Modern Monetary Theory or: How I Learned to Stop Worrying and Love the National Debt

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There’s a wonderful scene in Stanley Kubrick’s 1964 masterpiece, Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb, where the assorted generals and politicians in the War Room are wrestling with the reality their policies have created – mutually assured destruction gone awry, where now everyone will be assuredly destroyed.

Dr. Strangelove pipes up to describe a theory of survival in the face of such a depressing reality, where the most genetically fit humans (along with their political and military leaders, of course) go underground into a giant mine shaft to wait out the apocalypse and then repopulate the Earth.


General “Buck” Turgidson: Doctor, you mentioned the ratio of ten women to each man. Now, wouldn’t that necessitate the abandonment of the so-called monogamous sexual relationship, I mean, as far as men were concerned?

Dr. Strangelove: Regrettably, yes. But it is, you know, a sacrifice required for the future of the human race. I hasten to add that since each man will be required to do prodigious… service along these lines, the women will have to be selected for their sexual characteristics which will have to be of a highly stimulating nature.

Ambassador de Sadesky: I must confess, you have an astonishingly good idea there, Doctor.


Nothing like a good porn fantasy to change the reality of nuclear annihilation from fear and loathing to “actually, doomsday machines can be fun and rewarding”. Yes, mistakes were made, but when all is said and done the world will be a better place for our having blown it up. Don’t you feel better already?

This is the power of theory in the service of political expediency, the power of post hoc rationalizations gussied up as “theory”.

“Theory” makes us feel better about all the bad stuff we’ve done.

Want more examples? I’ve got hundreds. For every politically expedient or power-expanding action that any government has ever done in the history of the world, there was a post hoc “theory” that supported it. Laffer Curves, anyone?

Modern Monetary Theory – which is neither modern nor a theory – is a post hoc rationalization of political expediency and power-expanding action.

It makes us feel better about all the bad stuff we’ve done with money and debt for the political efficacy of Team Elite.

And all the bad stuff we’re going to do.

At its core, Modern Monetary Theory is an argument that would be wonderfully familiar to every sovereign since the invention of debt. It is essentially the argument that significant sovereign debt is a good thing, not a bad thing, and that budget balancing efforts on a national scale do much more harm than good. Why? Because there’s so much to do and so little time for the right-minded sovereign. Because it is fundamentally unjust for the demands of private lenders to thwart the necessary ends of the sovereign, and it is politically difficult to finance those ends through tax levies on a fickle citizenry.

MMT is the sovereign-friendly justification for deficit spending without end.

Historically, this argument has been used by sovereigns to support wars without end.

Here, for example, is Edward III (1312 – 1377), shown below on the left in effigy at Westminster and on the right counting the dead at the battle of Crecy, the first major English victory in the Hundred Years War. And you thought Afghanistan was dragging on and on.

Edward III borrowed vast sums from Italian banks to finance his campaign. When he defaulted on those loans, the Italian banks were ruined. But Edward was fine, thank you very much. And within a hundred years or so, Edward’s successors were getting loans from other Italian banks. That’s the core logic of MMT. A sovereign’s gotta do what a sovereign’s gotta do, and private capital just has to deal with it.

What’s modern about MMT is this: the modern sovereign’s balance sheet cannot be understood solely from a fiscal perspective. The sovereign’s balance sheet includes not only the assets and liabilities of the sovereign’s treasury from tax-and-spend-and-borrow fiscal policy, but also the assets and liabilities of the sovereign’s central bank from money-printing-and-pricing monetary policy. As a result, MMT holds that not only are austerity and budget-balancing policies a bad move, but so are balance sheet-reducing and liquidity-draining policies. MMT is the theoretical justification for QE without end.

You may not have heard about MMT yet. It’s still a nascent narrative. But it’s growing, and it’s growing fast. Here’s a map of all non-paywalled US media articles on MMT over the past year, colored by recency (blue older and red more recent). Only 272 unique articles over this span (although 3x from the prior year), but you can see where this is going. Twelve months ago this was a fringe issue, negatively portrayed in the press. Today it’s part of the AOC media machine, with Bernie there to cheer it on.

Source: NLP analytics courtesy of Quid

Like I said, you may not have heard about MMT yet. But you will. You won’t be able to avoid it.

Why? Because MMT is the post hoc justification of both easy fiscal policy and easy monetary policy. As such, it is the new intellectual darling of every political and market Missionary of the Left AND the Right.

MMT is the theoretical justification for the economic policies of Trump and his Wall Street fellow travelers alike, who want nothing more than to keep the market punchbowl in place and well-spiked with pure grain ZIRP alcohol forever and ever, amen.

MMT is the theoretical justification for the economic policies of every potential Democratic presidential candidate in 2020. Because with MMT, you CAN have it all. You can pay for wars without end. You can pay for universal single-payer healthcare. You can pay for everyone to go to college. You can pay for a universal basic income. I mean … why not? A caring sovereign’s gotta do what a caring sovereign’s gotta do.

So yeah, you’re going to hear a lot more about Modern Monetary Theory. And you’re almost certainly going to get it.

Modern Monetary Theory is to the 21st-century United States what Lysenko Genetics Theory was to the 20th-century Soviet Union.

Everyone in a position of political power wanted to believe Lysenko’s “theories” of acquired inheritance and seed plantings SO MUCH, because it would make all of these horrible collectivist farming policies work out okay.

And then the famines began.

Look, I’m not a gold standard wacko or a balanced budget loon. I fully understand that the debt of all of us is a completely different animal than the debt of any of us. I’ve got a social science Ph.D. from the Team Elitist of Team Elite institutions. I was an ordained priest a tenured professor in this Church scientific field.

I get the joke.

So don’t tell me that the crowding-out effect of sovereign debt on the real economy isn’t a bad thing. Because it is. This is how entire economies are turned into zombies.

Don’t tell me that the monetization of sovereign debt, explicitly or implicitly, isn’t a bad thing. Because it is. This is how a middle class is destroyed.

Sigh.

I can see this narrative storm system forming off the coast of Africa. I can see it heading west across the Atlantic. I know the warm waters of the election cycle Gulf are going to feed it until it becomes a monster. I know it’s going to make landfall.

I can’t stop it and you can’t stop it. But forewarned is forearmed.

We can prepare for the storm.


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J Z
Member
J Z

Back in 2013, people were in two camps regarding QE, “eventually deflation, default, great depression”, or “eventually 10 thousand dollar gold”. You guys were saying either outcome could be true but most likely we will be “muddling through” under the policies of Omnipotence Central Banks. Now, 5 years later, the “zeitgeist” has changed. Are you guys calling 10 thousand dollar gold now? The thing is. I AM the middle class raising families and this MMT… Read more »

BobK71
Member
BobK71

In the modern system, there are more tickets sold than seats in the house (more money/debt printed than products and services, at current prices.) The elites are good at playing for time, but eventually ticket holders will want to go in. So you’re down to a choice among: denying entry to some tickets (default/deflation,) putting 4 people in every 3 seats (inflation/devaluation,) announcing everyone must wait indefinitely (financial repression,) and building more seats (economic growth.)… Read more »

Mike S
Member
Mike S

“This point of agreement sets both Austrians and MMTers outside of mainstream economics in precisely the same way. They appreciate that the modern monetary system is very, very different from older, commodity based monetary systems—in a way that many mainstream economists do not.” MMT’S AND AUSTRIANS (Libertarians) are both a combative crowd…I see the good in both compared to the status quo. BL don’t drink the “Coo-Laid.” No difference than blaming the “Fed” for all… Read more »

BobK71
Member
BobK71

The Long Night is coming, yes, very possibly. The history of the modern system is that the elites will have to apply great deflation from time to time to keep their system stable. You simply can’t have financial-asset inflation forever. (First of all, it’s fragile, and secondly, such an increasingly centrally planned economy would take the West out of its winning terrain, i.e. the perception that it alone is the true friend of free markets… Read more »

Mike S
Member
Mike S

War & Conflict and the Political Conversations The fact that we have not had another WW in over 3/4 of a century is unprecedented in human history. The big political economy conversation are not just the debate over socialism and libertarianism, that problem is too normative…people are talking more about “what things should be,” we should be having the conversation on “What good states are possible” then “What good states are sustainable” …this way of… Read more »

BobK71
Member
BobK71

What if the powers that be are not interested in ‘possible’ and ‘sustainable’ good states? But only in keeping their powers and keeping important (monetary) issues ‘very poorly understood?’ The modern system of money is unsustainable by nature, due to the perverse incentives faced by the elites. Over the centuries, while material wealth has grown, happiness and the environment have suffered. Happiness is down especially for the ‘winners,’ who face a variety of personal addictions… Read more »

chudson
Member
chudson

Great article Ben, thank you. I’ve been struggling with positioning for inflation vs deflation for 20+ years now. I’ve come to believe that its a timing issue rather than a “who’s right” issue. The timing looks to me like a small to medium sized deflation event happens, and that triggers a massively inflationary reaction. Ultimately we all know that policy ends in tears, but these politicians don’t care about what happens down the road they… Read more »

Kpaz
Member
Kpaz

I know it didn’t get a lot of traffic, but the debate around MMT did heat up quite a bit in 2010, some time just after QE1 got started. The post-hoc theory is “modern” only in the sense of a post Bretton Woods world. And more than a theory, I think of it as a description of how our fiat money system works. And it’s enlightening really. At that time, there were so many voices… Read more »

Mike S
Member
Mike S

I appreciate MMT’s understanding of the Fed and Gov Inputs/Outputs/Debt and not because of Bernie/Ocasio but simply because it describes how things really are…too bad Ben does not. They have a lot to offer so do Libertarians but neither have all of the answers…the same peeps that choose not to understand,,,how many of them have had a conversation with Warren Mosler, Stephany Kelton, Bill Mitchell or Steve Keen…none of them but they know everything. Every… Read more »

J Z
Member
J Z

I am all for conversations/debates on all social issues and science problems. Conversation about THEORY OF MONEY? I think it is waste of time and energy. Money is Caesar’s, it is NOT up to anybody else to debate. Caesar can choose to have sound money. Sound money is sound because nobody can do anything to it. Because there is nothing anybody can do to it, there is NO theory about it. Caesar can also choose… Read more »

merkava18
Member
merkava18

Wasn’t his great-great GF named Moses?

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BobK71
Member
BobK71

It think it’s extremely tempting to say, the money system really reflects human nature (and not the best parts either,) and there’s nothing we can do about it. I feel that anyone who claims to have an understanding of money has to have this inkling. Before we come come to that conclusion though, why don’t we think really hard, and make absolutely sure we’re not saying that because we benefit from the system (and let’s… Read more »

Sandy McIntyre
Member
Sandy McIntyre

Some simple data. As of Q2 2018 combined Federal, State and Local decficits were in excess of $1.2 trillion. The deficit as a % of Nominal GDP (this is what the population experiences is north of 6% during a boom. This does not include Social Security where contributions are treated as general revenue and the liabilities are unrecognized. Quite simply the United States cannot afford a recession. In every tightening cycle in the post Volker… Read more »

Victor K
Member
Victor K

Thanks to Mike S for the link (in we’re all ETists now), I downloaded and read Warren Mosler’s ‘Soft Currency Economics II’. I will have to reread it. From my first reading, I think I learned that fiat currency issuers with central banks cannot go bankrupt and that deficit spending is necessary to increase the money supply in the US. After that, there seems to be paradoxical relationships between savings, investment, taxes, wages and so… Read more »

Mike S
Member
Mike S

Missionaries think they know MMT, but they choose to see something else because it goes against what they were taught or because of some other dogma in there head. MMT is not about endless debt or you can print money forever…but those make nice bulletized soundbites! It simply states what money is and how it works in our current system and gives another path. Great thread below on all things money ran by William Hummel… Read more »

J Z
Member
J Z

The value Caesar sees in Nuclear “power” is a bomb, NOT electricity. Same way Caesar sees value in MMT. I learnt about banking and money from the Coursera’s online class provided by a Columbia professor. The point is all monetary systems have two opposing parameters. “Discipline” and “Elasticity”. You need elasticity in banking and money system to deal with growth and shocks like war and natural disaster. You need to discipline to restrict corruption. Caesar… Read more »

BobK71
Member
BobK71

Buying legislation is only an outgrowth of the state-bank-alliance system. When the US can print and borrow cheaply, ‘free’ money rains on politicians, more so than any other country. Political candidates don’t really compete on competent management; they compete on ability to build political capital by distributing the free money. You can see what types of people run and get elected, over the decades.

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BobK71
Member
BobK71

There was a famous quote (I don’t remember the details,) that says, you’re seeing this all wrong. It’s not an economic story; it’s a crime story. My eyes have been opened after the Financial Crisis. Yes, read the mainstream economics — it’s the most reliable, as far as raw information is concerned. But keep in mind it’s ultimately a crime and its cover-up. So read it with the mindset of a libertarian. If you can… Read more »

BobK71
Member
BobK71

The core nature of the world system is that an alliance of top politicians and bankers use state power to prop up the values of money, debt, and other financial assets they issue. While the bubbles hold, the elites benefit most, by issuing the assets. When the bubbles must collapse, the public at large foot the bill by suffering lost jobs, business, and lost savings. We in the West have really been running a socialist… Read more »

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