This Time It's For Real

A little over a year ago, I wrote a column about Modern Monetary Theory. Don't look now, but it's no longer a theory, it's reality. Depending on how it eventually turns out, we'll find out if the economic cure to the coronavirus was worse than the disease.

In simple terms, MMT adherents believe that countries that issue and back their currencies, like the U.S., can print as much money as they need and still stay solvent. (Compare the eurozone, where the European Central Bank issues the currency, not the individual member countries). And without creating runaway inflation.

You can try this at home, too, you know, although it doesn't work nearly as well for individuals as it does for governments. Pay off one of your credit card balances with a balance transfer from another bank, then keep repeating the process. This will work for a while until the merry-go-round eventually stops when the banks stop lending you money, and you'll have to either pay everything you owe or wind up in bankruptcy court.

Of course, it's different for the government, which is one of MMT's main arguments, since it can just print more money when it runs out, which means the merry-go-round keeps going, even if investors stop buying Treasury bonds. If that happens, which it never has, the Federal Reserve, a separate but "independent" arm of the government, will pick up the slack.

Neat, huh? Essentially, Modern Monetary Theory preaches that the government can simply print and borrow money at will without any regard to where the money comes from or how big government deficits get.

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If this sounds like something familiar rather than some academic exercise, you're right. Because this is what the government and Fed are doing in response to the economic fallout from the coronavirus. The government is spending vast amounts of money it doesn't have by borrowing it from the Fed. According to the Washington Post, the government is on track to spend nearly $4 trillion more than it takes in this year, more than twice as much as it spent, relative to GDP, at the end of World War II.

If you want to know how this works in detail, a recent article in the New York Times describes "How the Government Pulls Coronavirus Relief Money Out of Thin Air."

The Fed's balance sheet recently passed the $6 trillion mark, up nearly 50% in a little over a month. It got that way, of course, by buying up just about every financial asset in sight, except for common stocks, whether government-insured or not – Treasury bonds, mortgage-backed securities, corporate bonds, including below-investment-grade bonds, commercial paper, you name it.

While this policy can rightfully be defended as a temporary expedient in response to one of the greatest financial emergencies in our country's history, the idea that this will be "temporary" is debatable. Because not only will it take decades for the Fed to "unwind" it's massive – and still growing – portfolio, some people would be perfectly happy for this to remain permanent government policy.

Here we are in a situation with more than 20 million people filing for unemployment benefits just in the past three weeks, none of whom can pay taxes – not to mention their rent, mortgage, car loans, student loans, and daily living expenses. So the government and the Fed together will shoulder these expenses – which of course they can't, since the amount of money they've already pledged to the task, as generous as it is, will only cover about a month's worth of the typical household's expenses, if that. We haven't even come close to the amount of money that will be needed.

"I don't think there is a figure out there that is too much," says Rep. Alexandria Ocasio-Cortez, the Queens congresswoman and MMT advocate, according to Bloomberg. "I think we are going to have to make the New Deal look normal or even small." Unfortunately, she's probably right, although she doesn't sound unhappy about it.

Indeed, for believers in Modern Monetary Theory and other progressives, the longer the crisis lasts, the better.

As former Chicago mayor and former Obama White House chief of staff, Rahm Emanuel, once said: "You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before."

It took the Fed more than 10 years to start "normalizing" monetary policy after the 2008 global financial crisis. The coronavirus crisis makes that look like a mild recession. So get used to the "new normal."

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George Yacik Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.

5 thoughts on “This Time It's For Real

  1. George, wouldn't it be possible to play this game perpetually, with some conditions (closed system, circulation controls, adjustment for pressure changes)?

    1. Those measures already part of the Monetary Policy for most modern states around the world, take a look at China's Monetary Policy and you can see that it is heavily regulated by the State and with as much control and precisive adjustment as on an intricate Machinery.

  2. Magic Money Tree is Supply-Side with different winners selected. In our current instance the winners are the same as the previous nineteen years, thus is Supply-Side.

  3. A great article that gives some insight as to where we are going. But the problem becomes glaring as to how we all survive during a exercise you have just described. To be continued and God save us all. Everybody that is a citizen of America should read this article and try their best to understand it. Its written so most will gain insight as to what the country or for that matter, what the world is getting into. During the last great depression, I wonder how many understood what was going on?

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