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Here Today . . . Where Tomorrow

09/26/2021

Economists tend to be a pompous bunch and easily given to hyperbole.

Modern Monetary Theory (MMT) is changing the world – making it better in the short-run.  Of course, that begs the question of how short is short-run, and how long is long-run?

As a refresher, MMT explains that nations with a reserve currency, such as the dollar or the euro or the yen, can issue an unlimited amount of debt.  In the U.S. , when the Treasury needs cash, it sells bonds to get the cash.  Formerly, those bonds were sold to citizens, pension funds, foreigners, etc.  However, if the Treasury cannot sell all the bonds — cannot raise all the cash they need – it is no problem, because the Fed will buy the bonds.  There is now an unlimited buyer of Treasury bonds – the Fed!

As much as MMT has changed the world of economics, it has not changed everything.  The Keynesian school is largely unaffected – the level of spending still impacts our economy.  Likewise, the Supply Side school is largely unaffected — the level and type of taxes still impacts our economy.  The Classical school of economics is surprisingly unaffected – for example, the law of supply & demand still works.  However, the Monetary school has been upended – money supply can be managed like a thermostat by MMT, with the Fed pushing money out and then vacuuming it up.

The music is still playing, which means we should still be dancing.  The time to exit the dance hall will be when the dollar loses its reserve status and falls dramatically.

Of course, the death of MMT and the collapse of the dollar would be a great gift to emerging markets, because their debt is usually dollar-denominated.  A cheaper dollar makes it easier for them to service or repay their debt.  Famed Bond King Jeffrey Gundlach believes the dollar will fall 20% next year due to the twin deficits of budget and trade, and that’s without regard for the impact of MMT.

It may be different music and may be a dance hall in an emerging nation then, but until then, we can keep dancing . . .

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