In the same vein, MMT argues that government debt is not the same as private debt. It claims that as the sole “manufacturer” of US dollars, the US government can never be insolvent. It can always print more dollars to fulfil its obligations. Governments therefore do not have to comply with the same debt limits and ratios that we all do.
The Federal Reserve Bank of Minneapolis seems to agree. It claimed last year that there is “an infinite amount of cash at the Federal Reserve”.
Smart investors also know that it will end one day, and will probably end quite suddenly.
In the world of MMT, deficits don’t matter. There is no difference between a surplus, a 1 per cent deficit, and a 4 per cent deficit. Budgeting is essentially a waste of time. In one video, an MMT advocate comments on the size of the deficit with: “Who cares?”
Inflation is not considered a material issue. MMT acknowledges that government spending can lead to inflation, but this can be controlled by raising taxes that reduce the deficit and cut demand. Until inflation becomes an issue, there is no reason to burden society with spending limits or positive interest rates on government bonds.
MMT claims that by spending more freely, governments can fulfil their obligations to their citizens, which include full employment, social services, schooling, healthcare and so on. This will, over time, create a better and more productive society. All will be well.
Except it won’t be. The list of problems with MMT is long. Let’s look at three of them.
MMT doesn’t deal with global trade very well, or the natural advantages that countries have in their labour costs, access to resources and so on. In fact, MMT suggests that exports are a net cost to the US economy. The country sells goods to others cheaply when it should use the productive capacity to do, or make, things for itself.
MMT doesn’t explain the historic – and well-tested – relationship between money supply, inflation, interest rates, exchange rates, and the purchasing power of the average person. Printing money will over time erode purchasing power, and is no substitute for creating a productive and competitive economy. A visit to Latin America might be helpful.
The power of financial markets
MMT understates the importance and power of international financial markets. The US debt held by foreign investors is growing rapidly and now totals more than $US5 trillion. Australia, similarly, is highly dependent on foreign capital and foreign financial markets, which need to trust the government and the value of the currency. Thankfully, they do.
Financial markets are already nervous about quantitative easing, the rise in debt levels and the appearance of asset bubbles. Global debt has now reached $US277 trillion, or 365 per cent of global GDP. Even a modest rise in interest rates would generate serious issues, and could lead to sharp falls in bond, equity and property markets.
To put this in perspective: a 1 per cent rise in global interest rates represent a cost that is two times the entire Australian economy. Interests rates are several percentages below their long-term averages.
Smart investors know that they should not bet against the large balance sheets of central banks. Asset prices can continue to rise for quite some time as more and more cash is made available.
Smart investors also know that it will end one day, and will probably end quite suddenly. They are looking for investments that are not affected by rising inflation. This in part explains the rise in the value of gold and even bitcoin.
Interestingly, MMT uses the same recent decade as evidence that it has merit. It points to the enormous amount of money that has been printed by governments around the world since 2008, and the fact that the global economy has not collapsed.
As scientific arguments go, it is not very convincing. The philosopher Karl Popper set out how we should advance scientific discovery. He argued that we should not point to examples where a theory works. Instead, we should look for examples that the theory cannot explain. When we find these, we can refine the theory and become ever more precise. Or, we can throw the theory away and start again.
Which is what we should do with MMT.