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This Money-Destroying Policy Could Soon Become a Reality

Interest-Rates / Quantitative Easing Feb 22, 2019 - 10:16 AM GMT

By: John_Mauldin

Interest-Rates

It was my first encounter with what I thought was economic insanity.

More than 10 years ago, I came across the ideas of economist Bill Mitchell of the University of Newcastle in New South Wales.

He was teaching what he called Modern Monetary Theory (MMT). I looked into it and quickly dismissed it as silly.

Actually printing money as an economic policy? Get serious.

Fast forward to today, the idea is adopted by new socialist-like movements in the US and abroad. It’s cited by politicians and mainstream media.

There’s a growing number of rationales for adopting MMT into our philosophical base.


Most of you may wonder why we are even talking about this. Why should this be on any investor’s radar? Let me explain.

“Free Money” Is Making Its Way into the Public Mind

Politicians are increasingly talking “free stuff.” Free college, guaranteed basic income, more total healthcare paid for by the public, basic housing…

Their economic advisors say it is completely doable, or even necessary for the general welfare. It is almost like an auction to see who can promise the most free benefits, paid for by taxing the rich.

“The richest country in the history of rich countries can easily afford to spend more on its citizens ensuring basic income and wealth equality.” More or less a direct quote from several interviews.

And forget mere income taxes. The new political ante will be a wealth tax.

That means these ideas will be more and more promoted to the public. More politicians will argue for increased spending, or at least different spending priorities. Guns and butter.

It won’t take long before this enters the national mindset. An increasingly large group of voters, especially younger voters, will feel a natural affinity with the idealism.

Why shouldn’t a rich nation help those who are less advantaged?

The Next Recession Will Bring a True “Change” Election

Then somewhere along the way a recession will hit. Unemployment will rise and deficits increase. A few years into it, we’ll hit the $30-trillion mark in debt.

This will crowd out private investment and slow whatever recovery there might be.

Besides the financial fallout, the potential for a true “change” election will rise.

The frustration among Trump voters will still be there. But it will also be shared by many on the left who will see the promises discussed above as a way to change things.

It’s hard to argue in the middle of financial crisis and recession that we don’t need change.

There won’t be a President Warren Harding who decided to do nothing in one of the deepest recessions/depressions in American history in the early 1920s.

In that case, severe austerity allowed markets to clear, but the recovery gave us the Roaring 1920s. Cause and effect? Numerous scholarly books have been written to suggest that.

But that will not be the case 100 years later as we face the 2020s. There will be an increasing drumbeat for “doing something.” Change will be the mantra.

With this in mind, it is not far-fetched to imagine a White House and Congress starting to work around the principles of MMT.

Here’s Where It Gets a Little Murkier

The Fed does not have the legal authority to directly create money. That is a right reserved strictly for the federal government and specifically the US Treasury.

The Treasury can issue all the debt into the private sector it wants. The Federal Reserve can then go and buy all the dent debt it wants and add it to its balance sheet.

This is called quantitative easing. MMT is technically not the same thing.

Congress has tried to create agencies which would use the Fed to directly create money. These agencies and methods have all been ruled overwhelmingly unconstitutional by the Supreme Court.

So, for the Fed to create money as MMT advocates want, you would have to amend the Federal Reserve Act. Certainly a possibility, but not easy.

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