The central idea of MMT is that a government with a fiat currency system can, and should, print money to finance itself.
MMT argues government spending funded by the printing press can grow the economy to its full capacity, enrich the private sector, eliminate unemployment, and finance significant programs such as universal healthcare, guaranteed income, free secondary education, and green energy. Thus, making balanced budgets and debt ceilings a thing of the past.
Is MMT a new concept?
The idea of ‘creating paper money’ was written about in the early 1900s, and there are numerous times in history that countries have undertaken MMT.
Following Germanys World War 1 defeat, the government printed money to pay its bills. The war had destroyed its productivity, but Allies were insisting it pay reparations far above the ability of its shattered economy. When a lack of productive supply met an excess demand from cash, hyperinflation was the result - people needed wheelbarrows of money just to buy bread.
In the case of Venezuela in 2018, the printing presses spurred currency devaluation and hyperinflation. Prices soared, including stock prices on the Caracas Stock Exchange, but the value of the currency cratered. The Venezuelan Bolívar became a near irrelevant form of legal tender. Considering the positive returns in the stock market, domestic investors may have done alright; however, foreign investors' returns were wiped out due to the devaluation of the currency.
MMT holds that a government that borrows in its currency is never in a position where it cannot finance something, whether that is the employment of all idle labour at a guaranteed minimum wage or, as we see now, a response to the COVID-19 virus. Where countries get into sovereign debt trouble is when they do not control their currency, whether that is Indonesia borrowing US dollars in the 1990s or Greece borrowing euros in the Great Financial Crisis (GFC). MMT argues that it is the lack of goods, labour, or capacity that triggers inflation, not printing presses.
Implications of MMT in the US
The reality is that the US has been accepting growing deficits for years, even before the COVID crisis. However, this pandemic has moved MMT from the fringes to the actual monetary policy in the US. Post-pandemic national debt will approach $30 trillion.
Furthermore, election promises of the New Green Deal, a job for everyone, free health care and child care, the immediate cancellation of student debt, free college, affordable housing, national high-speed rail, expanded Social Security, a more robust public retirement system, middle-class tax cuts, and more. How much does this add up to $20 trillion? $50 trillion?
Will future generations be able to support this debt, or will printing presses? In the case of printing presses, governments need never default or worry since they can always print more to repay their debt.
Although MMT is not new, it has NEVER been executed by a country with reserve currency status. The US dollar accounts for about 55% of all international transactions. Any country with international trade is inclined to hold US dollars and dollar-denominated debt for future trade transactions (reducing currency risk). Trust and faith in the value of that currency is key.
“One thing we know for sure is that over the long-term, printing presses will not make the US dollar go through the roof.”
Sharon Watkins, CEO Sandstone Asset Management
Countries are not economic islands. Unlimited money printing and increased deficit spending strip away real value and purchasing power of that currency. The simple law of supply and demand argues that it is difficult to value something with infinite supply.
MMT allows governments to create their ability to spend. However, printing money to stimulate the economy is vastly different than printing money to stabilize the economy. The key issue is not whether the debt is good or bad, but what you do with it!
Questions we are still pondering:
- How could the US government manage a shift to MMT responsibly? Where would the checks and balances come from?
- Would a move to MMT further erode global confidence in the US dollar and its reserve currency status?
- Will the government utilize MMT to prioritize spending on infrastructure projects, the Green Deal or universal healthcare and over what timeframe?
- What is the number ($10 Trillion) that would create runaway inflation?
We have already seen governments replace some of their US dollar exposure with Gold. We feel that Gold, along with some form of Treasury Inflation Protected Securities, should be part of all portfolios. Also,we have spread our currency risk throughout the world, even investing in Asian Fixed Income in local currencies.
Balancing risk in this environment, including currencies, is of utmost importance.