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Jul. 7, 2020 1:43 AM ET|25 comments | Includes: BIL, DFVL, DFVS, DTUL, DTUS, DTYL, EDV, EGF, FIBR, GBIL, GOVT, GSY, IEF, IEI, PLW, PST, RINF, RISE, SCHO, SCHR, SHV, SHY, TAPR, TBF, TBT, TBX, TLH, TLT, TMF, TMV, TTT, TYBS, TYD, TYO, UBT, UDN, USDU, UST, UUP, VGIT, VGLT, VGSH, VUSTX, ZROZ
Lance RobertsReal Investment Advice PROUnique, unbiased and contrarian real investment advice(23,296 followers)Summary
The premise of this discussion was a recent explanation of “Modern Monetary Theory” by Stephanie Kelton.
In Part 2, we complete our analysis of the MMT theory and the potential ramifications.
Economic theory always sounds much better than how it works out in reality. In “reality” humans rarely act or react according to theory.
This idea was discussed in more depth with members of my private investing community,Real Investment Advice PRO.
If you missed Part-1 of our series on the “Theory Of MMT Falls Flat When Faced With Reality,” start there. In Part-2, we complete our analysis of the theory and the potential ramifications. The premise of our discussion was this recent explanation of “Modern Monetary Theory” by Stephanie Kelton.
As discussed previously, economic theory always sounds much better than how it works out in reality. The reason is that in “theory,” supply and demand imbalances always revert to previous norms. However, in “reality,” humans rarely act or react, according to theory.
We left off in Part-1 discussing the similarities between the U.S. and Japan. Most importantly, while MMT suggests that debt and deficits don’t matter in theory, economic realities have been vastly different.
Let’s pick up with Ms. Kelton’s views on this issue.
“Think about what happened after World War Two when the U.S. national debt went in excess of 100% –close to 125% of GDP. The way we talk about it today as burdening future generations, as posing a grave national security risk, we would have to scratch our heads. Did our grandparents worry about the next generation with all those bonds sold during World War Two to win the war, build the strongest middle class, and produce the longest period of peacetime prosperity?
The Golden age of capital, all of that followed in the wake of fighting World War Two, increasing deficits massively, increasing the size of the national debt. And, of course, the next generation inherits those bonds. They don’t become burdens to the next generation; they become their assets.”
We must address several issues in Ms. Kelton’s recollection of WWII.
The first issue is the amount of deficit. If you take a look at a long-term history of our debts, deficits, and economic growth, we can immediately gain some perspective.
As the U.S. headed into WWII, the Government ran a deficit, which in hindsight is barely visible. Most importantly, the Government did expand its debt burden by selling “War Bonds” to the public. These “War Bonds” were bought by citizens an “investment” to fund the “war effort.” These bonds were a “productive use” of debt. They funded manufacturing and construction projects with every manufacturing facility converted to “war-time” production.
Ms. Kelton conveniently forgot to mention that during this period, the 10-year average economic growth ran nearly 15% annualized. Such was not surprising with an entire population with a singular focus of the war effort. While the men signed up to fight overseas, the women left their homes to build planes, trucks, tanks, and jeeps. There was no “excess” consumption as everything from gasoline, to tires, to cheese, was rationed to the general public with everything consumed to feed, clothe, and arm the troops abroad.
Ms. Kelton is correct that our grandparents didn’t “squabble” over the debt. There was no need, as the focus of every single worker in the U.S. was “winning the war.” They also knew that when the war was over, the Government would reduce the debts and deficits as it returned to more fiscally responsible measures.
Then came the “Golden Age” as the “boys of war” returned home. Following World War II, America became the “last man standing.” After the war, the devastation of France, England, Russia, Germany, Poland, Japan, and others, left them crippled. It was here America found its strongest run of economic growth in history as the “boys of war” returned home to start rebuilding a war-ravaged Europe.
But that was just the start of it.
In the late ’50s, America embarked upon its greatest quest in human history as humankind took its first steps into space. The space race, which lasted nearly two decades, led to leaps in innovation and technology that paved the wave for the future of America.
These advances, combined with the industrial and manufacturing backdrop, and low debt ratios, fostered high levels of economic growth, increased savings rates, and capital investment.
Currently, the U.S. is no longer the manufacturing powerhouse it once was, globalization has sent jobs to the cheapest sources of labor. Technological advances continue to reduce the need for human labor and suppress wages by increasing productivity. Most importantly, households are highly indebted, and use that debt primarily for non-productive uses.
While Stephanie certainly makes a case of running deficits, the evidence is abundantly clear the approach is misguided. Still, the abuse of debt is economically destructive.
“The types of inflation that have been important in the U.S. have almost always come on the cost side: what we call cost-push inflation. They come about because of things like oil price shocks. You might see increases in headline inflation rates because of the housing component or healthcare. So when you think about how to fight inflation, if inflation is resulting from energy price increases, you will probably not have the Fed raise interest rates or Congress raise taxes. You got to do something else that’s going to work, so I reject the idea that MMT is about using taxes to fight inflation. That’s a mischaracterization of everything we’ve written, but people say it all the time.” – Kelton
Such is the entire problem with MMT in a nutshell. On the one hand, as noted in Part-1, under the MMT theory, you can run debts and deficits as long as “inflation” is not a problem. However, for the theory to work, you must have a measure of inflation, which is both accurate and not subject to manipulation.
Currently, we have neither.
However, where Ms. Kelton, and almost all economic theories are misguided, is there is a vast difference between “economic theories of inflation” and “actual inflation.” With economic theories continuing to weigh on the economic prosperity of the masses, their ability to absorb higher “costs” has continued to erode over the last 30-years.
“The ‘gap’ between the ‘standard of living’ and real disposable incomes is shown below. Beginning in 1990, incomes alone were no longer able to meet the standard of living so consumers turned to debt to fill the ‘gap.’ However, following the ‘financial crisis,’ even the combined levels of income and debt no longer fill the gap. Currently, consumers cannot fill the record $2654 annual deficit to maintain their lifestyle without more debt.”
Then, as with all economic theories, you need an “out clause” to continue to justify “socialistic spending.” In this case, Kelton completely contradicts her theory by stating that in the pursuit of your spending goal, “inflation” doesn’t matter.
The reality is that MMT is already here.
During the “Great Depression,” the economically devastated masses would form “breadlines.” Today, the economic devastation is just as real, it is just that the “breadlines” are at the mailbox as the rise of “Social Assistance” skyrockets.
“The declines in real income are evident. The burgeoning ‘real’ labor pool, and demand for higher-wage work is suppressing wages. Companies further opt for increasing productivity, outsourcing, and streamlining employment boost profit margins. However, the cost of living continues to increase from rising food, energy, and health care prices. Without a compensatory increase in incomes – more families are forced to turn to assistance just to survive.”
Without government largesse, many individuals would be living on the street. The chart above shows all the government “welfare” programs and current levels to date. The black line represents the sum of the underlying sub-components. Since the onset of the “pandemic,” both unemployment insurance and “other benefits” have surged by $3 trillion along with continued rises in all other benefits, like social security, Medicaid, and Veterans’ benefits.
Importantly, for the average person, these social benefits are critical to their survival. Government assistance now makes up ~38% of real disposable personal incomes. With more than 1/3rd of incomes dependent on Federal assistance, it should not be surprising the economy continues to struggle. Recycled tax dollars used for consumptive purposes, has virtually no impact on increasing economic activity.
MMT is not a free lunch. Individuals pay for it through a reduced value of the dollar and ergo your purchasing power. MMT is a hidden tax paid for by everyone holding dollars. As Michael Lebowitz outlined in Two Percent for the One Percent, inflation tends to harm the poor and middle class while benefiting the wealthy.
The inflation problem is masked by the inability to calculate inflation in one meaningful number accurately. Even if you believe everything about MMT, how can you practice it without an accurate reading on its most crucial gauge, inflation?
For the last 30 years, each Administration and the Federal Reserve have continued to operate under Keynesian monetary and fiscal policies believing the model worked. However, the reality has been most of the aggregate growth in the economy has been financed by deficit spending, credit expansion, and a reduction in savings. In turn, the reduction of productive investment into the economy has led to slowing output. As the economy slowed and wages fell, it forced the consumer to take on more leverage, which also decreased savings. As a result of the increased leverage, it diverted more of their income into servicing the debt.
Without debt, there has been no actual organic growth since the 1970s.
Secondly, most of the government spending programs redistribute income from workers to the unemployed. Such, as Keynesians argue, increases the welfare of the many hurt by the recession. What their models ignore, however, is the reduced productivity that follows a shift of resources toward redistribution and away from productive investment.
In its essential framework, MMT correctly suggests debts and deficits don’t matter as long as the money borrowed is spent for productive purposes. Such means that the investments made create a return higher than the carrying cost of the debt used to finance the projects.
Again, this is where MMT supporters go astray. Free healthcare, education, childcare, living wages, etc., are NOT productive investments that have a return higher than the carrying cost of the debt. In actuality, history suggests these welfare supports have a negative multiplier effect in the economy.
Most telling is the inability of the current economists, who maintain our monetary and fiscal policies, to realize the problem of trying to “cure a debt problem with more debt.”
The Keynesian view that “more money in people’s pockets” will drive up consumer spending, with a boost to GDP being the result, has been wrong. It hasn’t happened in 30 years.
MMT supporters believe that if the Government hands out money, it will create more robust economic growth. No evidence supports such is the case.
We fear that MMT, which promises “free everything” with no consequences, instead delivers inflation, generates further income inequality, and ultimately higher social instability and populism. Such was the result in every other country which has run such programs of unbridled debts and deficits.
While MMT sounds excellent at the conversational level, so does “communism” and “socialism.” In practice, the outcomes have been vastly different than the theory.
As Dr. Brock suggests:
“It is truly ‘American Gridlock’ as the real crisis lies between the choices of ‘austerity’ and continued government ‘largesse.’ One choice leads to long-term economic prosperity for all; the other doesn’t.”
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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terryongarlandComments1779 | + FollowAs stated by many ,we already have MMT. The prospect of free stuff forever will be sold to those that are in bottom 50%, those that don't care about debt..free is free, bro. Politically it may be a winner for those that are selling this concept as a road map to utopian life..
Some of us enjoy work..enjoy the satisfaction of working hard and seeing the results appear.Being productive matters
Yet I fear the new generation will accept MMT as some new entitlement. Working hard.. why would one do that ?
I fear for our country.07 Jul 2020, 10:43 AMReply1Like
dirohaComments3115 | + FollowMMT is simply a ruse.07 Jul 2020, 08:31 AMReply0Like
Lawrence J. KramerPREMIUMComments10941 | + Follow"Even if you believe everything about MMT, how can you practice it without an accurate reading on its most crucial gauge, inflation?"
How accurate does it have to be?
If the only thing wrong with MMT is that we can't measure inflation, the obvious solution is to work on the inflation measure to make it accurate enough and politically safe enough, because every other monetary/fiscal approach is inherently wrong from the start. As if some other model has proven an infallible guide.
The comparison to communism is inane. MMT is not an economic system, much less a form of government..
(edited)07 Jul 2020, 08:14 AMReply3Like
shackmasterComments39 | + FollowGreat article, but it's all academic. How about offering your idea for investing in said environment.07 Jul 2020, 08:09 AMReply3Like
tadoussacPREMIUMComments10 | + FollowGreat article, but the problem is most don’t realize the problem, and governments to stay in power they must keep issuing more debt. Productive or not, mostly the latter.07 Jul 2020, 07:47 AMReply0Like
SayItWithLyricsComments3568 | + FollowThe unstated premise of your discussion is flawed.
The unstated premise is that those in power care about any of the things you are talking about, and that they are measures of success. That is not true.
Those in power only seek more power. MMT is a great path to more power. It creates an infinite pie for those in power to dole out in the manner which they see best consolidates and grows their power. In that respect, it has been a brilliant success. Just look at how much more power DC has since deficit spending started 35 years ago.
Those who debate whether deficit spending will create inflation, deflation, or any other "-flation" have missed the point. It is not about classical economics, it is about power.07 Jul 2020, 07:22 AMReply5Like
Flashback9Comments189 | + Followwell said, SayIt!07 Jul 2020, 08:53 AMReply0Like
nestor7Comments2448 | + FollowEverybody's inflation is different depending on their consumption of goods and services.
About 70% of the government's spending is relegated to entitlements and social programs that are more or less political pandering vehicles. Vote getting by politicians.
The promises made by the use of Keynesian economics cannot be kept and thus we are going deeper into debt to keep the system afloat. Think public pensions. No police, no teachers, etc...equals no pensions to pay out with money that does not exist.
We are now in the "great reset" where the world's economies have been "faked" into severe disruption in order to collapse the financial system and replace it with the equivalent of a nightmarish, control freak, economy completely ruled by one world government.
MMT is now DOA. Unplug from Wall Street and the TV news and see the real world. Endless debt will never result in prosperity beyond the top 5-10% enjoying the debt party because they control 80% of the world's wealth.07 Jul 2020, 07:08 AMReply2Like
SEB443MarketplaceComments14 | + FollowGreat article. Thank you for your thoughtful analysis.07 Jul 2020, 07:08 AMReply0Like
thebroker8829MarketplaceComments1635 | + FollowAin't no free lunch people. & Chickens always come home to roost.
FCN, CFP & 8th generation Texan07 Jul 2020, 07:05 AMReply0Like
fourthesauriPREMIUMComments32 | + FollowGreat article. I think one of the best measures of real inflation is the wage growth versus the increase cost of goods. When I was a kid in the 80s, my parents bought their first detached 3 bedroom home for $67k, which was the about twice the average yearly earnings. To buy that same house today would cost you about $1.2M, probably 20 years of annual wages or more. And that’s with a cost of living that exceeds your average income. If that’s not inflation, I’m not sure what is .07 Jul 2020, 06:46 AMReply4Like
wwilcoxen1Comments1 | + Followok, here i go..........We need another moonshot moment. We do not need a recovery from WW3. Perhaps we should identify the most critical problem(s) to mankind, the destruction of our environment in the guise of consumerism. My suggestion for the new moonshot moment come from the path not to destroy the earth and its population by the overproduction of greenhouse gasses, repair the legacy of mineral extraction disasters, and decontaminate the toxic residue from our waste streams and chemical production (past and future). I am willing to borrow any amount of money to achieve these goals. I am willing to except much higher taxes to achieve these goals. Jobs, science, engineering, education can all be focused on these goals. Let’s become the world leaders instead of the scourge we are perceived to be.07 Jul 2020, 05:13 AMReply4Like
DafackPREMIUMComments111 | + Follow@wwilcoxen1 - In some ways the approach you suggest reminds me of the "broken window" example in economics 101.....how is it productive for society to simply abandon the cheapest source of energy by increasing investment into a more costly alternative in the name of progress? It would be better to focus on safety and environmental practices until the cost equilibrium shifts in favor to the alternatives. I agree we need to fund research into alternatives, but we have have to have an "all of the above" approach and let the market forces lead us to the correct path. Maybe in 100 years we won't have a choice, but we certainly do in this moment.07 Jul 2020, 06:52 AMReply2Like
malaparteComments596 | + Follow@Dafack One of the things FDR did with the New Deal was essentially take America out of the 19th century and into the 20th. Projects such as the TVA, the Hoover Dam as well as other programs such as SS and even the FHA brought us into the new times.
We have a screaming need to duplicate that program with so many Americans unemployed and our infrastructure in tatters07 Jul 2020, 08:32 AMReply2Like
JhalgrenComments524 | + FollowAt the rate we are going, maybe in 100 years humans will be extinct since we have been irresponsible in our relationship to Nature of which we are a part. We need to go all in on reducing greenhouse gas emission now to sustain humanity albeit the Earth can thrive without us! So GHG infrastructure is our way out of the nightmare that translates into prosperity visa vi 'productive' deficits and debt!07 Jul 2020, 09:19 AMReply1Like
JhalgrenComments524 | + FollowHere's the big question for Lance, you and all of us: Why is the one percent resistant to move full blast into clean energy production and mitigation of GHG from building construction and other tangibles too? Are they waiting for the last second to scoop in and take over the next avenue to billions? Is that the plan? What does everyone think?07 Jul 2020, 09:22 AMReply0Like
terryongarlandComments1779 | + Follow@Jhalgren . The reason many are not moving full blast to clean energy production may be..the costs are higher than the benefits. Millions of people will lose their jobs. Real people , real families real jobs . Much of the movement is basing their position on theory not fact.
There seems to be little room for critical thinking. Disagree and you are called a knuckle dragger..are shamed.
There is no other way..so shut up and obey.
Yah..I am not stupid.. I don't want to kill the planet..and I don't trust the people that are pushing clean energy. Clean energy is a tool for the Leftists to control.. everything. If you are serious about clean energy..let's discuss nuclear.07 Jul 2020, 11:08 AMReply0Like
marlin3mComments145 | + FollowThank for the good article! I am Not learned in these matters, therefore allowed to ask silly questions, like: if Tax is designed to benefit the wealthy and rape the middle-class (something i’ve repeatedly read in various articles) why is it that Europe (higher taxation) has less problems with wealth diversity (or less super-rich) than the US (lower taxation)?
Is wealth and wealth-generating policy allowed greater influence in the US, even when this doesn’t benefit the citizens-at-large, as in Europe (social support, medical assistance, pension assistance, etc). ?
Thanks, M07 Jul 2020, 03:45 AMReply1Like
DafackPREMIUMComments111 | + Follow@marlin3m - I think that taxation and the safety net of Europe has reduced innovation - the biggest difference I see between the USA and Europe is the level of technology innovation [including biotech] that happens in the U.S. There is no Silicon Valley equivalent in Europe to really speak of....this is where the wealth gap is being created. Same thing in China - growth of technology and manufacturing capabilities in China has created an exponential wealth gap [ironically] in the least democratic republic in the world.07 Jul 2020, 07:02 AMReply1Like
JhalgrenComments524 | + FollowI think it's a cultural values notion not related to innovation, money or power. The EU has experienced the ravages of war on their soil to a greater extent than the US. They have moved to being more communal and building consensus for survival while the US is still hell bent on being 'me first' no matter the consequences (damaging or not) and the ol' survival of the fittest mentality! Our misguided notion of individual liberty conquering all has gotten us to the place we are today: not enviable or something to duplicate.07 Jul 2020, 09:26 AMReply0Like
terryongarlandComments1779 | + Follow@Jhalgren .. communal.. for the greater good..things like that through history mean.. regulation upon regulation. Everything is either mandated, or prohibited. Bottom line is ..freedom is gone.
It totally discounts human nature..we are different and do not all think alike..some are strivers, some are lazy..political doctrine breeds dissent. Socialism fails everywhere.07 Jul 2020, 11:18 AMReply0Like
kimbillroComments19689 | + FollowI look for another $10 trillion wall of money to hit the stock market and economy starting in August. $3 trillion in a new stimulus bill. $1.5 trillion in a new infrastructure bill. $5.5 trillion in Fed balance sheet expansion and SPV (Special Purpose Vehicle) activities. This punch bowl is gonna to be huge.07 Jul 2020, 03:30 AMReply2Like
Salmo truttaPREMIUMComments14336 | + Follow@kimbillro "another"
Yup. There are countervailing forces. Savings is not synonymous with the money supply.07 Jul 2020, 09:56 AMReply0Like
Capt Stu - Phase OnePREMIUMComments198 | + Followpay me now, or pay me later. either way, you're gonna pay.07 Jul 2020, 02:43 AMReply0Like
Philip MauseContributorComments5851 | + FollowThe big question is what is the alternative or what would you do or have done in 2008? There is now a real danger of a deflationary depression as there was in 2008 - a vicious cycle in which prices decline leading buyers to wait for lower prices and leading debtors to default on loans made when prices were higher, leading in turn to financial panic and more reluctance to spend leading to every lower prices, all along the way with a government balancing the budget by increasing the tax rates on an ever smaller nominal tax base until the government pries gold out of its citizens' teeth in a futile effort to "balance the budget".
Also, if you can't measure inflation, then you can't really measure "real economic growth" which is nominal growth deflated, you can't tell whether MMT leads to inflation, deflation, both, or neither, you can't criticize Japan because they may actually have huge real economic growth with deflation due to measurement problems.07 Jul 2020, 02:02 AMReply4Like+Add a commentDisagree with this article? Submit your own.To report a factual error in this article, click here.Your feedback matters to us!RSS Feeds|Advertise with Us|Sitemap|About Us|Feedback|Careers|Contact UsTerms of Use|Privacy|Market Data Disclaimer|© 2020 Seeking Alpha
I still see this working, could you please send a screenshot of what you see ? Here is what I see.