By Curtis Dubay
There is nothing new under the sun, even if it goes by a new name. The latest proof of this is “modern monetary theory.” The basic outline of MMT is that large deficits are not necessarily economically harmful, so in many circumstances the government should spend more than it does. It can do that by printing the money to pay for goods and services directly or by printing the money to pay off the debt it incurs for borrowing and spending.
The U.S. government is on its way to a debt crisis. The national debt stands at over $22 trillion, which is greater than the $20 trillion economy. Part of that debt is money owed to the Social Security trust fund, which is money the government owes itself. So the debt owed to others is still less than 100 percent of the economy—but not for long.
Spending on entitlements like Social Security and Medicare will drive federal government spending higher and higher for the foreseeable future, which means the debt will continue to grow. The Congressional Budget Office estimates the debt the U.S. owes to others will be $29 trillion in 2029, or 93 percent of the economy. MMT backers may be right that we can sustain larger deficits without serious economic harm, but limits still remain.
Backers of MMT clearly want to test those limits. Those who have newly come to back MMT want to spend more on a jobs guarantee, expanded government-financed healthcare, zero-emissions energy sources, transportation infrastructure and other expensive government programs. These policies were all included in the “Green New Deal” that several congressional Democrats proposed in early 2019. One estimate puts the cost of the GND at $93 trillion over 10 years.
Under the traditional way of thinking—too much government debt eventually sinks an economy—the future path of debt and deficits leaves little room for the government to pay for any of the GND’s expensive programs. MMT offers a way out of this conundrum by saying we can pay for them via the government printing press.
The idea that governments with sovereign currencies can print money to pay off their debts goes back to antiquity. MMT is a nothing more than a new term for seigniorage, which is when a government prints money and charges the public more for the money than it cost the government to produce it.
If the government uses MMT to pay for vastly more government spending, the end result will be hyperinflation. History has shown this is always the case when the government prints money, including for modern, industrialized economies. Former Treasury Secretary Larry Summers, who is in favor of more government deficit spending, reminds MMT supporters that France in the early 1980s and Germany in the late 1990s essentially tried MMT. The British and Italians tried it in the mid-1970s. Germany and France quickly reversed course when inflation took off. Britain and Italy had to seek rescues from the IMF.
MMT adherents claim that the government can wring excess currency out of the economy through taxation. But taxes are a blunt instrument to reduce the amount of money in circulation. It would take Congress too much time to figure out how much money it needs to take out of circulation, calculate the appropriate tax rates, determine who should pay the tax, pass the law and implement it. In that time, hyperinflation could have already run its course.
Runaway inflation of course would be harmful for banks, especially if they are earning fixed interest rates on their loans. And as we are seeing in real time in Venezuela, hyperinflation wreaks havoc on the broader economy as well.
MMT has little chance of becoming law in the next few years, but the next election cycle could improve its chances. It is something for banks to keep a watchful eye on.
