tl;dr: MMTers argue that deficits don’t matter unless there’s inflation. But what if there’s inflation?

I’m writing this post on the morning after the first Presidential debate between Trump and Biden.

To say that I am saddened and depressed by what we witnessed is an understatement. A low point in American history, imho.

By the time this is published, the pundits have had their say and we’ve moved on (hopefully), but it’s a cloud hanging over me right now.

Particularly so because the significant, meaty issues that should have been addressed, like China, like immigration, like well anything, weren’t.

And one of them is the economy.

It’s an MMT World and We’re All Living In It

I’ve been working my way through The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, which I blogged about previously in MMT, Economic Slack, and Liquidity

I’ll admit, it has not been an easy read. That’s not because it’s not well-written, it is. It’s because it has really challenged a lot of the thinking that I have developed over the course of the my life and, in particular, the last 5 years that I’ve gone “full crypto native.”

I’d be lying if I said that Dr. Kelton didn’t make some good points, the biggest one being “the government can’t run out of money.”

I had fallen for the myth that the government gets money through taxes and, in so doing, determines its revenues for the year. From there, it has an obligation, like a household, to balance its budget.

The “deficit myth” reminds us that, like Neel Kashkari of the Minneapolis (in)famously said on 60 Minutes, “there’s infinite cash” because the government is not the user of the currency…it’s the issuer.

A fair point. If you can print the money, you don’t have to worry about it.

Plus, per Kelton, as long as a country has “monetary sovereignty” and there’s little to no inflation, deficits don’t matter.

Ok, I get that….kind of.

Inflation is Already Here

Still, a bet on MMT is a bet on two things.

• you’ll have monetary sovereignty forever
• inflation can be managed

Yet, a bet on the first is a bet against history. She’s counting on the US Dollar…and I would argue Why you shouldn’t count on the US Dollar

and secondly, and I’ve been worried about this ever since the Pandemic started, Inflation Is Already Here—For the Stuff You Actually Want to Buy

For example:

Start with recent supply and demand. The cost of food at home, where so many of us have been spending our time, was up 4.6% in August compared with a year earlier, the biggest rise in almost a decade

https://www.wsj.com/articles/inflation-is-already-herefor-the-stuff-you-actually-want-to-buy-11601112630

So, how is this possible when the Fed is committing to pushing inflation above 2%?

The swings in our buying habits have accentuated the difference between the consumer-price index (CPI) and the personal-consumption-expenditures price index (PCE). CPI captures the headlines and determines the return on inflation-linked Treasurys, or TIPS. The Federal Reserve uses PCE—and the two diverged over the summer.

CPI is assessed based on spending patterns from a couple of years ago, while PCE recalculates spending every month. The latest PCE data is only through July, but showed prices rebounded, rising 0.4% over three months compared with the prior three months, on an annualized basis. CPI was still showing prices falling on that basis—although in August the reopening of the economy pushed three-month annualized CPI inflation above 3%. PCE could be even higher for August, given the calculation method.

So, and this is the crux of the challenge facing MMT, imho…it’s centralized planning by another name.

There’s a naive(?) or maybe just arrogant belief that the economy can be controlled.

However, if the primary throttle on MMT is inflation and the way that inflation is calculated doesn’t actually reflect the things that people buy, then you’re literally flying blind.

It’s like saying that “we can put our foot on the accelerator as much as we want as long as we don’t go above 95 mph…but the speedometer is broken.”

Biden and Trump are MMTers

What’s become clear over the past few years, and in particular, the past few months is that both Dems and Reps are already MMTers.

At this point, it’s just a question of how “full throttle” we’re going to go.

I guess, in a weird way, it’s a good thing…we’ll get to see if MMT is right.

If it is, great.

If it’s not, no big deal…we’ll just have a ruined economy, high inflation, and devalued currency.