Posted March 08, 2023
By Jim Rickards
Is MMT Now Official Policy?
Remember Modern Monetary Theory or “MMT”? I first sounded the alarm back in 2018 and then again in 2021.
At the time, MMT was all the rage among monetary and fiscal policy wonks. It seemed to offer the best of all possible worlds. You can spend as much as you want without any downside.
The main tenets of MMT are that debt and deficits don’t matter because the Fed can monetize the debt by printing money. The Fed can just wire money directly to government contractors to pay bills.
But MMT gradually faded from the headlines.
The pandemic of 2020 changed everything. MMT was still not a topic of discussion. It didn’t matter, because MMT was being practiced, even if by stealth.
COVID relief and economic “stimulus” was Job One. Congress provided $2.7 trillion in new spending including $1,400 checks sent to every American. Then, on Dec. 21, 2020, Trump signed another $900 billion relief package that provided an additional $600 check to every American.
Wait, There’s More!
Not to be outdone, the new Biden administration passed the American Rescue Plan Act of 2021 (ARPA), which provided another $1.9 trillion of deficit spending, and sent another $1,400 check to every American.
The runaway spending didn’t end there. On Nov. 15, 2021, Joe Biden signed the $1 trillion Infrastructure Investment and Jobs Act. This was followed by $737 billion in new deficit spending for the Green New Deal in the misnamed Inflation Reduction Act of 2022 (IRA) signed by Biden on Aug. 16, 2022.
The U.S. debt-to-GDP ratio has risen from a dangerously high 106% at the start of the Trump administration to an astronomical 124% or so today, the highest in U.S. history.
For perspective, the other countries with a debt-to-GDP ratio in that range include Lebanon, Greece and Italy. The U.S. is now a full-fledged member of the deadbeat club.
Does this debt and deficit debacle mean that MMT has achieved its goals and is now the guiding light for fiscal and monetary policy?
The answer is: yes and no.
The “yes” answer is easy to explain. MMT says that spending doesn’t matter and deficits don’t matter. The U.S. can issue as much debt as it wants and spend as much money as it wants.
As long as the debt is denominated in dollars and the Fed has a U.S. dollar printing press, we can always monetize the debt with new money. Problem solved.
With $10 trillion of new debt in three years and a 124% debt-to-GDP ratio, the U.S. is certainly acting as if debt and deficits don’t matter. This is the essence of MMT.
The “no” answer is more nuanced and political. It’s true that we are acting in accordance with MMT, but the MMT advocates are keeping their heads down. Why shouldn’t they? They are getting exactly what they want and the Republicans have gone along with it.
Trump increased the deficit by $4.6 trillion in his last year in office, almost half the $10 trillion total increase under Trump and Biden together since 2020. There’s no need to push MMT or even discuss it if Republicans and Democrats are acting in accordance with it.
So the U.S. is implementing MMT without acknowledging or even understanding it. It now exists in practice, but it has not passed a political litmus test. The future of MMT hangs in the balance starting now.
The Debt Ceiling “Crisis”
We’re facing a debt ceiling “crisis.”
What is the debt ceiling exactly? It’s a numeric limit on the total debt that the U.S. Treasury is allowed to issue. There’s no debt ceiling in the U.S. Constitution. Instead, it’s imposed by statute. There’s no legal requirement for that statute.
The debt ceiling itself could be repealed by Congress at which point there would be no limit on the size of the national debt. Still, Congress likes the idea of a debt ceiling. It forces the White House and Treasury to come back to Congress from time to time to request increases as needed.
This gives Congress some leverage to ask for political concessions in return for raising the debt ceiling. So the debt ceiling is really a political football rather than a serious macroeconomic policy tool.
In the end, Congress always approves the ceiling increases. In a way, the debt ceiling debate is all for show. To be clear, the debt ceiling does not mean the Treasury cannot issue any new debt. It means that the Treasury cannot issue debt that increases the total outstanding above the ceiling.
The Looming “X-Date”
The “X-Date” is the day the Treasury is projected to run out of cash and can’t pay bills or pay off Treasury note holders. Right now, the X-Date is estimated to be around June 5, 2023, but even that is a guess. The real X-Date will depend on how much positive cash flow the Treasury generates during tax season around mid-April.
Congress and the White House are also battling over the budget for fiscal 2024, which begins on Oct. 1, 2023. If a new budget is not passed by Sept. 30, 2023, the government will shut down at midnight.
It is possible that Congress could extend that deadline with a continuing resolution (CR) that permits government agencies to keep spending at existing levels for existing programs until Congress gets around to passing a budget.
Although the debt ceiling increase and the budget are separate issues with separate procedures, they are converging at about the same time. Mid-April is the date when markets will focus on this more intently because of the X-Date.
We’ll have better estimates of the X-Date by April, and a kind of “countdown to default” will begin.
Where does the MMT crowd stand in all of this?
Putting MMT to the Test
As noted, supporters of MMT have had the luxury of getting everything they want politically without having to stand up and defend MMT publicly. COVID and climate change (really, bogus climate alarmism) acted as the perfect cover for the Trump and Biden spending seemingly without having to worry about debt or deficits at all.
The mantra in Washington was “spend, spend, spend.” And they did.
Now that the pandemic is over and the Green New Scam is law (for better or worse), a day of reckoning has arrived. If the debt ceiling is raised and deficit spending is increased without serious reforms, it will be left to MMT’ers to explain why none of this matters.
They will rise to the occasion. Again, the main tenets of MMT are that debt and deficits don’t matter because the Fed can monetize the debt by printing money. If inflation emerges, the government can simply raise taxes to cool off the inflation.
Of course, MMT is nonsense. One can be reasonably sure that if members of Congress don’t understand MMT, they definitely do not understand the flaws in MMT. But that won’t stop the banner from being raised. Expect to hear a lot of commentaries that “deficits don’t matter,” and “debt doesn’t matter” as the debt ceiling and budget battles are being waged in the months ahead.
We can be sure of a few things…
There Will Be No Default
The Treasury will not default on its debt. You’ll be reading a lot of stories about a debt default in the coming months. Those stories will be used to scare voters into a “clean” debt ceiling increase.
Whatever your views on the debt ceiling, you can ignore these default stories. It won’t happen because it serves no one’s interest. A better way is to think of the debt ceiling debate as a game of chicken between conservative Republicans and the White House.
In the end, Republicans will get some (not all) of what they want and the debt ceiling will be raised. That will lay the issue to rest … until the next time.
Passing the budget is more complicated. The budget is huge and there’s a lot more at stake than just debt issuance. Spending increases, defense spending, support for Ukraine, social programs, tax increases and more are all on the table.
Although the budget deadline is Sept. 30, Congress will try to get something done over the course of July and August. This will happen at exactly the same time that the debt ceiling and X-Date crisis is playing out.
In the end, the debt ceiling will be raised, most likely in July. A government shutdown in late September is a real possibility. That will be another point of high volatility in stocks. All in all, it will be an interesting year.
At a minimum, investors should expect increased market volatility as default talk grows louder. It may be a good time to reduce equity exposure and increase your cash allocation.