Boomergeddon vs Modern Monetary Theory (MMT)

by DJ Rippert

Saving America’s bacon. In 2010 Jim Bacon, blogrunner of this site, wrote a book titled Boomergeddon. The sub-title of the book is, “How Runaway Deficits and the Age Wave Will Bankrupt the Federal Government and Devastate Retirement for Baby Boomers Unless We Act Now.” The book is well written and contains considerable supporting detail but that sub-title pretty much sums things up. At the time of publication Bacon’s book amplified the conventional wisdom of the day — deficits are bad and, as our president might say, big deficits are bad bigly. That traditional belief has come under scrutiny lately. One leading critic of the theories espoused by Boomergeddon is Stephanie Kelton, an economics professor at Stony Brook University and former advisor to the Sanders campaign. Her new book, published in 2020, is titled, The Deficit Myth.  One paragraph from the description of Kellon’s book on Amazon.Com sums up her thesis vis-a-vis Boomergeddon. “Kelton busts through the myths that prevent us from taking action: that the federal government should budget like a household, that deficits will harm the next generation, crowd out private investment, and undermine long-term growth, and that entitlements are propelling us toward a grave fiscal crisis.” Kelton believes the United States has considerably more room to incur debt without causing economic harm and we should get about the business of incurring more debt. Paying homage to her Democratic-Socialist roots, Kellon sub-titled her book, “Modern Monetary Theory and the Birth of the People’s Economy.”

Bacon, like Orwell, was an optimist. Since Jim Bacon’s opinions on monetary and fiscal policy are well known to readers of this blog I’ll bypass the opportunity to write a book review of Boomergeddon. However, a quote from the very first chapter is instructive. The context is the budget surpluses that occurred during the Clinton Administration and a speech Clinton gave in 2001 during his “farewell address.”

Bacon wrote in 2010, “The total national debt has surged past the $13 trillion mark — more than double the level when Clinton gave his speech — and the Obama Administration has forecast that the nation will surpass $20 trillion by 2020.”  Well it’s 2020 (for better or for worse) and the actual US debt as of May 1 is just under $25 trillion. As of July the total national debt reached $26.5 trillion. Last July the national debt totaled $22 trillion so even without Coronavirus the Obama Administration’s estimates undershot the mark.

The people’s economy. Professor Kelton doesn’t just dismiss the dangers of national debt she actively embraces national debt as a major tool available to solve society’s ills. Her thinking is now generally described as Modern Monetary Theory (MMT). Ms. Kelton’s thinking and MMT are somewhat complex and counter-intuitive. Those seeking to understand these matters in detail would be well advised to buy Kelton’s book and read it. For the purposes of this post I’ll try to summarize my understanding of MMT rather than discuss the specifics of Ms. Kelton’s book.  In admittedly over-simplified terms based on this article, MMT holds that:

  • Federal government debt is different than other kinds of debt because the federal government can create the money it needs to repay its debt. The federal government is described as the monopoly currency issuer. Neither states nor localities nor households can create money and therefore do not fit this definition.
  • The federal government is immortal and will never have to pay its debt down to zero. When federal bonds come due they can be paid off by issuing new bonds. The federal government can also pay the interest on accumulated debt by “printing” more money.
  • Government spending is good and the only legitimate constraint on spending should be inflation, which can break out if the public and private sectors spend too much at any given time. Absent inflation the government can spend whatever it believes necessary to maintain employment (including the provision of guaranteed employment) and solve social issues like crumbling infrastructure and climate change.
  • In periods of low inflation taxes are not necessary to fund government spending.  However, they are useful in reducing income and wealth inequality.
  • Deficits that are too big will spark inflation but that can be managed by taking money out of circulation through reduced spending and increased taxes.
  • Economies should not be managed through interest rates, which only serves to enrich the “investor class.” The right rate of interest for a country with fiat currency is zero. Business investments are made based on the potential for future gain rather than the cost of money.
  • As the Bloomberg article states, “They [MMT advocates]  want a nation’s central bank to do the bidding of its treasury. So when the treasury needs money, the central bank accommodates it with a keystroke—creating base money from thin air by crediting the treasury’s checking account.”

How different are Boomergeddon and MMT? In corporate terms, MMT advocates believe the United States has more debt capacity than it is using. The government’s unwillingness to use the remaining capacity is a drag on our ability to quickly recover from COVID19 and grow in the future. Deficit hawks (like Jim Bacon) believe that we have either exhausted our debt capacity or are well on track to blow through the invisible “debt ceiling.” Both philosophies understand that there is a point where there is too much debt. Both accept that exceeding the debt threshold will cause significant economic problems. The difference is that those who toe the Boomergeddon line envision excessive debt causing long running fiscal mayhem while the MMT people see no more than a temporary problem that can be solved with tuning through higher taxes and spending cuts. When America’s economic “car” breaks through the guardrail of too much debt and flies out over the cliff, Boomergeddon-ites recite the Hail Mary while MMT-ers confidently say to themselves, “No problem, we’ve got airbags.”

How much do you trust our government? Given that nobody seems to know where the debt ceiling lies, our current path is bound to put us through that ceiling sooner or later. This is true regardless of whether Republicans or Democrats are running the country. Today, both parties seem to be modern monetary theorists now. Why not? In the words of Dire Straits, “Money for nothing …”

But what happens if interest rates do start rising? Would our government really have the gumption to simultaneously raise taxes and cut spending? I don’t see it. Congress would dither, dally and delay. The fops and dandies of D.C. would spend their days studying the weather vane of public opinion and wondering how to get reelected. The moment for an MMT “soft landing” would pass and existential Boomergeddon would be full on us. But that’s all in the future. For now the debt ceiling is somewhere over the rainbow and both parties want to turn up the dials on the metaphorical printing presses in D.C.

Implications for Virginia. Regardless of this fall’s elections, massive increases in deficit spending and national debt are going to occur. Before the end of this calendar year our national debt will be much closer to $30 trillion than the $20 trillion predicted by the Clinton Administration in 2001.

In the immediate term Virginia’s state government should cease and desist making payments to help those most affected by Coronavirus. Instead, we should instruct our Congressional delegation to demand that the monopoly issuer of currency (i.e. our federal government) make massive payments in aid to states.  Why deplete our reserves or further tax our citizens when the Feds have the goose that lays the golden eggs? Go goose go. Ginny needs a new pair of shoes.

Over the mid term (2021 General Assembly Session) state taxes should be dramatically cut. Assuming inflation remains low it is more efficient for the federal government to create money to solve issues like global warming than for the state to tax its citizens for that purpose. Alternately, continue taxing but keep building the reserves rather than spending it away. The real “rainy day” may be a monsoon the likes of which we cannot imagine. Virginia has 6% of annual state expenditures in its rainy day fund, Wyoming has 109%. Be like Wyoming.

Over the long term, first get used to the fact that the states will have very little power. In a world where the federal government can create money out of thin air (so long as inflation remains low) we should expect the federal government to call the shots. The real golden rule is that he who has the gold makes the rules. The reality that the all-powerful federal government will be run by either Sleepy Joe or Agent Orange is disquieting in the extreme but the feds will call the shots. The second long term task is to find an alternative value store for Virginia’s money in the amped up rainy day funds. Gold, silver, Euros or even bitcoin need to be investigated. Land usually holds its value in times of hyper-inflation. Maybe the state should buy up private landholdings. But one thing for sure — holding U.S. dollars as a hedge against the U.S. dollar crashing would be pretty stupid.

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30 responses to “Boomergeddon vs Modern Monetary Theory (MMT)

  1. I regard Modern Monetary Theory as the economic version of the perpetual motion machine. If it’s too good to be true, it’s… not true.

    Here’s another analogy. I have a friend who has a “system” to win at roulette. He puts $10 on red. If the ball lands on red, he wins, and he’s up $10. If it lands on black and he loses that spin, he puts $20 on red the next time. If the ball lands on red, he’s back to even. If it lands on black, he doubles down, betting $40 the next time, and $80 the time after that. If he doubles down six times, the chances of losing all seven bets (including the first one before doubling down) are like one in 64. How likely is that to happen? Not very!

    That, in a nutshell, is U.S. economic policy. Every time there’s a hint of a recession, the U.S. gooses the economy through fiscal and monetary stimulus — running up deficits, cutting interest rates and pumping liquidity into the financial markets. In effect, the Fed has been doubling down since the early 2000s — and so have all the other central banks around the world. Double down, then double down again, and double down again. Right now, we’re in the third or fourth iteration of that strategy, We can probably get away with it a couple times more. But sooner or late, the ball lands on black again. This time, instead of losing $10, you lose $640. Instead of having a routine recession, you have another Great Depression.

    • Mr. Bacon – You beat me to the punch.

      “In short, perpetual motion is impossible because of what we know about the geometry of the universe,” said Donald Simanek, a former physics professor at Lock Haven University of Pennsylvania and creator of The Museum of Unworkable Devices. “Nature provides no examples of perpetual motion above the atomic level.”

      https://www.livescience.com/55944-perpetual-motion-machines.html

    • His seventh bet would be $1,280 which is more than some casinos let you bet on a single spin but I get your point. The problem with Boomergeddon is that there is a level of debt that can be indefinitely carried and increased as the economy grows. Contrary to Harry Byrd’s thinking, all debt is not bad and well managed debt can make a company or a country grow faster. In that regard, MMT is right.

      The problem with MMT is the belief that inflation can be easily unwound through fiscal action. Per MMT elected and appointed officials will see inflation start to grow and will act quickly, honestly and selflessly to stem the inflationary tide. Not a chance.

      Both Boomergeddon and MMT agree that excessive debt will cause inflation. Neither knows what level of debt will start the inflationary cycle. Right now Japan has an eye popping level of debt relative to GDP. No problem. Number 2 on the list is Somalia. Big problems.

      We are playing Russian roulette with the national debt. We’ll keep increasing that debt until we finally spin to the chamber with the live round. After that – who knows?

  2. Well the thing is – if you look back at Boomergeddon – what were supposed to be the bad stuff that would happen if we did not control the deficit/debt?

    High inflation? more and more of the budget devoted to paying interest on the debt?

    How come that hasn’t happened – apparently not even a little?

    inflation is virtually non-existent. And on the treasury notes, people are almost willing to pay the govt interest to safeguard their money!

    What’s REALLY amazing is all these years Conservative types have talked about how grossly irresponsible liberals are – and now – crickets.

    As Peter said. We are all Keynesians now, it’s almost as if Conservatives types were just using it as a boogeyman issue. Even they don’t believe it!

  3. Has Professor Kelton been to Venezuela lately? Does she address it in her book?

    LarrytheG – I didn’t know you were such an avid follower of conservatives. Crickets? Hardly

    “I’m hoping people in Washington are listening. You cannot deficit spend your way into prosperity. If you could, Venezuela would be the richest nation on the face of the Earth.”

    Mark Levin – April 2, 2020

    https://www.foxnews.com/media/mark-levin-coronavirus-economy-loosen-restrictions

  4. Ironically, Nixon made the “we’re all Keynesians now” (which was earlier made by Milton Friedman with a very different context) at a time when the prevailing Keynesian (neo Keynesian) views were starting to hit a wall. Neo Keynesians didn’t anticipate or have a solution for the stagflation that was starting to emerge worldwide.

    New Keynesians, like Paul Krugman, incorporated rational expectations (which came from classical economics) to explain the 1970s stagflation. Rational expectations explained why you couldn’t have guns and butter without ultimately having inflationary expectations and higher interest rates. The regime change in thinking due to rational expectations may take a while to take hold, but once it does, it takes an extraordinary response (i.e. the Volker-led Fed action to kill inflationary expectations) that led to a painful recession.

    Perhaps for this reason, New Keynesians like Krugman are not moving to endorse MMT. (So you are wrong to conflate the two, Larry.) This may seem like deja vu to them. Indeed, Krugman (and other New Keynesians) and Professor Kelton went back and forth on this several times last year.

    • well not everyone is on board:

      ” The post-Keynesian economist Thomas Palley argues that MMT is largely a restatement of elementary Keynesian economics, but prone to “over-simplistic analysis” and understating the risks of its policy implications.[74] Palley denies the MMT claim that standard Keynesian analysis does not fully capture the accounting identities and financial restraints on a government that can issue its own money. He argues that these insights are well captured by standard Keynesian stock-flow consistent IS-LM models, and have been well understood by Keynesian economists for decades.”

    • You have the crux of the debate well defined. Once in the inflationary spiral how hard will it be to get out? Constricting the money supply constricts liquidity and that’s what causes recessions and depressions.

  5. Larry, first of all, note that Palley is referred to as a “post-Keynesian economist.” You always reference the Laffer Curve. Larry Summers argues that MMT and the Laffer Curve are really from the same vein of Voodoo economics. Resume isn’t everything, but take a look at the resumes of Paul Krugman and Larry Summers and then compare to Thomas Palley. See his interview below or his article.

  6. A very good synopsis of the arguments, Don, and a provocative post.

    Whenever economists start arguing with each other, my head begins to hurt.

    The refreshing thing about this post and the comments, so far, is that no one is trying to blame just the Democrats. It is a good thing because any such claim would be false on its face:

    “Reagan proved that deficits don’t matter.” Dick Cheney

    “This is the United States government… you never have to default because you print the money.” Donald Trump, just renominated by Republicans to be President.

  7. I just need somebody to tell me how to structure the IRA for the next 25 years….’cause I do think the fit is going to hit the shan, and at best I’ll be getting a small percentage of Social Security and my wife’s VRS.

  8. For the Baby boomers, their timing is exquisite.

    For post Baby Boomers, not so much, poor devils.

  9. We’re all Keynesian now

  10. Eric the Half a Troll

    Seems to me that with inflation and the cost of money so low, increased deficits are not definitively a bad thing. The crux, imo, is what you do with that very cheap money. Shoring up stock prices does not seem to be the best long term investment and I would think runs counter to fiscally conservative free market ideals.

  11. Kelton’s ideas are not new. They are the same expressed in my Econ 101 college course back in 1970-71. Also, the idea of a central bank running up the paper money presses is not new either. What happen? Hyperinflation. Ask any country that has done it.

  12. Seems to me this is no so much about debt, but about 1) the rate of increase in money creation 2) the mechanics of money creation.

    In regards to #2, what the theory is missing is a reliable mechanism for regulating money creation. That’s what the debt ceiling does. Maybe the debt ceiling isn’t the best way, but you surely can’t rely on Politicians and Bureaucrats to stop pressing the “0” button on the check printer because inflation is a bit high.

    Even if we had a true stateman in charge of the printing press, our current methods of measuring inflation aren’t leading indicators of actual inflation. In other words, the closer the debt ceiling is to actual “maximum debt,” the less time we have to react to get inflation under control. This is not unlike the supply chain issues we faced a few months ago, except one misstep and the $ becomes the TP.

    What I think of as traditional money creation, was done through the banking system thru fractional reserve leading. While some loans failed, this method was somewhat self regulating in that generally speaking, the loans were to be made for investments with reasonable expectation of a return with some form of security (with a notable issue of bank runs, followed by the government manipulating the regulations to allow easy money for special interests.)

    What we’re talking about here is: printing money for the politicians to spend on political wants, which are rarely good investments. That political pressure to spend never diminishes, and there will always be some economist willing to write a book about how to justify spending even Mo’ Money financed by those with what real Money is left.

    This is clearly the Democrats fault (sorry Dick, I had to do it), but its also just an issue with human nature. The Republicans are clearly just as bad. When there is little consequence to how money is spent, its rarely going to be spent wisely. As such, there needs to be a hard limit or far better tools to regulate money creation.

  13. MMT says that countries in a special position (control their own currency, have a currency that is a reserve currency, etc.) says more or less that these countries can get away with leveraging that position — up to a point. Rational expectations (which got the Neo-Keynesians in trouble) says that people aren’t stupid and will figure out what is going on and will change their behavior based on that. This will happen over time as the U.S. continues to run up debt, and the likely upshot is the special position will go away. This would have a huge impact on the U.S. economy.

    DJ’s analysis is excellent and possible implications for Virginia should be evaluated (but likely won’t until too late). The rainy day fund should be larger (currently less than Maryland and California as a % of budget) and look at diversifying.

  14. Using inflation as a measure for the rate of money creation is interesting, but also frought with political issues much like government spending. Austrians define inflation as the increase in money supply, which is about the opposite side of the same coin as what MMT is suggesting and an interesting insight.

    What politically acceptable method does one use to measure inflation? Should inflation in certain sectors of the economy matter more or less than overall inflation? Certainly inflation in some sectors is going to have a bigger impact on lower and middle class than other sectors. All of this can be politically gamed by the powers that be.

  15. A bit late to add this, but somebody sent me a text this morning goosing me to make the point that MMT collapses when nobody will buy the debt. He was looking at a lovely Confederate bond on his wall as artwork when he read. He’s a smart one so I’ll ask HIM where to invest now….

  16. https://youtu.be/Ro7lrA781To

    Conservatives cound have fun with this, agreeing to support MMT so long as the funds are used to fight endless wars. Becareful what you wish for

  17. How come this never seemed to work out for Latin American countries who seemed to generate massive inflation and eventually cut 3 zeros off their currency introducing a new ‘cruzado’ to replace the ‘cruzeiro’?

    The US won’t eventually face the same outcome? If not, what specifically and absolutely prevents it?

    It seems like since Trickle Down Economics was invented– it’s all been financial tricks that pols can used to put 2 chickens in every pot no matter what the economic circumstances are. They will follow the incentives — so if there is no actual threat to them for going full throttle, whether it’s called ‘Trickle Down’ or ‘QE’ on ‘MMT’ they’ll do it. And the last poster’s comment about using it for endless wars is something to be mindful of. Each pol uses that last guy’s financial trick book– but for their policies.

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