Modern Monetary Theory... non-political!

[82-T/A]

Guys... would really love to discuss this and get your thoughts. I want to be clear that this is not political.


Why is it not political? Because it's pretty obvious that both political parties seem to ascribe to this. I really like some presidents over another, but even the president "I" personally really like 100% totally supported MMT. Our last three (four) presidents right now have gone full-fledged MMT. I haven't been active enough to see if this gets heated, but the Bye Bye post seems to show that it does. I'd suspect it's political.


So if I may, would really like to discuss this because I have some significant concerns and am interested in identifying if these are founded or not.


First, what is Modern Monetary Theory?


My understanding of MMT is that the Government simply prints more money, effectively borrowing from itself to cover expenses, thereby increasing inflation, which in turn reduces the value of the debt.




Am I correct in understanding this?




Here are my long-term concerns:


- It damages strength of the US Dollar
- China is looking to replace the US Dollar as the global currency
- It inadvertently hurts those who do not own assets. E.g., it directly affects people who don't own homes, do not own stocks, etc.




My big concern is that, along with China's intention to replace the USD as the global currency, or at least get the world off of it (even if not the Chinese Yuan), it will lead to a collapse of the USD and in turn, the complete collapse of our economy.



WHEN that happens... what does that mean for us?


My mind can really go down a crazy path. I imagine inflation first skyrocketing, and then massive deflation to the point where our dollar isn't worth anything. At that point, what happens to those of us that own homes? Can / will the banks repossess them?



Do I expect this to happen in the next 4 years? No... do I expect it to happen in the next 8 years? Maybe. Do I expect it to happen in the next 20 years? Absolutely I do.


My mortgage payoff date is in exactly 20 years. The stock market is really, really high. I can take a residential loan out of my 401k and pay off my home's mortgage immediately. I now owe myself back money with interest. I effectively have taken a loan from myself, at a stock market high.





Two things I'd like to see in this thread, if I may...

1 - Is MMT good, and what do you think? Am I totally blowing this out of proportion?
2 - Is it dumb for me to take a tax-free 401k residential loan to pay off my house, there-by securing my high-value stock price before any potential stock market crash, knowing I'll be paying MYSELF back with interest at twice the original interest rate?

 

[stepford]

Some folks have been expecting us to turn into Weimar Germany any day now... for decades. But inflation seems to stay low. I'm not saying endless money printing is a good approach, but Modern Monetary Theory, or Fractional Reserve Banking, or Fiat Currency don't seem to be the disastrous ideas they're made out to be (at least so far).

 

[82-T/A]

Some folks have been expecting us to turn into Weimar Germany any day now... for decades. But inflation seems to stay low. I'm not saying endless money printing is a good approach, but Modern Monetary Theory, or Fractional Reserve Banking, or Fiat Currency don't seem to be the disastrous ideas they're made out to be (at least so far).

I would agree with you in concept. I think what saves us is that the USD is the global currency. Where I'm concerned is that I see a potential shift to the Yuan, and / or some form of cryptocurrency (don't know how realistic that is)... and I see that as when the problem arises.

I'm worried that my financial responsibility will end up being meaningless.



Just some thoughts... but appreciate the reply.

 

[njhowie]

MMT is not political, it is economic.

I do not agree with it...it is the antithesis of Capitalism - practically Socialism.

The problem is that if you just print money without bounds, you devalue it without a lower bound. Likewise, because there is more money in the system, and everyone has more of it, by definition it will bring about inflation. More folks can afford goods and services, there will be more demand and push prices higher. Similarly with the push for the $15 minimum wage. If you set that minimum wage, what about skilled labor and others, making between say $15 and $20 before the mandate? They will demand higher wages, because why would they want to work harder in a skilled position when they could make the same doing a job which requires no skill and less effort? Again, more inflation.

Some of the radical folks have been claiming that the US dollar is on its way out. In the past I have brushed off such thinking and reasoning. Now, as I see what is taking shape and how things are progressing, it doesn't seem so far fetched.

 

[MichaelB]

Just to clarify an apparent misunderstanding. If the main political parties share a similar position on something, that does not mean it's not political, it means it's not partisan. Still can be political. In the case of MMT, it is clearly an area where economics and politics intersect.

A discussion on MMT might be more informed if someone were to define it. It would also help if this were related to FIRE in some way.

 

[njhowie]

A discussion on MMT might be more informed if someone were to define it. It would also help if this were related to FIRE in some way.

It's related to FIRE because a well-funded retirement nest egg could be devalued to nothing.

Here's a decent definition/explanation of MMT:
https://en.wikipedia.org/wiki/Modern_Monetary_Theory

Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires.

MMT is an alternative to mainstream macroeconomic theory. It has been criticized by well known economists but is claimed by its proponents to be more effective in describing the global economy in the years following the Great Recession of 2007–2009.

MMT argues that governments create new money by using fiscal policy. According to advocates, the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes to reduce the spending capacity of the private sector. MMT is debated with active dialogues about its theoretical integrity, the implications of the policy recommendations of its proponents, and the extent to which it is actually divergent from orthodox macroeconomics.

 

[misanman]

I have heard that a key to successful MMT is an automatic taxing mechanism that would come into play if inflation gets unwieldy. Passing new taxes can be difficult from a political point of view so you need something in place that automatically responds. A VAT might be an example of this but I'm clearly out of my depth on how such an "automatic" tax might be structured.

 

[82-T/A]

It's related to FIRE because a well-funded retirement nest egg could be devalued to nothing.

This is exactly my point, and it's something I'm very concerned about.


How do I protect myself against economic collapse of the dollar? Buying gold, or ammunition is stupid. I'm not going to trade gold for cans of soup, and I'm not going to shoot anyone. So what (logically) can I do? Should I pay my house off early so that the banks cannot leverage it? Or do I keep putting more money into the stock market over and above my retirement amount... just so that maybe I end up on top (even if that means almost nothing)?

 

[stepford]

At some point you just have to live your life and accept that things like asteroid strikes, nuclear war and global economic collapse are going to mess with your day. At a somewhat less dire level, diversification into international equities, real estate and precious metals might be a good idea if moderate, but not world ending, dollar devaluation occurs.

 

[82-T/A]

At some point you just have to live your life and accept that things like asteroid strikes, nuclear war and global economic collapse are going to mess with your day. At a somewhat less dire level, diversification into international equities, real estate and precious metals might be a good idea if moderate, but not world ending, dollar devaluation occurs.

I have accepted them, that's why I want to be prepared for them.

 

[Animorph]

If I was afraid of future high inflation I would borrow as much as possible now so that I could pay it back later with worthless dollars. Borrowing from a 401k is the opposite of doing this, as is paying off a mortgage.

As an economy grows the money supply has to grow with it if prices are to remain stable. Otherwise, if your economy has doubled its production but your money supply has remained static everything will cost half as much. I guess in that case your stock prices would constantly be decreasing, but hopefully not as fast as "deflation". Hey, loans would have negative interest rates! Normal bank loans are part of the money creation process. Without that "created" money loans would be very different.

I think we need to somewhat match the money supply to the economy, if just to keep things as they are. Targeting a small inflation rate accomplishes that.

Has anyone thought how an economy could be jumpstarted? Say there is a village of 1000 people that suddenly appears out of nowhere. All sorts of skilled people, but no money. They could of course barter, and if they did that efficiently they could live pretty well. Or we could introduce currency as a substitute for bartering. But how is that currency introduced into the economy?

 

[82-T/A]

If I was afraid of future high inflation I would borrow as much as possible now so that I could pay it back later with worthless dollars. Borrowing from a 401k is the opposite of doing this, as is paying off a mortgage.

As an economy grows the money supply has to grow with it if prices are to remain stable. Otherwise, if your economy has doubled its production but your money supply has remained static everything will cost half as much. I guess in that case your stock prices would constantly be decreasing, but hopefully not as fast as "deflation". Hey, loans would have negative interest rates! Normal bank loans are part of the money creation process. Without that "created" money loans would be very different.

I think we need to somewhat match the money supply to the economy, if just to keep things as they are. Targeting a small inflation rate accomplishes that.

Has anyone thought how an economy could be jumpstarted? Say there is a village of 1000 people that suddenly appears out of nowhere. All sorts of skilled people, but no money. They could of course barter, and if they did that efficiently they could live pretty well. Or we could introduce currency as a substitute for bartering. But how is that currency introduced into the economy?

What you explain (borrowing as much as you can) is good in successful MMT... that is effectively the point. The inflation devalues the debt.


The problem though is what results from MMT... that is, when the USD is no longer the global currency. This would happen almost literally overnight. We live in a very connected world, and society as adopted a fast-fail / fast-success mentality. Just like in a stock market crash... everyone starts pulling out so they don't lose in the end. When enough momentum develops that people start pulling away from the USD... it'll happen fast, in the matter of hours to days. This would likely be sparked from a single law passed internationally somewhere, or a negotiation made between several countries, etc.



At that point the value of my cash would be worthless, and I'd have tons of debt.

 

[MichaelB]

The problem though is what results from MMT... that is, when the USD is no longer the global currency. This would happen almost literally overnight. We live in a very connected world, and society as adopted a fast-fail / fast-success mentality. Just like in a stock market crash... everyone starts pulling out so they don't lose in the end. When enough momentum develops that people start pulling away from the USD... it'll happen fast, in the matter of hours to days. This would likely be sparked from a single law passed internationally somewhere, or a negotiation made between several countries, etc.

I take it you mean global reserve currency?

 

[38Chevy454]

I think it is a valid question and concern. But as with many things in life that are out of my control, I can only react to them in my best interest. To that extent you can adjust your equities to be more favorable to the conditions. Inflation is the silent killer of retirees on (relatively) fixed incomes. I do think that gov't will work hard to keep inflation under control so it does not go haywire. Increasing US gov't debt does scare me, but so are the rest of the world gov'ts doing the same. Net effect is that while the money printing seems bad, it is keeping pace with global. The fact that US dollar is the reserve currency helps out a lot.

 

[82-T/A]

I take it you mean global reserve currency?

Yes, respectfully... I thought that it was obvious.

 

[audreyh1]

I’m 61. Will I care when I’m 81 and the US dollar maybe* has finally been pushed out as being the global reserve currency?

Dunno.

*I just observe that the alternatives are in similar boats. And changes like this take a very, very long time.

 

[82-T/A]

I’m 61. Will I care when I’m 81 and the US dollar maybe* has finally been pushed out as being the global reserve currency?

Dunno.

*I just observe that the alternatives are in similar boats. And changes like this take a very, very long time.

Are they? That's a good point. Is China's internal national debt the same as ours (or worse)?

 

[Whisper66]

1 - Is MMT good, and what do you think? Am I totally blowing this out of proportion?

-- I think that the US over reliance on this theory to justify our continued gross deficits provides the most likely driver for a future catastrophic economic downturn or total economic collapse within the US. My expectation is this will only occur when / if BRICS or another group with a broad economic base starts to use a non-US dollar currency broadly.


2 - Is it dumb for me to take a tax-free 401k residential loan to pay off my house....

-- I don't use the potential impacts of MMT much in my financial plans. I expect any changes I make won't do much good to protect us in a true economic collapse.

 

[audreyh1]

Are they? That's a good point. Is China's internal national debt the same as ours (or worse)?

You always have to look at the global alternatives.

 

[MichaelB]

I’m 61. Will I care when I’m 81 and the US dollar maybe* has finally been pushed out as being the global reserve currency?

If the US$ were not the global reserve currency it would likely decline some in value relative to other major currencies. While I think this is a low probability scenario, it would probably affect prices, making imported goods more expensive and leading to higher interest rates. It would probably also lead to higher domestic employment, so the impact would be generational, with us boomers worse off and our grandchildren better off.

A well diversified portfolio with lots of int'l asset exposure would ameliorate much of this.

I suspect your guess of this happening when you're 81 is optimistic. It'll take at least that much time.

 

[Retch The Grate]

Ok, if you are really interested in MMT, here is the primer:
MMT Primer | New Economic Perspectives

If you want a quick overview by an economist, Economics Explained does an ok job but not as good as reading the above material:

In a REALLY TLDR form, the quote njhowie put up above from wikipedia is decent.

MMT makes a LOT of sense, the older models people use don't really work for debt denominated in a currency a government can print.

The way to think about it, imo (again SUPER truncated tldr version), is the govt can print as much money as it wants to fund activities, and manage the excess through taxation to prevent inflation. The downside is as that as the printing of money that the government does expands relative to the supply of money already in the economy, the economy moves from market based to command based. And of course the economy made nothing but hornswagglers, which the government really needed to fight off the alien invasion, but means that no other goods that people wanted were made. So net happiness/utility/whatever economic measure of individual needs satisfaction you want to measure, most likely went down, but of course the government is tasked with making people unhappy when necessary to accomplish needed goals like fighting off alien invasions by making hornswagglers and that's where the political side is.

Imagine there is $100 total held by the 10 individuals in an economy that they use to direct economic activity. If the government decides it wants everybody making hornswagglers, they just fire up the printers and keep paying out as much money as it takes for everybody to switch to making hornswagglers. If that is $1000, that's how much they print. If that's $1,000,000, they print that. Everybody switches to making hornswagglers because it is the only thing that makes sense, and the hornswagglers that the govt wanted gets made. The downside is that the existing value of the currency in the economy is wiped out, but the government manages that by imposing stiff taxes on the 10 individuals, sucking the $1,000,000 back out of the economy.

Now that obviously is an extreme example where MMT converts your market economy into a command economy. The reality is somewhere in between, but reality it is also much harder to use taxation in a way that it pulls out the effects of the money printing without impacting people. So generally, yes governments who have debt denominated in their own currency can print as much as they want and manage it through taxation, but this will definitely cause distortions in the market. The redirecting of effort to goals the government wants to accomplish is the entire point, but we will note that any government spending, regardless of where the money comes from, is technically distorting in this manner. The government buying food production to make sure there is a strategic production reserve in the country is a distortion we have regardless of whether one is using MMT to describe what is happening or Keynesian economics, or Marxist, etc.

So where MMT is useful is for understanding why things like Quantitative Easing aren't having the immediate impacts we would have expected, and to give guidance on how we should be managing them (likely taxing the huge amounts of money that QE is causing to pile up in the top part of the economy).

 

[Mr._Graybeard]

I'm more concerned about private debt than the hole U.S. (federal state, local) governments have dug. Easy money has made it easy to go into hock for business and individuals. What happens when interest rates go up?

Check out this paper from the St. Louis Fed.

 

[Animorph]

What you explain (borrowing as much as you can) is good in successful MMT... that is effectively the point. The inflation devalues the debt.


The problem though is what results from MMT... that is, when the USD is no longer the global currency. This would happen almost literally overnight. We live in a very connected world, and society as adopted a fast-fail / fast-success mentality. Just like in a stock market crash... everyone starts pulling out so they don't lose in the end. When enough momentum develops that people start pulling away from the USD... it'll happen fast, in the matter of hours to days. This would likely be sparked from a single law passed internationally somewhere, or a negotiation made between several countries, etc.



At that point the value of my cash would be worthless, and I'd have tons of debt.

If your debt is in worthless USD's then I don't see a problem. You do have some investments in international economies, right? Won't a USD collapse, global shunning or whatever cause, cause USD inflation? Strictly market action, no MMT needed. Maybe if your debt was denominated in Bitcoin and your portfolio was all USD CD's you'd be in big trouble.

Certainly this possibility, and I agree the USD status as a global currency poses a significant risk, is a great reason to invest globally. Japan was always in the discussion when discussing the 4% rule and what could go wrong with it.

 

[bjorn2bwild]

MMT explained by professor Stephanie Kelton in this Newyorker article -

This spring, Kelton spoke at the Wall Street Journal’s Future of Everything Festival, held in a converted warehouse in Tribeca, where earnest networkers milled around taking notes. On the dais, a Journal staffer introduced Kelton as an economist with an idea “that will either solve the world’s problems or send it into ruin!” She made a face, and then walked onstage.

https://www.newyorker.com/news/news...s-the-government-should-just-print-more-money

 

[audreyh1]

I suspect your guess of this happening when you're 81 is optimistic. It'll take at least that much time.

That was kind of my point. If it occurs very late in my retirement, I probably don’t care much at all.