To me the most important engineering puzzle policy makers around the world have to solve for the years ahead is how to get the economic machine to produce economic well-being for most people when monetary policy does not work…. Ray Dalio
Economies are human constructs, not inevitable natural phenomena. Humans make up the rules that participants must follow when playing the game, and as the economy grows and evolves, humans must change the rules of play in ways that optimize the well-being of the majority of participants. In this piece, we argue that the MMT fiscal policy proposition of government spending into the private sector, with inflation being the only limiting factor, is not only needed for a real recovery from the great recession, but is inevitable.
We have been pounding the table publicly since 2015, and privately since 2009, with the assertion that monetary policy alone was not enough to optimize the economy for the benefit of the majority. We have repeatedly pointed out that lowering interest rates (to encourage credit creation) and buying financial assets (to save the banks), while necessary, was not sufficient to engineer an economic recovery for the masses. Fiscal policy, that delivers money to the base of the economic-pyramid, was missing.
Economies run on money, and if an economy slows down because of a malfunction in some part of the system, then once the malfunction is taken care of, the entire economy needs access to money in order to return to normal functioning. Starting in 2009, the malfunctioning financial sector was rescued by easing monetary policy—zero-bound interest rates and financial asset purchases (QE)—but the broader economy was left to fend for itself. The money from QE went to, and stayed at, the top of the financial-pyramid--owners of financial assets such as stocks and bonds. There is no (and never was) any “trickle-down” effect. Monetary policy by itself has not been effective in getting money in the hands of most people to increase their productivity and prosperity. The process of having the central bank buy losing financial assets (QE) from those who already have financial assets so they can buy other financial assets they want to own, has not been effective in producing money and credit growth (i.e., spending power). To accomplish that, there has to be fiscal spending into the real economy, not just the financial sector.
But the argument we frequently hear, says that expansionary fiscal policy implemented at the tail-end of an already mature business cycle is completely the wrong thing to do. However, the fault with that argument lies in the fact that, since we do not have inflation, the business cycle is not as mature as many are assuming. Despite the chronological age of this expansion (10-years old), it has not reached the mature stage because up until the present it has not received the fiscal flows that are required to grow to its full potential—analogous to how Bonsai trees are stunted by a lack of fertilizer.
The bi-partisan agreement to spend $2T on infrastructure is the metaphorical fertilizer that will deliver growth to the base of the economic pyramid where the bulk of the producers and consumers reside. This will extend the expansion of the business cycle, increase aggregate demand and, if the spending is wise, increase productivity which will keep inflation in check. “Infrastructure” must include not just roads and bridges, but healthcare and education as well. An economy cannot grow properly if its participants are unhealthy and ignorant.
The government debt and deficits scolds are just plain wrong, in our view. Could former VP Dick Cheney have been right all along? Running government deficits (at a near zero percent real cost), below real GDP growth, counters the fetal-positioned over-saving private sectors. If the spending goes to infrastructure, defense, education and healthcare, enhancing future productivity, all the better for future economic growth. This is one of many reasons why we haven’t believed the consensus gloom & doom brigade on China’s rising debt. Yes, we have heard that government spending is “unproductive”. In our view, this is just jaundiced thinking, given the power of defense-driven research, and government infrastructure, public education, healthcare breakthroughs and spending on space and energy. The list is long. It is a short bridge from greater fiscal deficits to Modern Monetary Theory (MMT). We think investors need to take this seriously. The investment implications of MMT going mainstream are important, just as those from QE were. And they are different…..Ajay Kapur (Bank of America).
MMT is inevitable and has the potential to change the path of the economy in ways that few people believe possible. We leave you with this visual of possible futures under the influence of MMT:
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