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Policy Makers May Have Already Embraced Modern Monetary Theory

Apr. 07, 2021 4:52 AM ET23 Comments
Lance Brofman profile picture
Lance Brofman


  • Whether the pandemic has forced the issue or Modern Monetary Theory is an idea whose time has come, it is now a factor to be considered.
  • Despite massive quantitative easing in the United States and Europe over the past decade, inflation continually undershot the expectations of many financial market participants.
  • The inflationary impulse that would be expected to result from massive infrastructure spending might be offset by lower fossil fuel prices as the spending accelerates the switch to electric vehicles.
  • Because gasoline is such a visible commodity, energy prices have an impact on inflationary expectations beyond their weight in the consumer price index.
  • Policy makers may have already embraced Modern Monetary Theory even as they publicly disparage it.

The discipline of public finance is undergoing drastic change. In 1980, before accepting a vice presidential role, George H.W. Bush referred to the Reagan economic program as voodoo economics. Cut taxes at the top, reduce government’s role in the economy, and growth will soar to the benefit of all. The phrase and the policy have dominated for the past forty years, but it is about to change.

The Biden administration is rejecting the trickle-down theory in favor of a return to the New Deal and Great Society eras of an expanded role for the federal government. Its goal is to lift the socio-economic groups at the bottom end of the income and wealth distribution while asking those at the top to help finance the spending on new programs in order to accomplish this goal.

Until recently there was universal agreement that in times of crisis, whether it be war or pestilence, the government must borrow as much as is necessary to deal with the crisis. However, just as in the case of an individual’s personal finances, there used to be universal agreement that any federal debt incurred because of an emergency should be paid off or at least reduced as soon as possible once the crisis is past.

As we illustrated in our report dated January 17, 2021 The Post Pandemic World: Lion or Lamb, the federal debt incurred as a consequence of World War I was mostly repaid over the next decade. The federal debt rose from about 7.5% of GDP prior to the war to about 35% in 1919. By 1929 it had fallen back to about 16%. Similarly, borrowing for the much more expensive and protracted American participation in World War II pushed the federal debt to nearly 120% of GDP by 1946. A decade later it was at 60.7% and it eventually bottomed at about

This article was written by

Lance Brofman profile picture
Note: In 1996 Fundamental Portfolio Advisors and myself were subject to civil litigation by the SEC which resulted in deregistration and a permanent bar from the securities industry. - Ph.D. economics and Finance MBA finance NYU) Colorado Technical University Professor – courses: Applied Managerial Finance (Graduate Level), Microeconomics, Macroeconomics., Previous: Globe Institute of Technology Professor – Economics and Finance, Head of Business Department International Finance European School Of Economics (New York) Professor – Economics (Graduate Level) Courses taught: Microeconomics Metropolitan College of New York Professor – Economics, Banking and Finance Courses taught: History of Economic Thought, Macroeconomics, Money and Financial Institutions World Gold Council Consultant Economist New York, NY • Constructed econometrics relating to gold's role as a portfolio diversifier primarily aimed at institutional investors. • Focused on the embedded optionality of gold in terms of its relation to other investment assets and economic fundamentals such as inflation and business conditions. Freenet, Inc. Founder Internet Startup company with investment advice websites. Fundamental Portfolio Advisors, Inc. Chief Portfolio Strategist – Founder • At the predecessor company I started the New York Muni Fund, the first single state triple tax-free municipal bond fund. • I took the fund from a one-employee start-up where I performed every function to a family of mutual funds which had five funds with total assets above $300 million and which did all of its distribution and transfer in-house. • I wrote the initial prospectus and was responsible for managing the portfolios of what eventually grew to be a family of 5 mutual funds. • Was chief economist for parent company’s brokerage firm. • Involved on the buy-side in the development and monitoring of various structured municipal finance products. Worked with major issuers such as New York City and major investment banks such as Merrill Lynch and Goldman Sachs. • Submitted a U.S. Patent for a portfolio management system for mutual funds involving derivatives. A. Gary Shilling & Co. Senior Economist – Economic consulting and forecasting. Both macro and micro. • Clients included: Emerson, Castle & Cooke, Cooper Industries I was the author of the 1979 study commissioned by the U.S. Government Interstate Commerce Commission, which calculated the expected economic impact of trucking deregulation. White, Weld & Co, Inc. Economic analyst • White, Weld was the sixth largest investment banking and brokerage firm when Merrill Lynch bought it. • Extensive work was done on the All-American Pipeline Proposal to tap the Alaskan Gas Reserves. • The economics department of White, Weld formed A. Gary Shilling & Co. at the time of the Merrill Lynch merger. American Stock Exchange Economic analyst Degrees: New York University June 1978 Ph.D. Economics/Finance • Ph.D. dual field, economics and finance. • Doctoral dissertation was in contingency claims (options) theory June 1973 MBA with concentration in economics and finance NYU Engineering School June 1971 Bachelor of Science - Nuclear Engineering Published works Analysis of the Embedded Inflation Optionality in Gold Prices. World Gold Council, 2000. New York, N.Y. The Economic Impact of Trucking Deregulation. Interstate Commerce Commission, 1979, Washington D.C. I was an author of the textbook: 'Global Financial Management' Words of Wisdom, Schaumburg, IL. Dec.2015 ISBN 978-1-934920-46-6,

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Please note that this article was written by Dr. Vincent J. Malanga and Dr. Lance Brofman with sponsorship by BEACH INVESTMENT COUNSEL, INC. and is used with the permission of both.

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Comments (23)

The US dollar changed forever in August 1971 when Nixon abandoned the gold standard, an act that proclaimed loudly what LBJ had whispered in March 1968 when he removed the "gold cover" for the US dollar, effectively abandoning the need for gold to be held in a fixed proportion (25%) to the Federal Reserve Notes in circulation. Whether anyone over the ensuing thirty years realized it or not, this thrust the US overnight full Monty into MMT. Through the years of Ford, Carter, Reagan, H. Bush, Clinton, W. Bush, Obama, Trump, and Biden, the US Congress pushed the national debt up ever faster, so much it would make any MMT proud ---- but why then were they not MMT? Because Congress - both parties - felt GUILTY about the deficit spending, continually talking about how it was not such a good idea and they'd fix it someday. Then MMT was their way to enjoy the spending and not feel guilty about it! It was like when the Victorian prudes who slunk away for secret sex had discovered the sexual revolution and became bold and proud. But MMT is much more dangerous than any unrestrained sexual revolution. Let's see why.

The dollar, now a fiat currency, is no longer a store of value or even a unit of account. It is a "Take a Number Please" for access to real resources (goods, services, labor, commodities, land, etc) where the larger your number, the greater percent of those FINITE real resources you have access to. Unless you are the Federal Government, in which case you have UNLIMITED access to those FINITE real resources due to your INFINITE MONEY (thanks to MMT). The Feds can take a Number that is arbitrarily large and use that to preempt anyone else in purchasing anything from the FINITE real resource pool. Where does this lead? Given human nature, the lust for power, and political demands, it inevitably leads to 1) unrestrained wealth redistribution (socialism/communism can't be far behind) 2) centralized planning of the economy by Washington bureaucrats (they never know when to stop and why would they with the ideology of MMT? 3) massive misallocation of the FINITE real resources as a few distant ideologues decide how the economy should be invested. This describes the entire economy of the old Soviet Union with their vaunted Five Year Plans which ultimately led to the demise of their empire.

The only time a MMT approach to government spending should be adopted in the US (or any free capitalist democracy) is in times of existential crisis when survival trumps the individual pursuit of happiness. This occurred during WWII. Society inherently knows this which is why any government that wants to sell MMT to its free citizens will find a way to sell them the idea that they are in a perpetual existential crisis. This should be ringing bells and sounding very familiar by now.
Salmo trutta profile picture

In 1949, the U.S. dollar was not only as “good as gold”, but it was also preferred over gold. There were not enough dollars to finance the legitimate needs of the world economy. So, the chronic balance of payments deficits which began in 1950 were for a number of years beneficial to the world economy and to the U.S. Because of our large and chronic balance of payments surpluses after World War II, foreigners were unable to accumulate sufficient dollar balances to efficiently finance world trade. These balances were desperately needed because of the total dominance of the dollar as the reserve custodian, standard of value and transactions currency of the world.

The Korean Conflict (1950-1953) temporarily solved the problem but, the longer term solution consisted in implementing our “containment policy” against the U.S.S.R. This involved the establishment of approximately 700 military bases, not only around the perimeter of the Soviet Union but throughout the world. We have paid hundreds of billions of dollars to foreigners to acquire the bases and to maintain a garrison of more than 400,000 military personnel abroad. With diminishing merchandise surpluses this policy proved to be financial overkill.

By the mid 1960’s foreigners found themselves in possession of excessive dollar balances (foreign exchange reserves -- FOREX reserves), excessive in terms of the needs of trade. Some of these excess dollars came to be used as “prudential” reserves in the formation and growth of the Euro-dollar banking system.

The Korean War, which began in June, 1950, initiated the chronic balance of payments deficits that persist to this time and which will probably continue as long as foreigners are willing to increase their net investments in this country.

The U.S. has had a net liquidity deficit in every year since 1950 (with the exception of 1957), Up to 1976 (when the private sector contributed its first trade deficit ) these deficits were entirely the consequence of excessive U.S. government unilateral transfers to foreigners (re: foreign policy – solely our far flung military bases and personnel).

During all this time the private sector was running a surplus in all accounts: merchandise, services and financial. The Vietnam Ten-year War administered the coup d’etat to our gold bullion standard. By 1968, in an effort to keep the dollar at the $35 par, we had exhausted nearly two thirds of our monetary gold stocks, or approximately 700 million ounces to about 260 million ounces.

Although the dollar ceased to be freely convertible in March, 1968, institutional (central bank practices) and attitudinal lags were sufficient to offset, until late 1970, the excessive expansion in the supply of dollars. In August 1971, all convertibility was ended.

This further accelerated the decline in the exchange value of the dollar. All fluctuations in exchange rates prior to this time were the result of other currencies changing in value relative to the dollar. Changes in the exchange rates were negotiated by governments, usually through the offices of the International Monetary Fund.
Salmo trutta profile picture
re: "But on balance, history shows no reliable correlation between oil and inflation nor commodity cycles and inflation"

The evidence of inflation, contrary to the conventional wisdom, cannot be conclusively deduced from the monthly changes in the various specialized price indices. The price indices are passive indicators: for the average change; of a group of prices.

They do not reveal why prices rise or fall. I.e., inflation targeting depends on how inflation’s defined (which somehow neglects to encompass the vast proportion of all past and present asset-holding bubbles).

Only price increases generated by demand, irrespective of changes in supply, provide evidence of monetary inflation. There must be an increase in aggregate monetary purchasing power, AD, which can come about only as a consequence of an increase in the volume and/or transactions' velocity of money.

The volume of domestic money flows must expand sufficiently to push prices up, irrespective of the volume of financial transactions consummated, the exchange value of the U.S. dollar (per the Nattering Naybob: "reflected in FX indices and currency pairs"), and the flow of goods and services into the market economy.

Money and money flows may be net robust, net neutral, or net harmful, depending upon the distributed lag effect of money flows, volume times transaction's velocity.

That saturation point is determined by the rate of inflation, the monetary fulcrum, the lag's pivot. This is perfectly clear. It is aptly demonstrated by the distributed lag effect of money flows being mathematical constants, for > 100 years.
Lance Brofman profile picture
@Salmo trutta The hard part is separating correlation from causation for the factors you mention.
Salmo trutta profile picture
@Lance Brofman re: separation

I don't see the discrepancies you describe. Money flows went down 80 percent from Jan. 2013 to Jan. 2016. Oil went down 70 percent.

Economists just have their lags and definitions wrong. When economists eliminated the money stock from their calculations, we got Black Monday.


"The Fed de-emphasized M1 as a guide for monetary policy in late 1982, and it stopped announcing growth ranges for M1 in 1987."

darwoods profile picture
If governments can embrace MMT and spend at will, the natural extension of that would be to allow enough $$ to flow directly to its citizens to do the same. Keep them happy lest they revolt. "Let them eat cake..."
Lance Brofman profile picture
@darwoods Thus, Universal Basic Income.
Buyandhold 2012 profile picture
Modern monetary theory.

A theory invented to justify poor money management.


As toxic as DDT.
Damoni Kennard profile picture
@Buyandhold 2012 It never stops amazing me that we're never going to get anything smarter from you than something about 1) your mother 2) your schnauzer 3) depositing dividend checks at the bank 4) buy and hold forever.

I think you can do better.
PapaWhisky profile picture
@Damoni Kennard

He's got 7000 followers doing that ...

He's the Kardashian of Seeking Alpha
Buyandhold 2012 profile picture

tim.rohrer profile picture
Well written and thought provoking.

Can you expand upon the discussion related to the affect on productivity by increased regulation and government control which seems to accompany MMT-like policies? Conventional wisdom states increased wealth transfers reduce productivity, but you only spoke of increased productivity from technological innovation.

@tim.rohrer Agree... well written, thought-provoking, and insightful, as in "thanks for the education." - much appreciated.
Lance Brofman profile picture
@tim.rohrer I am not sure that all wealth transfers reduce productivity. Generally, the market produces the most productive outcomes. However, taxing corporate profits and reducing taxes on individuals will increase productivity. That is because a profit maximizing corporation will set its' prices, wages and output levels at the levels that maximize profits. If corporate taxes are a % of pretax profits, then the levels of prices, wages and output that maximize pretax profits, are the same levels that maximize after-tax profits. Thus, a change or imposition of a corporate income tax will not change behavior of a profit maximizing corporation.
tim.rohrer profile picture
@Lance Brofman Thank you for the reply. I've been doing more reading today, and have more to do, especially about taxation and MMT. Any suggested readings on this particular aspect?

In my comment above, I was thinking more about UBI and mandating unions in Government contracts which, I think, will drive up effective wages, while reducing the incentives for some types of work. I know last year of friends (white collar) and family (blue collar) who both said they made more money with unemployment. Anecdotal? Sure. But I have other examples in both government service and in researching industries like health care that have seen significant inflation over the past couple of decades.
Damoni Kennard profile picture

By looking at the list there it's clear that there are more years with a deficit than a surplus. To me, the MMT is not a recent thing, it's been (unofficially?) used for decades already.
PapaWhisky profile picture
@Damoni Kennard

You need also to look at the deficit as a percentage of GDP. That has not gotten too far out of hand.


One of the tenets of MMT is that the *only* constraint on deficit spending (money printing) is inflation. The absolute or relative size of the deficit is immaterial.
Salmo trutta profile picture
@PapaWhisky re: percentage

Debt-to-GDP ratios are obviously contrived metrics. Unprecedented large deficits “absorb” a disproportionately large share of N-gDp (as gov’t spending is a component / factor of gDp).

To appraise the effect of the federal budget deficit on interest rates, it is necessary to compare the deficit, not to the debt to a GDP-ratio (a contrived figure), but to the volume of current net private savings made available to the credit markets (including concealing green-backing).
PapaWhisky profile picture
@Salmo trutta

Contrived though they may be, they do drive political discourse.
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