Modern Monetary Theory (MMT). Has The World Gone Crazy?
- The Fed is literally bailing everyone out!
- The US Government is rapidly spending trillions on stimulus packages.
- A theoretical Monetary System may soon become a reality.
- What does this all mean and how will it affect you?
Modern Monetary Theory (MMT), also called Modern Money Theory, is rapidly gaining political popularity on both the left and the right.
Those who subscribe to modern monetary theory see it as simply a way to describe the current monetary system.
But you'll notice the thought leaders in the space, people like Stephanie Kelton, Warren Mosler and Bill Mitchell not only describe the system but also give policy prescriptions as well.
So if modern monetary theory is adopted as a way to battle the current recession/depression in the developed economy, will it be temporary?
Never forget the the lesson from 2008: Any new political or economic policy introduced as “countervailing”, “temporary”, or “extraordinary” will become a permanent feature of our political and economic systems going forward.
— Roy Sebag (@roysebag) March 22, 2020
Or like most “temporary” government programs, will it become permanent?
My base case is once the general public gets used to MMT or “helicopter money”, they'll demand the politicians continue the program(s) or face the consequences come election time.
As a result, this will reshape the economy to depend more and more on MMT, making it fundamentally weaker and weaker over time.
How To Financially Thrive In A World Of Helicopter Money
In this article, I'll explain how MMT works and how they look at money creation and inflation, so you can come up with a specific game plan that will keep you safe.
What is modern monetary theory?
Step number one, let's understand how MMT works.
How do the MMT people describe the current monetary system? They always say, “It's a description, it's not a prescription.”
Well, I think it's a little bit of both, but here's their description as to how the current monetary system works.
To make this super simple, let's just look at a game of basketball, and assume the government is the one that gives or takes points away.
And in this basketball game, there can be more points than baskets scored, or there can be fewer points than basket scored.
To understand this, let's go right to my legend in the upper right-hand corner.
So points would equal currency units, baskets would equal producing goods and services, and the players are the economic capacity of the entire system.
And oh, by the way, the players owe the government points, so they've got to go out there and make baskets to earn points to give back to the government.
This is what gives the points value.
And again, this isn't me talking, this is the MMT folks talking. We got to differentiate between the two here.
Whoa, time out. I know, I know, I know, I'm going to have all the MMT people in the comments saying, “George, you don't know what you're talking about.
The MMT people don't think that this works like a scoreboard or a basketball game. That is total crazy talk.” Okay, fine.
To add a little validity to what I'm saying, let's cut to a clip from Warren Mosler himself,
If we're all in a card game and I'm the scorekeeper, how many points do I have?
I don't have any points. Well then how do I give you 100?
I just write them down.
And do I have fewer points after I give you 100?
No.
So the federal reserve is an agent of Congress, the treasury and the fed are both agents of Congress, and the Federal Reserve is the scorekeeper for the dollar.
When they spend, they just credit the account. They write the number down, and the account gets larger, which Chairman Bernanke has told us many times.
He was on public television, they were asking him where all the hundreds of billions for the banks came from, and he said, “We just used the computer to mark up the numbers in your accounts.
Modern Monetary Theory And Taxes
He's exactly right. So when the government spends they add numbers to accounts, and when they tax, they subtract.
They don't give anything up when they spend and they don't get anything when they tax.
So the government adds, let's say 100 points into the basketball game. This is currency units they're spending.
So if the away guy and the home guy both score 50 baskets, then it's perfect, because the amount of spending or the number of points equals the number of baskets that are made.
Fantastic.
Well, then what the government would do is they would take 30 of those points away.
So if we look at a scoreboard, the player's combined score would be 70, and the government's score would also be 70.
No problem.
What happens when the government puts too many points into the game for the number of baskets that are made?
We have inflation.
If there are too little points for the game, let's say there are 100 points that the government puts into the game and they score 200 baskets, well, that's bad because that's deflation.
But what about the players?
In this game, there's only two, just the away guy and the home guy, so there's a limit on the number of baskets they can make.
But there are two other players that are sitting on the sidelines. This guy, the away guy, he's kind of indifferent to the whole thing, and the home guy, and it looks like he's really frustrated because he wants to get into the game.
So the government says,
“Listen, why are these players not on the court making baskets? All we have to do is add another 100 points to the basketball game, and then they can come in off the bench, they can make baskets at the exact same time, and instead of scoring 70 points this game, well, we'll go ahead and score 140 points. All we have to do is add more points to the game and there'll be more baskets scored, because more players will be involved. No brainer.”
So if we only have two players making baskets, of course, we have a score of 70, but if we have four players making baskets, now we have a score of 140.
But we've got Tea Party Todd over here, and he is pissed! He's holding a sign that says, “The government's score is too high.”
But you've got Warren Mosler and Stephanie Kelton down below laughing at him saying, “Ha, ha, ha, Tea Party Todd, what a loser.”
It looks like Mosler is flipping him off, and Kelton is just pointing at him. We'll assume that Kelton is the more polite one of the two.
So why are Mosler and Kelton laughing at Tea Party Todd?
Because they see this basketball game and they say, “Todd, who cares what the government's score is? Does it matter if it's 70 or 140? The only thing we should be concerned with is how many baskets are being made. And we want the player's score to go as high as possible.”
So if the government's score, in other words, their deficits, has to increase in order for the player's score to increase, well then that's a good thing. We shouldn't be concerned with it at all, because nothing constrains the government from creating more points. It's only an electronic scoreboard.
Step #2 MMT and hyperinflation
To really figure out a game plan, how you can not only survive, but thrive financially in a world of helicopter money, we have to see things through the vantage point of MMT.
We understand how they see money creation, but now let's really dive into hyperinflation. And in step number three, we're going to put all the pieces of the puzzle together, so you can be more prepared and have a better financial future.
So as an example of hyperinflation, let's use Zimbabwe, of course. An example of central planning fails at it's finest.
We've got Robert Mugabe right here, looking incredibly stylish in his beret. He looks at all these farmers that are just kicking butt, they're producing cotton, corn, soybeans, it's well over 50% of their economy. They're considered the breadbasket of Africa.
He says, “Wow, they're doing fantastic, but I don't think it's really their land.”
All these people that are on the outside, these people that are pissed, you can tell just by looking at their faces, they say “Mugabe, that is our land, not the farmers. We should be kicking butt. We should be making all the profits from farming.”
So Mugabe comes in and says, “Yeah, you are right. I'm going to kick these farmers off their land, and I'm going to give it to its rightful owners.”
The problem with that is that the people who are pissed come into the farms, but they don't know anything about farming.
Likewise, the farmers who are really, really good go into the other side of the economy, where they don't have any skills at all.
The result, and we can just visualize it here simply with these giant circles, is you have this big black circle is the economy before Mugabe came in, then you have this little red circle, which is the economy after all of the misallocations of resources from the central planning fail of Robert Mugabe.
Unfortunately, while the economy was shrinking, the output was getting less and less and less, the Zimbabwe Central Bank just kept printing money to try to paper over all of the problems.
I have no idea what the bank's name is, so we'll just call it the Bank of Stiff Drink Time. Very, very appropriate name.
So they're just printing Zimbabwe dollars like it's going out of style, pumping it into the economy as the economy shrinks. Of course, this produces hyperinflation.
hyperinflation isn't a result of money printing?
So MMT pros like Bill Mitchell, come in and say, “Wait a minute, what are you Austrians talking about? This hyperinflation isn't a result of money printing. It's not a result of deficits or government debt. It's just a result of the economy shrinking in size. Hello? How can you not see this?”
And if you MMT people in the comments right now think that I'm putting words in his mouth, editor, let's cut right to a clip of Bill Mitchell.
The Zimbabwean agriculture sector was one of the most productive in the world, the food bowl of Asia. And what he did was he gave the farms to the freedom fighters who knew nothing about farming, confiscated them.
And within a very short period, approximately 60% of Zimbabwean agricultural output capacity was decimated.
In other words, a huge reduction in supply capacity in the economy.
It was obvious there was going to be inflation, told you nothing about running deficits, but told you everything about if you destroy the supply capacity of your economy and keep spending then, of course, you're got to get inflation because there are not enough goods being produced.
So according to Bill, the size of the deficits don't matter at all, it's really just the size of the economy.
Can the economy keep up with the money printing, or is the money printing exceeding the rate of growth in the economy?
That's really the question we should be asking.
Taking it back to the example of basketball, just to keep things very simple, from Mitchell's standpoint, he's saying that, “Listen, it's all about the number of baskets the players are making. It's not about the number of points that the government is putting into the system. As long as the players can make as many baskets as the government is creating points, then we don't have a problem.”
In the case of Zimbabwe, the government kept creating points, but the players made fewer and fewer baskets.
Can modern monetary theory work?
Now I don't want to make this video about me, debunking MMT, or giving you the list of things I disagree with. It's not what it's about, that's a whole separate video.
But I do want to push back slightly here and go over where I think they're not seeing things clearly, or where they're not seeing the entire picture.
Is modern monetary theory nutty or essential?
I think the MMT crowd really look at the economy as though it's a board game or it's a video game, where all you have to do is move your joystick this way or press this button and the player on the screen is just going to do whatever you tell them to do.
Or if you're playing a game of chess, if you just take this block of wood and move it here, it always moves in this direction. There are rules that the entire game is played by, and those rules are never broken, it's programmed into the system.
Unfortunately, I think it's not really like a video game. It's much messier, because we're dealing with emotions, we're dealing with human beings, and we're not dealing with rigid rules.
So what I think they're missing, to a certain degree, is that government spending, by definition, is increased central planning.
And increased central planning, by definition, means there's going to be a misallocation of resources, very little price discovery, or less price discovery, and more regulation in the private sector with small and midsize businesses.
This in and of itself will create lower economic output.
And then the solution they have for lower economic output, of course, is more government spending, which takes us right back into this doom vortex.
So as the government spends more, it creates an economy that's producing less.
Therefore, if the solution is to spend more money in deficit spending, at the end of the day, the result will be very similar to what they experienced in Zimbabwe, but maybe just on a lesser scale, because what you're doing is you're printing more money, but the size of the economy is shrinking.
Step number three: how you can survive and thrive in a world of MMT and helicopter money.
Let's put the pieces of the puzzle together so you can come up with a specific game plan.
We understand how the MMT group looks at the creation of money and inflation, so now we can start to predict that if they get the ear of the politicians, which they most likely will, I think they already have both left and right, what the policies are going to be as a result.
So we know that they're going to try to get more players onto the court scoring baskets. They want more baskets or more goods and services produced. They want the economy running at what they perceive to be full capacity.
This is fantastic because the players are scoring more points, therefore more points equate to more purchasing power.
Again, this is in their mind, I'm not saying this is exactly the way it works.
So how are we going to get these players onto the court? How are we going to get them into the real economy?
Well, of course, they're going to do it through government spending. They're going to create more points. And the government scoreboard is most likely going to infinity and beyond, I just wrote as many zeros as I could fit on their scoreboard. I have no idea what that number is, but I know one thing for sure, this number is definitely too small.
So we've got Warren Mosler here saying, “Guys, don't worry about that scoreboard, don't even look at it. It doesn't even matter. The only thing that matters is that we print more money so our economy can be more productive. The more money we print, the more productive we can be. We need to unleash the power of our fiat currency.”
So the government is going to come in, what are they going to most likely do?
Infrastructure spending.
So when we've got the doom vortex we discussed in step number two, where government spending, more central planning, more misallocation of resources, limited price discovery, more regulation equals lower economic output, the solution for Mosler and the government is more government spending, which puts us in this doom vortex of consumer price inflation.
When you combine the doom vortex of price inflation with infrastructure spending, what goes up in price?
Thankfully, it's something that's pretty darn cheap right now.
Commodities as a hedge against inflation
Number one, commodities. To discuss this further, let's go right to a recent report on MMT investing from my buddy, Chris Macintosh.
“If we're even half correct about all of the above, and he's talking about the economic impacts of MMT, we're about to experience the greatest wealth transfer in our lifetimes, and possibly the greatest in the last century.
So let's look at the outcomes.
The spending programs: the government will enact these measures whether they do MMT or not, but MMT will make it much easier to implement.
Bridges, airports, highways, all that sort of infrastructure build-out. Not bearish for commodities.”
Obviously, when Chris writes he uses a bit of sarcasm.
I also want to point out that Chris references exactly what I was talking about in the doom vortex of inflation.
“As MMT is implemented, it'll take a while for the imbalance of productivity falling to meet the demand rising from the MMT free money spigot to actually manifest. When it does, the scramble to protect oneself from the stagflationary outcome will be rapid.”
So commodities could be a great way for you to not only survive but thrive in the future.
What I've been doing in my own framework is taking things back to the basics. I'm sure you guys have heard me talking about this in a lot of my videos, the basics for me are just food, energy, and shelter.
Now, I also want to add that if I'm looking at a specific business, I'm really only paying attention to businesses that were very profitable in 2019.
If they couldn't turn a profit in 2019, there is no way they're going to do it in 2020 with the whole entire global economy going into a recession/depression.
In closing
And I've got a bonus idea for you that could not only be a great way to increase your purchasing power but could also be a fantastic hedge against inflation.
To explore this further, let's go to a clip from my recent interview with my good buddy and cash flowing asset ninja, Miles Beckler.
Miles Beckler: “So let's say inflation, right? There's definitely some data points that say inflation's coming. And actually those data points have been very valid for 10 plus years.
Anyways, I have complete control over my pricing.
If you're an employee, you are in this delay, it's like a slinky effect. It's like, okay, so the company raises the prices, the bread costs more. Well then the truckers, how long until the truckers who deliver the bread make more?
Okay, there's a delay there. How long till the warehouse workers, how long until the baker of the bread starts to earn more?
How long until the farmers who are growing the oats to make the oat bread make more?
I'd change my prices in an instant, right?”
George: Right.
“So I have this insane flexibility, this insane freedom. If I needed to generate $100,000, tax bill, this, that, some other reason, or I'm just like, “I need to buy another parcel of land, whatever,” I can put together an offer.
I've got an audience who knows me, likes me, and trusts me. I have an email list, I have 130,000 subscribers, I can put together a six week or an eight-week mentorship program for $500 a person, I could sell 200 people into that, I'm there. Bingo. I have full control over my cash flow.”