Modern Monetary Theory (MMT): How will it affect precious metals?
derryb
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Get used to it, it will be in the limelight in national economic discussions.
MMT (some call it the "Magic Money Tree") basically claims that printers of money (nations) do not have to worry about accumulating too much debt because they can always print more money to pay interest. Makes sense. Seeing that MMT (QE) was in the driver's seat for the last financial crisis and how it drove gold up, chances are gold will react similarly if MMT takes over national economic decisions.
MMT also claims that as long as there are enough workers and equipment to meet growing demand without igniting inflation, the government can spend what it needs to maintain employment and achieve its goals. Pretty much where we are today. But, what are the longer term affects of this lack of concern over money creation. I suspect we are at the beginning edge of finding out.
All fine and dandy, but here's the scary part: It also claims that the price inflation that normally follows increases in the money supply can be "controlled" by throttling (raising) taxes.
We all know what happens when the supply of money available to purchase goods and services increases at a faster rate than those goods and services. Price Inflation, for those that do not know.
former NY Fed president Bill Dudley's take: "It Failed In Germany, Venezuela And Zimbabwe"
My verdict: MMT is in the long run bad for a currency, therefore good for gold. We saw gold's reaction to this theory in 2009. And yes, this reaction was in reality a reaction to a fear of inflation, and as the FED runs out of tools to keep it in the closet that inflation remains a threat.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
Comments
The weak part of MMT is the "theory" part. As far as I can tell (and the proponents are pretty incoherent when they try to explain it), it is more of a collection of observations coupled with a hope. The observation (from Japan, and from the developed world following the financial crisis) is that significant monetary expansion can occur without being inflationary. This of course is true, but the MMT proponents don't seem too interested in understanding the cause. (which is complex, but is tied to the vast pool of labor that has existed in an increasingly connected global economy, and the fact that money supply didn't really increase as fast as the numbers would suggest; or, more precisely, money was not put in the hands of people who would spend it, in part because of a fairly mild fiscal policy, and only a moderate temptation to "redistribute"). If MMT is taken seriously among policymakers (which has yet to happen, but could), and to the extent that we see a highly stimulative fiscal policy coinciding with some degree of de-globalization and a more restrictive global labor pool (look at Chinese demongraphics), we could definitely see a return to material inflation. I'm moderately optimistic that we won't go completely off the MMT deep end, but could imagine a return double digit inflation beginning around 2025, followed by "Volker 2" five or ten years later. For those rare people who are adept at market timing, that would suggest that there is a gold buying opportunity around 2023!
Seems like a straightforward way for the bankers to finally assume ownership of the majority of assets for free, while the working classes have their wealth taxed and diluted. It's going to cause no end of misery until the politics change, and I do believe more people are understanding the problem now.
I knew it would happen.
Look for MMT to be embraced and promoted by those who want to promise "free stuff" to everyone in order to get votes. The old truism "socialism works until you run out of other peoples' money" will be replaced with "MMT works until you make the currency worthless."
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
Other peoples money to finance corporate tax breaks and to bail out bankrupt presidents. Yeppers that there's the ticket. lol
The whole worlds off its rocker, buy Gold™.
I think the key phrase here is “increases at a faster rate”. In a growing economy the money supply must expand, and in a fiat money economy the only way that’s possible is for the government to run a deficit. A balanced budget would bring its own set of problems. If the U.S. government were to begin balancing its budget, it would issue no new money. Therefore the money supply would remain constant as the amount of goods and services increased. Thus value of each dollar would increase relative to the amount of goods and services it can buy. This may appear to be a good thing compared to the opposite situation we face today, but it isn’t. At present, excess money creation favors debtors over creditors, allowing them to discharge their debts in ever-cheaper dollars while their nominal wages are rising. Freezing the currency in place would favor creditors over debtors, who would be forced to pay back their debts in appreciating dollars as their nominal wages were being forced down. Neither of these outcomes is desirable. Either too much or too little money creation leads to imbalances within the economy. If the goal is a stable unit of account and medium of exchange, one which neither appreciates nor depreciates, the growth rate of the money supply must approximate the growth rate of goods and services in the economy.
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@Overdate said:
If the U.S. government were to begin balancing its budget, it would issue no new money. Therefore the money supply would remain constant as the amount of goods and services increased.
This is not correct. Money can be created within the banking sector without the U.S. government ever spending a dime.
Fundamentals and news events don't have the effect most people expect. That's why most people lose money when speculating. I don't expect MMT to be implemented in the near future, certainly not immediately after the 2020 election.
My guess is that any initial effect would be a "buy the rumor" and "sell the news" outcome, depending upon where the metals are in the trend. This is what happened with QE which had a much bigger impact on asset price than consumer inflation.
Since this is a coin forum, I will also repeat that, aside from temporary impacts by increasing the flow of funds, much higher metal prices are terrible for collecting longer term, as this outcome will make a lot more coins less or unaffordable to the (prospective) mainstream collector.
The banking sector creates credit, not money. See this.
The widespread practice of fractional-reserve commercial and retail banking is possible only because it is backed by the implicit promise of government bailouts when too many loans go into default. In ordinary times the government does not have to “spend a dime”, but it still is on the hook to pay off depositors (by expanding the actual money supply) if economic conditions take a turn for the worse. If government deposit insurance did not exist (which would likely be the case under a gold standard), people would be much more careful about which banks to trust with their hard-earned money.
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Apparently, it doesn't matter what it is called - be it Social Security, Medicare, Income Tax, Obamacare - it doesn't matter what "they" call it - it's just another tax that goes into a general fund black hole and comes out of a wormhole on the other side of the universe in the form of corporate welfare, vote-buying freebies, church-sponsored refugee programs, war machine finance, political graft (in a big way), and the educational system's round robin games of tenure and public employee union finance.
But, the tax revenues are never enough (by a large margin), so the rest has to be keystroked into existence and then the banking system gets to leech off that revenue stream just to keep "them" in high cotton so that they can buy more real assets and retire early.
It's way, way, way beyond the "WTF" stage. And then, there's the missing $21 trillion stashed somewhere at DoD and HUD, but that's been spent on who-knows-what and since gov.com accounting is now inaccessible to anyone with oversight, it's just a question of "what happens next?"
We're havin' fun now.
If you own PMs, you at least own a real asset that is fungible now and is likely to be fungible in the future. End of story.
I knew it would happen.
My original statement is correct, and it is one that both mainstream and less-mainstream economists will agree with.
Very interesting discussion... but what it all boils down to (IMO), is an incredibly large and unwieldy balancing act between continued growth and financial disaster.... Such a disaster would be global in nature, if allowed to happen. Cheers, RickO
Ongoing debt obligation of citizens to accomplish the corporate privatization of public tax money & government assets.
Greg Hunter had a very revealing interview with Catherine Austin Fitts this weekend.
I knew it would happen.
Shockingly little printed currency available....which is the most conservative definition of "real" money other than those money substitutes possessing true tangible value that are fairly easily exchanged.
About $1.7 TRILL FRN's world wide, 80% of that in 100 dollar bills. That comes down to approx $5000 per person or say $15,000 per family. If you only specified small bills that would be $2,000. And if you negate the money overseas than cannot can return quickly, maybe $1,000. If the credit/keystroke world of money ever gummed up that would be an issue. Banks currently only let you withdraw $500-$1500 on no notice. In a cash freeze you wouldn't get close to that $15K per family figure.
Treasury yields are collapsing, the yield curve is inverting, and it appears clear we are in the early stages of a recession. Equities are headed lower and are firmly in a downtrend. I would say metals is the place to park your money now
@roadrunner:
If I'm interpreting your comments correctly, I think I hear you worrying about deflation!
(it is very interesting that some historical economies, like Europe in the mid-to-late Middle Ages, were held back by a severe shortage of money. The Dutch economy took off because they invented--or at least promoted--paper!)
Isn't the Bank of England "mainstream"?
“…the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the profitable lending opportunities available to them…It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Bank of England.”
See Bank of England Dismisses Money Multiplier Theory
Looks like credit creation to me, backstopped by government deposit insurance guarantees.
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I am cock-a-hoop in seeing Higashiyama and Roadrunner actively participating in the forum. You have been missed.
Now if we could just coax Baley out of his self-imposed exile
Knowledge is the enemy of fear
There is no shortage of money, only in the ability of marginal and weak debtors to service their debts and the downward inflexibility of prices and wages. In the information age with electronic money, persistent consumer price deflation does not pose a transactional problem since it is divisible into smaller and smaller units.
The biggest current economic risk is deflation from a bursting of the unprecedented asset mania and any tightening of the loosest and laxest credit conditions in the history of civilization. Supposedly "prime" credit risks such as governments and corporations owe mountains of debt. Most "cash" (such as on technology company balance sheets) is just someone else's debt. Many if not most high FICO consumers are practically broke or will be with a job loss or market crash like 2008.
@cohodk: thanks!
@Overdate: we definitely agree on one thing--the BOE is a mainstream institution. However, nothing said in the articles you reference contradicts my assertion. In order for me to better understand what you disagree with, let me restate my assertion, in a more precise, and almost equivalent manner:
Statement One: most economists view M1 as a plausible definition of money, albeit a very narrow one.
Statement Two: government spending is not required for M1 to increase.
Which of these statements (or both) do you disagree with?
@WCC said:
The biggest current economic risk is deflation from a bursting of the unprecedented asset mania and any tightening of the loosest and laxest credit conditions in the history of civilization.
However, the MMT proponents seem to be saying that no tightening would be required in this scenario. Just 'print' money. If this proves inflationary, increase taxes?
A shrinking supply of physical currency becomes more irrelevant the more consumers turn to digital transactions.
A growing supply of physical currency can create inflationary problems. This is the threat that MMT poses.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
@Higashiyama Okay, here’s my take:
Statement One: most economists view M1 as a plausible definition of money, albeit a very narrow one.
This is the official line that is taught in most economics textbooks and promoted by the U.S. government and the Federal Reserve, so I suspect that your statement is likely true. Most (not all) economists view M1 as a plausible definition of money. However, in a historical context this is a very recent (re)definition of money that would not have been accepted as recently as 100 years ago. Balances held in demand deposit accounts would not have counted as money, except to the extent that they were backed by actual money residing in the banks and available for immediate payment to the depositors.
Statement Two: government spending is not required for M1 to increase.
This is true in the narrow literal sense, but with two important caveats:
1) The portion of M1 that can increase without government spending is precisely that portion (balances in demand deposit accounts) that was not even considered to be money until relatively recently (with the introduction of central banking and government deposit insurance).
2) A defining characteristic of money (at least until the early 20th Century) is that it is available at all times for use as a medium of exchange. This is true for currency and coins, but not true for checking accounts and other demand deposits. There is not nearly enough to go around if a significant number of depositors attempt to withdraw their money. Such demand deposits can only be treated as money (part of M1) because the government stands ready to create as much money, on short notice, as needed to make the bank’s depositors whole. In effect the government is a co-signor, issuing a virtual promissory note each time a bank makes a loan. The addition of demand deposits to the M1 money supply is possible only because of these government guarantees; if such guarantees did not exist, there would be no way to make a case for including demand deposits as part of M1. While “government spending” does not immediately come into play, this guarantee creates an increase in government liability that turns into government spending whenever a banking crisis occurs.
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Not deflation per se. I was commenting on the lack of "in the hand currency" should the digital money-laundering system get a glitch or go into spasms. Key stroked or promised money/debt isn't going to pay the merchants and retailers. There's unlimited "digital money," that's the problem. In a digital lock up there is essential NO money available....mostly just goods and services available to exchange/barter.....until the EMP is overcome.
A link to Bill Halter's interview on Dave Janda's Operation Freedom radio show is posted on jsmineset. It's worth a listen.
15% of the world's debt now involves negative interest rates. Pension funds have historically been modeled with returns of around 8%, so just contemplate how those funds are going to find returns needed to sustain their promised levels of returns.
The implications of negative interest rates on pensions are inescapable - especially in a financial environment of accelerating debt that is unserviceable without increasingly large levels of QE, i.e., keystroked money. It seems pretty obvious that we're on a steeper part of the money creation curve now.
As roadrunner points out, the potential for a digital lockup in a credit-based economy absolutely requires some forward planning for physical needs.
I think that the financial markets are going to have some convulsions and that we are going to be whipsawed first with a deflation, and then a pretty nasty inflation. I think we're in that deflation stage right now. It's hard to see how electronic money and market manipulations are going to do anything but complicate the whole mess.
I knew it would happen.
This is essentially my view, except that I expect multiple crashes (large or massive asset price deflation) and intermittent rallies over a "noticeable" time period, as in a decade or decades. I expect most people's net worth to be decimated by the asset price deflation and then many more to be wiped out by the subsequent inflation.
Getting the timing correctly is probably going to be critical. Being in the wrong asset class at the wrong time or even the right assets at the wrong time could prove ruinous. One reason for this is what happened in 2008. Many people lost noticeable proportions of their net worth in the stock bear market and real estate collapse and then had their income stream cut off by losing their job.
I also agree with you on pensions. Longer term, you can stick a fork in most of them as even the currently fully funded ones won't be able to pay current promised benefits if the assets lose substantial value and the sponsor's profits or tax revenues decline noticeably.
There is theory and then there is reality. We'll see how reality actually works in a real economic crisis. (Hint: 2008 wasn't one.)
If people were robots instead of human beings, the current system of perpetually lending money to unqualified borrowers who can't afford to pay it back so that they can live above their means at someone else's expense could go on forever. This is essentially the concept behind inflation targeting; just cheat savers forever like boiling a frog.
There is theory and then there is reality. We'll see how reality actually works in a real economic crisis. (Hint: 2008 wasn't one.)
If people were robots instead of human beings, the current system of perpetually lending money to unqualified borrowers who can't afford to pay it back so that they can live above their means at someone else's expense could go on forever. This is essentially the concept behind inflation targeting; just cheat savers forever like boiling a frog.
Well put. In addition to the Bill Holter interview, Greg Hunter had a very critical interview with Catherine Austin Fitts (former HUD Assistant Secretary) this weekend on USAWatchdog.
The government's finances have gone completely dark as of a couple months ago, as well-documented from FOI documents by a Michigan State economist Mark Skidmore and his doctoral candidate research team. Talk about not being accountable. This little nugget was passed by both parties in Congress during the Cavanaugh hearings. FASAB Rule 56, I believe.
Obviously, there's something going on that we don't get to hear about. Heck if I can tell you what that is.
I knew it would happen.
Why do some folk believe in gobbledygook? The more utterly nonsensical the more believable. Why?
Knowledge is the enemy of fear
We'll see how reality actually works in a real economic crisis. (Hint: 2008 wasn't one.)
Were's the "disagree" button when you really need one?
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
Agreed...2008 was a very big crisis.
Knowledge is the enemy of fear
Magic Money Tree saved us. . . so far.
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
2008 was a very big crisis.
Yes, Hank Paulson of Goldman Sachs gave us an epic performance.
I knew it would happen.
Not by my definition.
When most debtors whose actual credit worthiness should keep them keep them from borrowing money at all actually can't borrow or at what are actually low rates, that will be a real one. The primary reason money has been so easy to borrow at such relatively low rates for so long is because of government guarantees and financial intermediation. The latter because those who make the lending decisions aren't lending their own money.
Folks have been able to borrow at low rates because rates are low. There are no guarantees. How is the Govt guarantee a car or personal or equipment loan? Or how does the Govt guarantee a loan (bond) issued by Microsoft or Verizon or John Deere, ect?
Knowledge is the enemy of fear
Gov guarantees don't have any direct bearing on the examples you used but only indirectly.
In a normal financial environment without government distortions, many people would not be able to borrow at all, much less at the ridiculously low rates which don't reflect the actual risk. Banks are able to make what are actually below market rate loans (auto or otherwise) because of deposit insurance and the implicit (more explicit now) central bank "put option". Without these distortions, someone would have to be out of their mind to make what is effectively a no questions asked loan (aka, deposits) to such a marginal if not actually insolvent institutions.
During the 2008 credit crisis, the lowest rated corporate borrowers were 'locked out". Without the credit mania, they wouldn't have access to the bond market at all, ever. Financial intermediation has also made this possible because those making the lending decision (hedge funds, private equity, mutual funds, pension funds) aren't risking their own money. The fund managers are more worried about underperforming their benchmarks than losing their client's money. In bad times, clients leave anyway.
Credit was never actually "tight" for consumer borrowers during the 2008 GFC, whether for mortgages or otherwise. The idea it was then or since is nonsense. Those who think so don't know what credit standards were like previously, such as the 1960's to 1980's. Some of the change is due to improvements in risk management made possible by technology but mostly, it's the result of the credit mania which has lasted so long, it's viewed as "normal".
The Fed, QE, & Why Rates Are Going To Zero
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
Sure would be nice to have a no interest mortgage.
Knowledge is the enemy of fear
2.5% is good enough for me right now.
Great example of "a little knowledge is a dangerous thing". Lot of supposition and partial fact. This really sounds like the climate change argument.
Knowledge is the enemy of fear
Me too. After the near zero drought of ten years, I like seeing my money earn a little something.
Sure would be nice to have a no interest mortgage.
I can't comment on this without becoming political.
I knew it would happen.
I know jmski. I've paid 9% on a mortgage too. It's just not fair that folk may pay very little on their mortgage.
Knowledge is the enemy of fear
I've never had anything close to a 9% mortgage - what I was alluding to was AOC's recent comments about the "right" to housing vs. a company making a profit.
There's zero understanding of economics.
We live in interesting times.
I knew it would happen.
And then, hilarity ensues...
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