“The United States is not on a sustainable long-term fiscal path.” –Fed Chairman Jay Powell
Modern Monetary Theory, or MMT, has become a hot topic in economics and politics in the last year. Simply put, MMT theorizes that governments which can issue debt in their own currencies are not subject to the constraints of normal individuals, companies, or even nations which must borrow in other currencies. Rather, a government which can issue debt denominated in its own currency can borrow as much money into existence as it wants without fear of default, and national budgets must only be reined in when deficits lead to price inflation. Of course, this sounds good enough if you think the administration and Congress are the thoughtful, reasoned, measured and responsible adults found in TV shows like the West Wing. On the other hand, if you believe that they are self-dealing, irresponsible, childish sociopaths concerned only with gaining and keeping power for their own enrichment, then you should be very, very afraid. The barely restrained ability to hand out money to one’s donors and pals is one of the calling cards of a Third World dictatorship, and a government with no budgetary brakes is a recipe for cronyism and economic looting. Staying “honest” requires that the government act as though it cannot simply spend whatever it likes regardless of whether or not this is true.
But whether or not one believes that MMT accurately represents the true nature of national government financing, Washington is pretty much operating as though it does. One might suggest that the trillion dollar deficit which the US will run this year supports what little growth (as measured by the Gross Domestic Product, or GDP) there is. Without the federal government spending this much money into existence every year, the economy would likely sink into a recession. A downturn, of course, would result in an even higher deficit.
The deficit used to have a cycle—increasing during downturns as paychecks stagnated or shrunk while the safety net spending rose, and then falling during recoveries as wages accelerated, business profits climbed, and social spending fell back.
For example, the government’s fiscal position worsened during the recessions of 1989-90, 2001-03, and 2008-09, only to improve during the subsequent recoveries. For the last four years, however, the deficit to GDP ratio has increased even during “good” economic times. One can only imagine what the chart will look like if we do have a recession. And if Washington were somehow to lose its ability to spew out large amounts of cash created by keystroke, the economy would be faced with a ruinous collapse in demand.
As the Fed Chairman has said, we are not on a sustainable fiscal path, and it appears that we can no longer “grow our way” out of deficits with rising wages and restrained spending the way we used to. There seems to be no alternative but to embrace MMT and trust Washington to use its unlimited spending powers wisely. For this to work out well we would need a focused, knowledgeable executive and legislature capable of saying no to their friends and donors. We will leave it to our readers to consider how apt that description is.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Doylestown Wealth Management, Inc. are separate entities from LPL Financial.