Don't Know Modern Monetary Theory? Buckle Your Seat Belt.

When I was born in 1950 the National Debt was $257 billion. Adjusted for inflation that amount in today’s dollars would be about $2.7 Trillion. Today that debt is nearly $27 Trillion (watch it run at Debt Clock ) almost exactly ten times the size.

I’ve spent nearly my entire life listening to politicians extol the value of balanced budgets, warn against debt passed onto future generations, and condemn social expenses deemed “welfare”.  Usually these efforts came from those considered “fiscally conservative” and they were a mantra for the Republican Party.

Liberal leaning Democrats have fumed over unpaid wars, special interest pork, and reductions in taxes for the very wealthy.

We have learned, and should know, that it’s never made a difference which political party had power in Washington. Only in 5 of my 70 years have there been budget surpluses (all under Democratic Administrations). Dealing with the “Great Recession” in 2009 the Obama Administration almost doubled the National Debt during his 8 years in office. Trump is getting ready to nearly double it again in his first 4 years, even though he and the Republicans were given a relatively healthy economy.

Given the erratic, embarrassing, upside down world of the Trump Administration, the Covid19 Pandemic, and the explosion of racial awareness you might think enough news is on your plate, and you’d generally be right. Still, have you stopped to think for a second that the trillions of dollars thrown at every problem that has surfaced seem a little different…a little unusual?

Your familiar Republicans, a’la Paul Ryan, who would rail against excess spending and fight to reduce revenues have been deafening in their silence, have they not? If you weren’t paying attention, this disappearing act has been going on since Obama left office, not just since the Pandemic hit. They’ll attack Democratic proposals for spending, which seem endless in their presentation, but go mute regarding the spin of the Debt Clock.

Actually the whole gang, Republicans and Democrats, have quietly entered us into a new era. They have for some time now adopted a new economic reality that embraces a new discipline known as Modern Monetary Theory. Our economic dingy has been launch on to virgin waters and there’s no telling where it’s going to end up.

To give a detailed explanation Modern Monetary Theory (MMT) would be no easier for the average citizen then to explain Keynes’ General Theory (1930s-70s) which focused on Government spending or the Monetarist Theories of Milton Friedman (free market determination of money supply) that followed Keynes. It is easiest just to present the practical application of MMT.

Both Keynes and Friedman argued that excessive increases in money relative to the supply of goods and services ultimately produced inflation.  MMT takes a different tact. MMT argues that there is no limit to the increase in money into the economy as long as the economy has excess capacity and inflation is at bay. Excess capacity is often referred as unemployment.

MMT claims taxes are not used to pay for government expenses; rather they are a tool for government to regulate the money supply.

The supply of money, as you may have been noticing, certainly since 2008 or before, is simply accomplished by the Federal Reserve Bank (Fed) creating instruments of debt (bonds). It is simply the way we have for decades printed up money without the necessity of paper. The accounting for this increase in money is what we fondly call the National Debt.

Andrew Yang knew this when he proposed his $1000 a month for every American. The left side of the Democratic Party (Bernie Sanders et al) have also embraced MMT with all their proposals. In neither case was the Theory presented along with their plans.  The Republicans have been no better with unfettered military spending and reductions in revenue.

Bottom line is that there is now no real ceiling to the National Debt nor any reason to reduce it. Perhaps when it is more than twice the Nation’s GDP (Gross Domestic Product), in another $20 Trillion or so, they might start to take a look at it.  As long as inflation is cool the spending in Washington will remain hot.

There is good thinking behind MMT, and in an economic petri dish it offers Government extraordinary fiscal power.  Fix the infrastructure, provide health care, or educate the populous, on the short list. However, there are so many variables (foreign currency markets, corruption, natural and manmade disasters, international conflicts and competition, and shortages to name a few) that our Economy seems to resemble the Starship Enterprise now that we’ve been freed from what we thought was gravity.

The takeaway I always come back to from my Econ education is that Economics is not an exact science, it’s a social science. Therefore, it is subject to the behavior of the people that lead and inhabit it. Science can eventually provide reasonable predictability about things like Pandemics and Climate Change, but Economic Theory can take us on a wild ride. I have some suspicion we’re one right now. All Economic theories work…until they don’t. Buckle up.