Good Tuesday AM,
I hope you enjoyed the holiday.
Equities are up but that is not hurting bonds as Treasury Bonds are up today and showing signs that they could run further. Mortgage bonds are flat but the upward trend is still in place, which is also indicating some better pricing may be on the way. There is no news today and this week is fairly light. We will get housing numbers later in the week. At this point both the equity and bond markets will continue to focus on the stimulus deal and the implications it may or may not have on inflation.
Dan Rawitch said it well, Stimulus is deflationary, however this goes against convention wisdom. The principle is simple. Stimulus increases our deficit and our debt. Ask yourself, if you were to take on a ton of debt and your family was spending more than it earned, while having to service this huge amount debt, whether or not your family would be spendy. I hope not, as our debt service increases, it creates a huge drag on our household and we are unable to continue to invest or buy things. Make sense?
Speaking of debt, U.S. government debt that is held by the public, to $21.6 trillion. While the nation’s debt currently exceeds its gross domestic product,
Here is a good piece from Bloomberg for any other Technical Geeks that want to argue Modern Monetary Theory (MMT):.
Treasury Secretary nominee Janet Yellen will face a Senate hearing today where she’ll argue, among other things, that now is the time to spend nearly $2 trillion on more Covid relief. In light of all this spending, and the Fed buying billions of dollars’ worth of bonds, commentators are all talking about how we’re “going full MMT” or “trying some crazy MMT experiment” or something like that. So once again it’s time to clear up some misconceptions about what MMT is and isn’t.
- Aggressive deficit spending isn’t MMT. It’s just fiscal stimulus, the likes of which the U.S. has done many times before. The government might be spending on a historically large scale these days, but still, that just means it’s a large fiscal stimulus.
- QE isn’t MMT. The Federal Reserve buying bonds represents a swap of long-term government liabilities (Treasuries) for short-term government liabilities (reserves held at the Fed). It’s a tool that central banks employ, in part, to signal their desire to keep rates low. It’s not that new or special. It’s not even clear if it does very much.
- Low rates aren’t MMT. Low rates are just low rates.
- Low rates + QE + fiscal stimulus all at the same time isn’t MMT. It’s just monetary policy and fiscal policy both pushing toward expansion at the same time.
OK, so then what’s MMT? Well, here’s a beginner’s guide. But for our purposes, below are a few things to keep in mind:
The MMT view is that government spending is always based on monetary financing. This is key. It doesn’t matter whether deficits are high or low. It doesn’t matter whether rates are 0% or 5%. It doesn’t matter whether the Fed is buying bonds or shrinking the balance sheet. The MMT view is that a country like the U.S., which issues and spends its own currency, always finances spending the same way: by creating money. This is as true now as it was during the Clinton surplus years.
As such, conventional notions of spending sustainability (like the size of the deficit or debt-to-GDP) are useless. Instead, the main constraints on spending are political (will politicians allocate the money?) and real (are there enough real resources in the economy to absorb the spending?). If there is a shortage of real resources, we would expect to see inflation. Inflation is the indicator that spending is unsustainable, not some arbitrary ratio.
Therefore, the goal of budgeting shouldn’t be to set government outlays and tax revenues equal to each other, but to achieve full employment. Furthermore, fiscal policy (not interest rate policy) is seen as the primary tool for achieving full employment and macro stability.
Now it is true that attitudes around the deficit and spending are changing. Deficit-phobia is on the way out. Appreciation that fiscal policy is a powerful tool is in. The idea that full employment is a good thing is also in. So it’s true that many premises advanced by MMTers are making headway in the broader debate.
Please remain safe and healthy, make today great!