Barron\'s - 05.08.2019

(Michael S) #1

34 BARRON’S August 5, 2019


CURRENTYIELD n ByJamesGrant


TheTroubleWithMMT


Asdeficitsballoon,modernmonetarytheorydescribesRepublicanfiscalpolicy


MODERN MONETARY


theoryisn’tsotheoretical


anymore. In all but


name,it’sthedescription


of Republican fiscal pol-


icyinthislivingmoment.


“Federal Borrowing


Soars as Deficit Fear Fades,” said the


headline on page one of Tuesday’s Wall


Street Journal. For the second year in a


row,theTrumpadministrationisspending


$1 trillion more than the government ex-


pects to extract from the taxpayers.


The Bourgeois Gentleman is the


Molièreplayinwhichacharactercomesto


the proud realization that he has been


speaking prose all his life without even


knowingit.Bythesametoken,theTrump


administrationhasbeenimplementingthe


essentialdoctrinesof“functionalfinance,”


also known as MMT, without seeming to


realize it.


No harm came to Molière’s character,


M. Jourdain, for his funny lack of self-


awareness. The stakes are higher for all


who live under the influence of the 20th-


centuryprogenitorofMMT,theeconomist


Abba Lerner.


You can boil down MMT, as James


Montierdidin Barron’s lastweek,toafew


handyprecepts.Thefirstisthatmoneyis


thegovernment’screation,notsociety’s.It


derivesitsvaluefromthefactthatyoucan


pay your taxes with it.


Rightaway,youunderstandthepoliti-


calfoundationofthebodyofideasassoci-


atedwithLerner,anavowedMarxist.But


MMT is a big tent, and there’s plenty of


room for Republicans.


“[W]hatevermayhavebeenthehistory


of gold,” Lerner wrote in 1947, “at the


present time, in a normally well-working


economy,moneyisacreatureofthestate.


Its general acceptability, which is its all-


important attribute, stands or falls by its


acceptability by the state.”


PresidentDonaldTrumphasneverput


itexactlythatway,butLerner’sideaisim-


plicit in the way 21st-century central


banksdobusiness.Theysetinterestrates


and print money to achieve prosperity—


fullemployment,asLernerdefinedit;full


employmentplusrecord-highstockprices,


forRepublicans.Borrowmoney,spendit,


materializeitoutofthinair,Lernercoun-


seled.Stopwheneconomicgrowthreaches


itsphysicalconstraintsofsparelaborand


capital. If inflation accelerates, lower the


boombytaxingtherichinsteadofborrow-


ingfromthem.Exceptfortheadmonition


totax,theWhiteHouseandLernerareon


the same page.


Thesecondbigidea inMMTconcerns


the nature of the public debt. There’s


nothing to fear from it, said Lerner—at


least, not if a government can borrow


indefinitely in its own currency. “The


greaterthenationaldebt,”theeconomist


wrote,“thegreateristhequantityofpri-


vatewealth.Thereasonforthisissimply


that for every dollar of debt owed by the


government, there is a private creditor


whoownsthegovernmentobligations...and


who regards these obligations as part of


his private fortune.”


Lernercarriedtheargumenttoitslog-


icalKeynesianconclusion:Thegreaterour


collective fortune, the less we need to


save. The lower our savings, the greater


our spending. The greater our spending,


the higher the level of our employment.


The Trump White House talks an or-


thodox fiscal game, even now; Lerner


madenosuchpretense,believingashedid


thatthepublic’sliabilitiesareidenticalto


thepublic’sassets.Weoweittoourselves,


inotherwords—and,ofcourse,nowadays,


to the foreign bondholders, too.


Lernerwasaclosereasonerandlucid


writer. In his carefully constructed theo-


retical world, the public debt wouldn’t


grow indefinitely but rather tend to melt


away. Why? “The greater the national


debt,thegreateristhequantityofprivate


wealth”and,hence,thelowertheneedto


borrow.


Ithasn’tworkedoutquitethatway.Fa-


mously, the debt has not melted away, but


spurted. In the past 20 years, the ratio of


federaldebttogrossdomesticproducthas


leaptto105%from60%.Overthesametwo


decades,observeVanHoisingtonandLacy


H. Hunt, guiding lights at Hoisington In-


vestment Management, in Austin, Texas,


GDPhasgrownat1.2%ayearpercapita,


37% below the long-term U.S. average.


Lerner failed to anticipate today’s


loomingentitlementscrisis,thefallingna-


tionalbirthrate,andthestrikingdeclinein


the rate of private saving these past 10


postcrisisyears.Theempiricalfact,again


to draw on Hoisington and Hunt, is that


“largeindebtednesseventuallyslowseco-


nomicgrowthasresourcesaretransferred


fromthehighlyproductiveprivatesector


to the government sector.”


“We have, indeed, been told that the


public is no weaker upon account of its


debts,” wrote an earlier commentator,


“since they are mostly due among our-


selves,andbringasmuchpropertytoone


astheytakefromanother.It’sliketrans-


ferringmoneyfromtherighthandtothe


left; which leaves the person neither


richer nor poorer than before.” That was


David Hume, Scottish philosopher and


contemporary of Adam Smith, writing in


1777.AnticipatingMMTinanessayenti-


tled “Of Public Credit,” Hume called it


“buncombe.”


In fairness to MMT, England did not


default, as Hume feared it would, and as


Americanpatriots,thenfightingtheRevo-


lutionaryWar,hopeditwould.Infairness


toHume,manyanothernationdidsubse-


quentlydefault.Indeed,in1933and1971,


the U.S. itself left its creditors high and


dry by refusing to honor its promise to


paydollarsdenominatedinafixedweight


of bullion.


Nowthatdollars arefashionedfrompa-


per or (an even lighter-weight material)


digitalkeystrokes,formaldefaultisunnec-


essary. The government can print what-


ever it needs to service its fixed charges.


Thequestioniswhetherthecreditorswill


cheerfully accept the currency so effort-


lesslytossedoffthe21st-centurypresses.


Hume, steeped in the classics, re-


mindedhisreadersthatRomanemperors


stored up treasure against some future


day of peril. The “modern” expedient,


Hume disapprovingly continued, “is to


mortgagethepublicrevenues,andtotrust


that posterity will pay off the encum-


brancescontractedbytheirancestors:and


they, having before their eyes so good an


example of their wise fathers, have the


sameprudentrelianceontheirposterity;


who, at last, from necessity more than


choice,areobligedtoplacethesameconfi-


dence in a new posterity.”


Speaking for the newest posterity—


that’s us—I have arrived at one certain


conclusion:Theword“modern,”writtenor


spokeninthefiscal,monetary,orfinancial


context,istrouble—nothingbuttrouble.


JAMESGRANT,founder and editor of Grant’s


InterestRateObserver,istheauthorof Bage-


hot:TheLifeandTimesoftheGreatestVicto-


rian , which was published in July.


Joel Arbaje; Bettmann/Getty Images (Source)

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