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De Facto MMT

Steven Saville profile picture
Steven Saville


  • One problem with Lacy Hunt's argument is that some of the Fed's liabilities are already legal tender and have been for a very long time.
  • The PDs buy the debt from the government and the Fed buys the debt from the PDs.
  • The bottom line is that the US doesn't have MMT in law, but it does have MMT in fact.

Editor's note: Originally published at tsi-blog.com on May 4, 2020.

In a blog post on 31st March I argued that MMT (Modern Monetary Theory) had been surreptitiously put into practice in the US. However, according to a quote from Lacy Hunt (Hoisington Investment Management) included by John Mauldin in a recent letter, what the Fed and the US government are doing doesn't qualify as MMT.

According to Lacy Hunt: "For the Fed to engage in true MMT, a major regulatory change to the Federal Reserve Acts would be necessary: The Fed's liabilities would need to be made legal tender. Having the Treasury sell securities directly to the Fed could do this; the Treasury's deposits would be credited and then the Treasury would write checks against these deposits. In this case, the Fed would, in essence, write checks to pay the obligations of the Treasury. If this change is enacted, rising inflation would ensue and the entire international monetary system would be severely destabilized and the US banking system would be irrelevant."

One problem with Lacy Hunt's argument is that some of the Fed's liabilities are already legal tender and have been for a very long time. I'm referring to the $1.9 trillion of "Currency in circulation" (physical notes and coins). This currency sits on the liability side of the Fed's balance sheet. Also, the money that the US Treasury spends comes from the Treasury General Account, which also sits on the liability side of the Fed's balance sheet.

Admittedly, the Fed currently does not buy Treasury debt directly. Instead, it acts through Primary Dealers (PDs). The PDs buy the debt from the government and the Fed buys the debt from the PDs. When this happens, new money is credited by the Fed to the commercial bank accounts of PDs and thus becomes a liability of the private

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Steven Saville profile picture
I graduated from the University of Western Australia in 1984 with a degree in electronic engineering and from 1984 until 1998 worked in the commercial construction industry as an engineer, a project manager and an operations manager. I began investing in the stock market 2 months prior to the 1987 stock market crash and thus quickly learned about the downside potential of stocks. Only slightly daunted by the rather inauspicious timing of my entry into the world of financial market investments, my interest in the stock market grew steadily over the years. In 1993, after studying the history of money, the nature of our present-day fiat monetary system and the role of banks in the creation of money, I developed an interest in gold. Another very important lesson soon followed: gold may be the ideal form of money for those who believe in free markets and a wonderful hedge against the inherent instability of the government-imposed paper currencies, but it is not always a good investment. By mid-1998 the time and money involved in my financial market research/investments had grown to the point where I was forced to make a decision: scale back on my involvement in the financial world or give up my day job. The decision was actually quite an easy one to make and so, at the beginning of 1999, I began investing/trading on a full-time basis. My major concern in deciding to pursue a career in which I devoted all of my time to my own investments was that I would miss the personal interaction that had been part and parcel of my business management career. The Speculative Investor (TSI) web site was launched in August of 1999 as a means for me to interact with the world by making my analysis/ideas available on the Internet and inviting feedback from others with similar interests. During its first 14 months of operation the TSI web site was free of charge, but due to the site's growing popularity I changed it to a subscription-based service in October of 2000. Its popularity continued to grow, although I remained -- and remain to this day -- a professional speculator who happens to write a newsletter as opposed to someone whose overriding focus is selling newsletter subscriptions. My approach is 'top down'; specifically, I first ascertain overall market trends and then use a combination of fundamental and technical analysis to find individual stocks that stand to benefit from these broad trends. This approach is based on my experience that it's an order of magnitude easier to pick a winning stock from within a market or market sector that's immersed in a long-term bullish trend than to do so against the backdrop of a bearish overall market trend. Fortunately, there's always a bull market somewhere. I've lived in Asia (Hong Kong, China and Malaysia) since 1995 and currently reside in Malaysian Borneo.

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