Saturday, April 4, 2020

MMT and the Pandemic Panic

The Covid-19 crisis has unleashed Modern Monetary Theory madness.

History will tell whether the economic shutdown response by the U.S. and other nations to the Covid-19 pandemic was the right one. The crisis has given Modern Monetary Theory (MMT) and its disciples, MMT’ers, a platform to call for unlimited stimulus and debt monetization, now even coupled with an emotional plea for “social justice” [1]. This is ironic, since the inflation caused by fiat money printing is highly regressive, the opposite of social justice if that justice is meant to aid economic participants of low and moderate income. “A quick fix” by dropping massive amounts of cash has unintended consequences. There really is no substitute for a fully functioning economy and markets. MMT’ers have used the opportunity to flood the airwaves and opinion pieces worldwide with false information about the sustainability of MMT [2]. 

Credit markets have once again wavered as the Fed has struggled with its Open Market Operations to stabilize the Treasury market during the month of March 2020 and bring down interest rates so that they are in line with the Fed Funds Rate, reduced yet again to 0-0.25%. Zero/negative interest rate policy (ZIRP) is here for the foreseeable future, and that means financial repression for bond and cash holders. We already know that ZIRP has an unintended consequence of slowing the growth of capital investment and loans [3], and the growth coming out of this recession will be as anemic as the last one. 

It is not just ZIRP as far as the eye can see that has me worried. The Fed’s response [1] has for the first time included the purchase of corporate debt, including junk. The next step is the Fed’s outright purchasing equities, just right around the corner, particularly if the equity markets continue to decline from the already 25-30% drop of the February 2020 all-time highs. How long will it take the Fed to load up its balance sheet to the tune of some $23T, the approximate level of the national economy? This smacks of government ownership of the private sector, something common to communist countries, not a republic built on the principles in our declaration of independence and constitution. 

The MMT’ers are finally in charge here, with strong influence over the Fed and Treasury. This is a national security issue, one that will only be addressed once the consequences become acutely felt by so many people that a revolution against the movement will ensue. What will it take: a major currency crisis, knocking our reserve status away; hyperinflation, causing a regressive depression; interest rate shocks, whereby rates sharply move higher, causing yet more financial instability and recession. 


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