Interesting article in the WSJ today. It made me think that Modern Monetary Theory (MMT) seems inevitable at this point, only question is how long until we get there.
How are you planning to navigate the world of non-stop stimulus?
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As far as I can understand it MMT itās like candy for diabetics: poison. It tastes good while itās in your mouth but it will claim your eyesight and your feet if you overindulge rather than being moderate
https://www.bloomberg.com/news/features/2019-03-21/modern-monetary-theory-beginner-s-guide
Keep the eye on the ball
https://partners4prosperity.com/generational-wealth-cornerstones/
https://newsroom.cnb.com/en/personal-finance/wealth-transfer/non-financial-family-legacy.html
https://newsroom.cnb.com/en/personal-finance/wealth-transfer/multigenerational-family-legacy.html
Disclosure: I have Type 2 Diabetes, and thereās no one in the world who loves candy more than I do. Those are facts not open to dispute. Itās just that I like to read and to walk by my own two feet even better
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Thatās my reading sorted for the rest of the week 
Would you agree we are sleep walking towards MMT?
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Glad I could be of assistance
Unfortunately it looks like it.
When debt is 20% to 40% of GDP I believe thereās nothing to worry about. Thereās plenty of room. But with 90%, 100%, or moreā¦ I fear
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Continued stimulus and/or government spending feels somewhat inevitable, given the resurgence of Keynesian thinking following the GFC I expect weāll see the same themes again.
A lot of attention was paid to the austerity programs that shortly followed this and I think memories are long enough to bear this in mind now. The focus on debt at the expense of the denominator (GDP) ultimately led to worse outcomes in stifled growth.
We also have to consider the social cost, the links between austerity and populism are pretty convincing:
https://ces.fas.harvard.edu/uploads/files/events/FosterFriedenCompensationPopulismDec2019.pdf
I think there is a pretty credible argument that this was ultimately a significant factor in the Brexit vote.
Obviously the Debt/GDP figures feel high, but I donāt think the question is ācan we afford further stimulus?ā but rather ācan we afford not to?ā. Could cutting stimulus too soon lead to another round of self-destructive populist politics?
I hope that a lot of stimulus will come in the form of infrastructure spending to tackle the bigger challenge we face, climate change. I think the virus is a welcome excuse for significant spending on overdue āGreen New Dealsā around the world.
All that said question about how the bill eventually gets paid is still pretty worrying, given the state of UK politics it probably wonāt be the wealthy footing the bill. While boomers control the vote I donāt hold much hope for a remotely equitable repayment.
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I would agree I can see renewables/green companies benefiting from this more than most sectors.
Same with miners/exploration companies who will benefit as a traditional inflationary hedge but also from finding all these metals that are needed for the green revolution.
In general I could see stock markets doing really well in this environment, but this would be countered by heavier personal taxation.
I canāt escape the feeling though that eventually MMT is going to go terribly wrongā¦
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Not as well-read as Raul or Cameron on this, but Iāve put together a short post on MMT.
https://www.instagram.com/p/CKL5bIRHFgq/?igshid=1his2hbkbv4kh
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I donāt mean to be glib or contrarian, but the status quo has been going terribly wrong since the 80s for most people and itās getting worse. Thatās not to say that MMT might not be āevenā worse but maybe itās worth a try.
Somethingās going to give eventually. I think even the declining middle class of America is starting to realise that theyāre not just temporarily inconvenienced millionnaires after all, hence all mounting misdirected tensions over there.
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From a social policy point of view I agree that the current system doesnāt work for a lot of people and things like wealth inequality has only increased.
But acceptance of MMT feels like a big gamble to me. If it goes wrong itās going to lead to the worse depression for a long time.
Great effort
But I think you could include Central Banks and interest rates explicitly. They are implicitly included
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The increasing use of scientific jargon has permitted the Stateās intellectuals to weave obscurantist apologia for State rule that would have only met with derision by the populace of a simpler age. A robber who justified his theft by saying that he really helped his victims, by his spending giving a boost to retail trade, would find few converts; but when this theory is clothed in Keynesian equations and impressive references to the āmultiplier effect,ā it unfortunately carries more conviction. And so the assault on common sense proceeds, each age performing the task in its own ways.
Murray N Rothbard, Anatomy of the State
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MMT is just a recasting of a very old lie (monetisation of debt will save us). Whenever this has been tried in the past, it has lead to asset bubbles, then collapse, though often it takes decades to come to fruition.
Indeed the first and archetypal bubble, the South Sea Bubble, was triggered by trying to address huge debt built up over decades by selling shares in the South Sea Company, a company fully backed by one of those governments which print their own debt and canāt possibly fall into default. It all went so well, everyone was getting rich, until it didnāt, then everything collapsed and lots of people lost a huge amount of money. The government debt was effectively shifted onto the population at the time and those who came after, ruining many investors. It wasnāt a pretty ending and is one Iād rather we avoid this time round.
Printing money MMT style is known as soft default - itās just default by other means - debts are fully honoured, but become worthless because the currency they are denominated in is depreciated. So yes technically you wonāt default if you print your own currency, but you can certainly pay creditors with worthless paper - in the end the result is the same.
Even worse, weāre now buying our own debt - this is clearly a fixed market and going to end very badly - the BOE owns 1/3 of the debt issued by the government. If that was fine, why donāt they just buy it all and cancel it? QE was originally supposed to be a temporary and targeted measure, not a standard policy. They have tried to taper the ātemporaryā QE twice now in the US already though, and in both cases had to back off as it hit asset prices (in particular growth stocks). So it seems weāre stuck with it and it has hit remarkable levels due to COVID.
Iāve nothing against counter-cyclical stimulus, itās certainly necessary in a temporary way for a year or two during a large knock to confidence like 2008, and austerity in the UK after 2008 was a massive failure IMO, but thatās not what we are seeing now - we have seen permanent ZIRP and QE on a global scale with no end in sight.
Iām hoping they manage to gradually wind down this stimulus and accept the inevitable bear market in stocks this triggers, because the alternative is cranking up the stimulus to unheard-of levels with less and less impact, until one day confidence is lost and every asset crashes.
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What if all the largest economies are printing their currencies? This would dampen the impact of devaluation?
Not really. They would all be devaluating still. If anything they will dampen the relative relationships between each other. But purchasing power would go down on all of them, not softened
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Trussās government proposes a tax cut without a cut in spending;
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The Ā£ dives, for markets sense the proposed tax cuts would be financed by more debt (cuzā¦ no cuts in spending)
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Many, all around the world, denounced the idea of lowering taxes as irresponsible, choosing to ignore expenses were not going to go down and debt would go up; I wonder if these support MMT
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Some, not many, signaled this event as evidence MMT does not work
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Are MMT supporters hiding or are they standing their ground on this matter?! - asking for a friend
I think such claims display a pretty rudimentary understanding of whatās actually going on. If you speak to policymakers, the IMF or most investors, they will tell you the same thing: that it is unsustainable for fiscal policy to be dragging its heels in opposition to monetary policy against the backdrop of the highest inflation in five decades (and in the UKās case, near record current account deficits). Under MMT these are all real constraints on financing so I see nothing inconsistent here. Markets are increasingly skittish of a financial accident occurring primarily as a result of the Fedās tightening and the āwrecking ballā of the strong dollar and are therefore selling gilts and pounds because they correctly believe the fiscal plans wonāt produce growth. If anything, itās a repudiation of trickle down monetarism rather than MMT.
I think the best pointer here is Kelton on the Odds Lots podcast:
Alright. So this is the way I always have tried to say this. There is in my mind anyway, no one size fits all policy response to inflation. You have to look under the hood. If I were to walk down into my basement and find it flooded with water, I know I have a problem on my hands, but I donāt know why. I donāt know if a kid left a sink running, if a toilet overflowed, if the dishwasherās leaking of a pipe burst. And before I know what to do, I have to figure out where the source of the water is coming from, whatās causing the problem. And thatās how I think about in inflation.
We were talking earlier about energy, right, are higher interest rates, the right policy response to an inflation thatās being driven largely by oil prices? I think the answer is no. So I really think where weāre ultimately headed, I think, I guess I hope, is to a more granular tailored policy response.
So in the US a more tailored response could alleviate demand-pull inflationary pressures while Europe is a supply side shock that requires different solutions.
Thanks for coming to my Ted talk.
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