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The Demise Of Modern Monetary Theory
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The Demise Of Modern Monetary Theory

Interest Rates, Inflation, And The Unknown

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Tom Levine
Feb 21, 2022
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The Demise Of Modern Monetary Theory
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Let me say plainly and firstly that I do not possess a PhD in Economics, nor do I daily wander the hallowed halls of an esteemed institution of higher learning.

What I do possess is 35 years of financial market experience, a few certificates, degrees, and a fair amount of common sense.

El-Erian’s View on Interest Rates and The Economy

I have learned not to try to reinvent the wheel; when an expert is near, pay attention. Thus, we start with Mohamed El-Erian discussing his thoughts on interest rate policy as of February 18, 2022. Listen closely and enjoy!

Recap Of The 2/18/22 Interview

Allowing myself plenty of leeway, I’ll recap his current thoughts:

  • “First and foremost” it is “really uncertain” with respect to war prospects and the general economy

  • He doesn’t believe the Fed is likely to raise rates at all 7 meetings this year; this would be “excessive”

  • IF they did raise 7 times, the risk is stagflation, albeit a tail event at this point

  • He would recommend a 25bps hike at the March 2022 meeting and err on the side of allowing inflation to run a bit “hot”

  • The Fed needs to issue guidance and get in front of the narrative. They are on the brink of losing the confidence of market participants thus, losing control. He considers the policy errors to be “unforced”

  • Due to the unforced errors, and the Fed’s failure to act, there is not an ‘optimal” solution only a “less bad” option. There is no soft landing and the best case is pushing consequences out to 2023

Take it from me, a long time student of Mr. El-Erian’s commentary, non-verbal and verbal, he is seriously concerned about what lay ahead.

Modern Monetary Theory Is On Life Support

Now back to the topic of Modern Monetary Theory (MMT). Depending on who you believe the origins date to tidbits drawn from classical economic theory of the early 1900’s.

More relevant is work directly attributed to an Australian economist, Bill Mitchell and more recently, Stephanie Kelton. She received her PhD from the New School and published “The Deficit Myth”, June 2020.

The New York Times recently examined her line of argument in an article titled “Is This What Winning Looks Like?” It’s worth the read. In short, they aggressively question her views and conclude with this statement:

Why let someone else shape your narrative, when you could shape your own?

Essentially MMT states that governments can borrow, spend and print more money than classical, neo-classical, and most economists would argue is practical or logical.

The idea that we can print as much money as needed to solve problems, without proper regard for tax policy and the limits of productivity is almost laughable.

Think of it this way, the idea of putting people to work makes heartfelt sense even if the government has to borrow to do so.

The loan has to be paid back at some point either with tax revenues as a result of higher tax rates or from an increased base of employed paying taxes and producing more goods and services.

The theory might hold if productivity rises by a greater rate than the debt created. In 2022, it appears the theory is weak, a nice way of saying “wrong”.

If there are more dollars chasing the same quantity of goods, prices rise. Or worse, productivity falls, unemployment goes up, and we have more dollars, fewer goods, and what is known as stagflation. The economy worsens, which is a nice way of saying businesses struggle, individuals face tough times, and prices rise simultaneously.

A Trillion Is 12 Zeros - The National Debt

Twelve zeros in a trillion. Big numbers:

$5,000,000,000,000 - 5 Trillion in the 1990’s
$10,000,000,000,000 - 10 Trillion in the 2008
$30,000,000,000,000 - 30 Trillion today

$27,000,000,000,000 - 27 Trillion the last fiscal year under former President Trump
$30,000,000,000,000 - 30 Trillion currently under President Biden

The Pandemic Programs Provided (PPP2) Insurance

My veiw of the monster quantity of money spent on the Cares Act, Payroll Protection Program (PPP), Economic Disaster Insurance Loans (EIDL), extended unemployment claims to cover all inclusive of self-employed, government intervention in the capital markets via bond purchases, and all the other programs were necessary. In fact, they were mandatory.

During the crisis, throwing everything including the kitchen sink at the problem was prudent. Yet, the piper must be paid. The only questions are when and how much will it hurt?

The State Of The Economy - February 2022

The rutilant lights are flashing.

Adjective

1. Glowing or glittering with red or golden light



About The Author And Podcast Host

Tom Levine, leveraging a 25-year tenure in capital markets, leads Zero Hour Group and Native Angelino Real Estate, offering a suite of consulting, strategic analysis, and real estate services.

An alumnus of USC Marshall School of Business and the Claremont Colleges - Pitzer College campus with a term at the London School of Economics. Additionally, he holds a CADRE broker's license (#02052698) and the designation certified Short Sale Specialist under the National Association of Realtors.

Have a challenging transaction? Let's discuss. 

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I consult on a range of transaction types and deal structures.

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