Stop asking if [blank] is right for the economy...

That's the wrong question.

I’m reading an interesting book right now about “Modern Monetary Theory” (MMT). 

What’s MMT, you say? 

MMT is an economic philosophy that believes if a country has a sovereign currency, meaning that nation controls their supply of money, has no obligation to convert their fiat currency into any other asset (like we did pre-1971 under the gold standard), and does not hold any foreign currency debt, then that country can never run out of money. 

The conversation about money then moves from “how do we pay for this thing?” to “what’s the impact of us spending this money?” 

When I first heard about MMT, I immediately balked at the concept. I mean, how could we, as a country, spend more money than we take in. If we ran our businesses like that it wouldn’t take long to go bankrupt. 

But, MMT argues that being the monopoly issuer of a currency gives the country a special economic privilege. This country does not need to budget like a household. It doesn’t need to optimize for budget surpluses. And, the country should be doing more deficit spending during times of crisis. 

MMT changes the yardstick by which we measure economic success. Success does not mean running a high government surplus. What’s most important is measuring the impact that budget surplus or deficit has on the wealth of the citizenry. 

At first glance, this can be a radical shift in perspective. What value does money have if the government can print and spend infinite quantities of it? 

Well, just like anything, that money has whatever value the market assigns it to facilitate economic activity. Maybe we’re looking at our government spending all wrong.

MMT’s principles have definitely triggered my skepticism. Much of it sounds like trying to get a free lunch. We can deficit fund (meaning the federal government borrows money from the Federal Reserve) to spend into the economy and not need to worry about collecting taxes to “pay” for that spending. 

Wouldn’t that mean we could just print money to infinity to pay for anything we’d like? iPhones and laptops for everyone, amirite? 

But, once I got past my initial biases about how I thought things should be I ended up realizing that we’ve already entered a quasi-MMT policy in the United States. So, my thoughts on its merits really aren’t relevant. What’s relevant is how MMT currently shows up in our monetary system, what you can do about it, and how it could evolve. 

Did you know that the U.S. government has run a budget deficit (meaning that we spent more money than took in from taxes) every year for the last 19 years!? Imagine if you ran your household like that. You’d be homeless and destitute. 

Right or wrong, we’ve already taken the last 19 years “spending money we didn’t have”. So, my thoughts have now moved to conceptualizing what’s the highest probability outcome now that our country has entered this new paradigm (even if we still want to pretend that balancing our Federal budget is a priority). 

One thing that’s clear is that our country is going to continue to deficit spend. The Biden admin just announced a $3 trillion spending bill. And with 2021 deficits already cracking $1 trillion, we’re well on track to surpass 2020 in total annual deficits. 

Our politicians still want to give us the illusion that they’re attempting to run a balanced budget but I can’t see a path to that any time soon. The public pressure to spend massive amounts of money on clean energy, infrastructure, public health, and other progressive initiatives is too strong.  

So, the better question is not “Is MMT right for our economy?” it’s “How will MMT change our economy?”. 

Most critics of MMTs worry about it causing runaway inflation. They claim that if large amounts of money are borrowed (like what’s already happened over the last 19 years) then inflation will run wild and we’ll all become poorer as a result. 

But, there are always trade-offs. In our current system our economic gas and brakes are interest rates and access to debt. MMT’ers say that the gas and brakes should become targeted (not unlimited) government spending and taxes.

It’s clear that the current system leads to income inequality. Money created by the Federal Reserve (through creating bank reserves) gets into the wealthiest of society first because they’re the ones with relationships to the bankers who get the money from the Fed. Remember who got their money first during the beginning of the COVID pandemic… it wasn’t the stimulus checks. 

Wealthy people do not incrementally spend this money on good and services like the middle class do. They tend to move it into investment assets (stocks, bonds, real estate, art, precious metals, venture capital, etc) that majority only impact the already wealthy. The rich become richer. 

So, do we trade off the possibility of inflation from direct spending on programs that have large public benefits (clean water, clean air, clean energy, modern infrastructure, education, public works, and more…)?

Or do we continue to still run a deficit anyways, drive up wealth inequality, while also trying to increase taxes to “pay” for the spending?

I’m starting to see where the real merits of a well managed MMT program can be once I untangle the philosophy from the idea that it’s a de facto socialist welfare program. 

With MMT, I can see a world where the Fed can assign targeted stimulus, taxes, interest rates and other financial tools down to the individual level. This is precision finance and something that could create faster responses and getting money to the right people. This could be worlds more effective than our current response which is wrapped up in political self-dealing, virtue signaling, and waste.

But, the major issue I have with MMT is the agency problem. How can we with good faith give our government the ability to spend a theoretically infinite amount of dollars? Our political ranks are loaded with self-dealing morons and career politicians. Most will do whatever to remain in office and keep their power.

That’s still an issue with our current system, but the stakes are higher with MMT. 

As I said, MMT is already here. Our politicians are still just pretending like they’re trying to balance the budget. 2021 will show that that is just another lie in a big long list of them. Just look at the year over year chart below tracking the US federal deficit...

If our country embraces MMT there will be a huge shift in how our monetary system will work, and it will have big impacts on all of our wealth. 

Who we elect to control the purse strings will be more important than ever. And finding better ways to hold our elected officials accountable to the will of the people needs to happen fast.  

So, the question to be asking is not, should we be doing MMT… it’s how is MMT going to change the investment landscape, what assets are winners, and where my money will be treated best.