FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
June 8, 2021

IN THIS ISSUE:

1. Overview – Modern Monetary Theory

2. The Modern Monetary Theory Con Job

3. Editorial On MMT From Stephen Moore

4. Are We Already There? Sure Looks Like It

Overview – Modern Monetary Theory

For decades, liberals have argued for bigger and bigger government and that means more and more federal spending. As a result, the federal budget goes up every single year, regardless of what is happening in the economy. In following then, our national debt goes up every year.

The liberals have argued for years that our ballooning national debt doesn’t matter because it’s debt “we owe ourselves.” Long-time clients and readers know I have never bought into that argument, and with our rate of debt accelerating in recent years, more and more analysts have come to agree with me.

The liberals and the media needed a new story to justify the ever-increasing spending and debt, so a few years ago, they came up with one. It’s called “Modern Monetary Theory” (MMT). I first wrote about and explained MMT in mid-2019, but it deserves revisiting.

That’s where we’ll start today. Then I’ll follow up that discussion by reprinting an excellent recent column by conservative economist Stephen Moore, one of my favorite writers, who shares his latest thinking on MMT.

Finally, I’ll close with a parting question to think about, in light of the tens of trillions the last two presidents and the current occupant of the White House will have added to our national debt. It’s mind-boggling!

The Modern Monetary Theory Con Job

The age-old liberal argument that our exploding national debt doesn’t matter because “we owe it to ourselves” has begun to wear thin. Maybe this is because our national debt has more than doubled in the last 10 years alone.

So, the liberals needed a new narrative for why our exploding debt shouldn’t matter. And it didn’t take long for some progressive college professors to come up with one. They decided to call it “Modern Monetary Theory” or MMT.

I wrote about MMT in detail in my March 26, 2019 issue of Forecasts & Trends. You can go back to that issue for a more detailed discussion of MMT.

This new twisted argument for MMT goes as follows: Developed nations which have their own sovereign currencies should be able to print as much money as they want and federal deficits, however large, should not matter. In other words, if you have your own currency, you can print as much fiat money as you wish. How convenient!

This was never more true than last year. In fiscal 2020, the government ran the largest budget deficit in our nation’s history at $3.1 trillion. Granted, this was largely because of the COVID-19 pandemic, but even as the pandemic is winding down, our budget deficits are projected to run well over $1 trillion a year for the next decade.

I could go on, but let’s now turn our attention to the latest editorial by Stephen Moore last week in The Hill, and I’ll have some parting thoughts at the end.

Editorial On MMT From Stephen Moore

“$22+ Trillion In Borrowing
 — What Could Go Wrong?

by Stephen Moore    06-02- 21

A few years ago some nutty professors came up with a crackpot idea called “Modern Monetary Theory,” or MMT. It was the idea that as long as interest rates stay low, the U.S. government can spend and borrow trillions upon trillions of dollars at almost no cost and we will all be richer. This is a little like saying you can jump out of an airplane without a parachute and as long as you never hit the ground, you will be fine.

This looney idea was mostly ridiculed as a flat-earth-society idea — and yet now we have a president, Joe Biden, who actually is practicing MMT. His latest budget calls for $6 trillion in spending, soon to rise to $8 trillion, paid for with a $2 trillion tax hike on the rich and $7.6 trillion in additional debt. This is more debt than accumulated by the previous four presidents — combined.

The red ink is also on top of the some $5 trillion we spent to combat COVID-19. Now that the pandemic is over, a sane administration would be looking for ways to start to pay off some of that debt burden, which will grow to more than $150,000 per child born today. (And this from the same party that says it cares about the children.)

Seemingly everything the Biden administration does and spends money on in this budget manifesto is labeled an “investment.” Department of Education spending is an investment; so are child care expenses, paid parental leave, corporate welfare grants to wind and solar companies (many operating outside the United States), “environmental justice” grants, mass transit systems that few ride, aid to mismanaged blue states and cities, unemployment insurance bonuses that pay people more money not to work, ObamaCare subsidies, and on and on for 1,000 pages. Even the $30 billion that President Biden wants to spend to hire 75,000 more IRS agents is an investment.

What is dispiriting is that, despite the fattest government budget in world history, the two agencies that matter most to our national well-being — the Defense Department and the Department of Homeland Security — get virtually no increase at all. Nearly every penny goes for domestic social programs that are designed not to expand wealth, but to redistribute it.

In a perhaps temporary display of honesty, the Biden team predicts growth rates over the next decade of just 2 percent. For the last 40 years, average growth has been closer to 3 percent. Given that a lot of the growth in GDP is going to come directly from government spending, private-sector GDP is going to be closer to 1 or 1.5 percent per year. There is a term for this: secular stagnation. Two percent growth is treading water. 

Also, to his credit, Biden doesn’t play this game of make-believe that somehow, somewhere in future years, we will have a balanced budget in Washington. No, the Biden budget forecasts tens of trillions of dollars of debt, presumably to infinity and beyond. In this Biden never-never land, there are no fiscal cliffs to tumble off. 

What are the real-world pocketbook implications of a budget that recklessly raises spending levels every year with no plausible revenue source to pay for it all? More multi trillion-dollar levels of debt almost surely mean higher inflation and higher interest rates. So even if wages go up under Biden’s policies, it is quite probable that the inflation rate will outpace pay raises for workers, and we will have declines in living standards for those at the bottom and in the middle of the income scale and for seniors living on fixed incomes.

It reminds me of the saying back in the bad old days of the 1970s under President Carter: “My take-home pay won’t take me home.” 

With whiffs of inflation already turning into consumer sticker shock at the gas pump and cash register, Congress should be combating rising prices and the declining purchasing power of the dollar by whiting-out [erasing] wasteful spending from the budget, not pumping it up.   

Democrats dismiss any criticism from Republicans of Biden’s runaway borrowing strategy by pointing to large deficits under Presidents Trump and Bush — and that’s true. But Biden’s debt levels are two to three times higher. That’s at least twice as many bonds as we are going to need the Chinese to buy from us. (Ironically, I am often asked whether China will try to devalue the U.S. dollar so that the Chinese yuan becomes the new world currency. My response has always been: China can’t do that to us. We can only do it to ourselves.)  

To stop this financial madness will require just ONE Democrat in the Senate to stand up for principle and prosperity over political party and say “No.” It’s time for a “have you no shame?” moment for the Democrats: Sen. Joe Manchin (D-W.Va.), Sen. Kyrsten Sinema (D-Ariz.) — are you out there? Now is the time for all good men and women to come to the aid of their country. END QUOTE

Are We Already There? Sure Looks Like It

Many conservatives have debunked and rejected Modern Monetary Theory in recent years, as Mr. Moore does above, yet it is happening right under our noses. Consider this: When Barack took office in January 2009, our national debt was just over $10 trillion. When he left office eight years later it was $19.4 trillion, nearly double.

President Donald Trump spent like a drunken sailor as well, and by the end of fiscal year 2020, the debt stood at almost $27 trillion. Now it stands at $28.4 trillion. The bottom line is, we added over $18 trillion to our national debt in just the last 11 years.

So, here’s my parting question: How is this not Modern Monetary Theory? While MMT has never been officially recognized as government policy, our debt is soaring out of control, nonetheless. While I don’t know when this bubble blows up, it will end very badly!

Wishing I had answers,

Gary D. Halbert

Gary's Between the Lines Blog: When Does Our National Debt Create A Financial Crisis?

 

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