of MMT
is salient here. The theory says that a deficit is actually
just “unspent” money. Suppose the government puts $100 into the economy
but only gets back $90 in taxes. The result is a $10 deficit. MMT argues that
deficit is actually asurplus belonging to the economy at large. But this
argument doesn’t hold water, because unless a good or service is created from
that $10, the 10-er is inflationary.
It seems extremely unlikely that some kind of debt monetization
the likes of MMT could occur, but if it did, chances are we would have
hyperinflation, no different than Venezuela is currently suffering or
post-World War One Weimar Germany.
Even without a sudden shock to the economy like MMT, we know that fiat
currencies are subject to inflationary pressures and over time, lose their
value. Between 1860 and 2015, the dollar
experienced 2.6% inflation every year, meaning that US$1 in 1860 was
equivalent to $27.80 in 2015. This also means that prices in 2015 were 2,828%
higher than they were in 1860.
When the dollar falls, investors flock to gold, hence the inverse
relationship between the two.
When the dollar slumped between 1998 and 2008, gold prices nearly tripled,
reaching $1,000 an ounce in early 2008 and nearly doubling between 2008 and
November 2011, when gold hit $1,903 on the risk of the US defaulting on its
debt.
Gold is seen as a hedge against inflation, because its price generally
rises as the cost of living increases. As Investopedia
points out, “Over the past 50 years investors have seen gold prices soar
and the stock market plunge during high-inflation years.”
Imagine what hyperinflation would do to gold, the stock market and the US
dollar? Gold investors would see a dramatic spike in the price of bullion as
frightened citizens, seeing the value of their savings and stocks being
eroded, flock to a hard-asset safe haven. Read our
Sprout-less
Gold now Tier 1 Capital
Conclusion
It’s hard to guess what the US Federal Reserve will do, especially during
this era of unusual interference by the Trump Administration, but one strains
to imagine under what set of circumstances the central bank would adopt
something as radical as MMT. Now we have an economy running at near full
employment (unemployment just 4%), inflation is well within an acceptable
range at 2%, and the US dollar is holding steady, neither sinking nor rising.
Sure, we have inequalities and a trade war that isn’t doing the economies
of China nor the US any favors (the US continues to run a trade deficit with
China). But there is nothing in the US economy that would
justify opening up the floodgates to government spending and piling
on more debt.
In any case, the next few months look good for gold. An interest rate hike
appears very unlikely, in fact a rate cut appears to be among the options,
which would be bullish for the precious metal. If the Fed wants to take it a
step further and monetize debt, through MMT, gold is going to become very
expensive indeed.
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Richard Mills has based this document on information obtained from sources he
believes to be reliable but which has not been independently
verified. Richard Mills makes no guarantee, representation or warranty and
accepts no responsibility or liability as
to its accuracy or completeness. Expressions of opinion are those of
Richard Mills only and are subject to change without notice. Richard Mills
assumes no warranty, liability or guarantee for the current relevance,
correctness or completeness of any information provided within this Report
and will not be held liable for the consequence of reliance upon any opinion or
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