Modern Monetary Theory Goes Mainstream

Modern Monetary Theory (MMT) argues that because a government can never go bankrupt in its own currency, the only constraint on spending is inflation. Applied to the U.S., this justifies pandemic stimulus checks, spending on infrastructure and clean energy initiatives, expanded Obamacare and doubtless other initiatives too. Price tabs begin at $1TN nowadays. Stephanie Kelton’s book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy is worth reading to better understand where this theory will take us. We reviewed it last November.

There are no votes left in fiscal discipline, and investors don’t seem too worried either. With 30 year yields at 2%, there’s little evidence that voters should be more concerned than the bond market.

Kelton was an advisor to Bernie Sanders, now head of the Senate Budget Committee. We are embarked on MMT – although even Kelton’s advocacy of fiscal profligacy recognizes the inflationary constraints of the government outspending the economy’s ability to deliver goods and services. She quaintly believes Congress should score spending plans based on their potential to cause higher inflation, as if election cycles had ceased to exist. No such concern burdens Biden’s $1.9TN proposed Covid relief plan.

Betting on higher inflation, and rising rates, has been a losing proposition for over thirty years. It would seem foolish to expect anything different now – except that making such a bet is extraordinarily cheap.

The eurodollar curve, which reflects market expectations for three month Libor, is very flat. It’s true Fed chair Powell has said the Fed plans to keep rates low for a long time, and is willing to see inflation move above 2%, compensating for periods when it’s been stubbornly below their desired average. The futures curve takes him at his word.

But the stage is set for the market to test this view. The kindling includes unprecedented fiscal stimulus, almost $5TN in money market funds, up $1TN in a year (some of which is entering the stock market via Robin Hood) and a probable burst of pent-up consumption once pandemic lockdowns are eased. This may all be easily absorbed by the economy – but many are watching carefully, and a couple of high CPI figures will confirm the worriers.

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Disclosure: We are invested in all the components of the American Energy Independence Index via the ETF that ...

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