Modern Monetary Theory is one of those infinite number of configurations that is in my opinion inevitable and shouldn’t be looked at in a precise way. For those of you who don’t know what Modern Monetary Theory is, it’s described here (link). It’s described differently by different folks so it has slightly different configurations. For example, some might change fiscal policy so that there is a wealth tax that is used to eliminate student loans, and others might change taxes and spending in other ways, and there are an infinite number of ways these changes can be configured that we shouldn’t delve into at this stage because that will drive us into the weeds and the particulars that will stand in the way of seeing the big important things. Also, people who are focusing on MMT as a package will limit their thinking to the specifics of that package rather than thinking about the wider range of MP3 policies to find the best one. 

MMT’s most important configuration is the fixing of interest rates at 0% and there is the strict controlling of inflation via the changing of fiscal policy surpluses and deficits, which will produce debt that central banks will monetize. In other words, whereas during the times we have become used to, interest rates moved around flexibly and fiscal deficits (often) and surpluses (rarely) were very sticky so interest rates were more important in producing buying power and the cycles, in the future interest rates will be very sticky at 0% and fiscal policies will be much more fluid and important and the debts produced by the deficits will be monetized. In case you didn’t notice, that is by and large what has been happening and will increasingly need to happen. In other words, interest rates are now pinned near 0% in two of the three major reserve currencies (the euro and the yen) and there is a good chance that they will be pinned there in the third and most important reserve currency (the dollar) in the next economic downturn. As a result, fiscal policy deficits that are monetized is the contemporary stimulation configuration of choice. That existed long before there was a concept called “Modern Monetary Theory,” though MMT embraces it. Putting labels aside, it is certainly the case that the configuration of having 1) an interest rate fixed at around 0%, 2) more flexible fiscal policies with debt monetization to fund the resulting deficits with 3) rigorous inflation targeting exists and is increasingly likely, necessary, and possible in reserve currency countries. An added benefit of this approach is that the money and credit created can be better targeted to fund the desired uses than the process of having the central bank buy financial assets from those who have financial assets and use the money they get from the central bank to buy the financial assets they want to buy. There are many historical cases of this happening (see the 1930s-1940s prewar and war periods which, as you know, I think are analogous), which offer worthwhile lessons about how this was and could be engineered. 

The big risk of this approach arises from the risks of putting the power to create and allocate money, credit, and spending in the hands of politically elected policy makers. In my opinion, for these MP3 policies to work well, the system would have to be engineered in a way that decision making would be in the hands of wise, not politically motivated, and highly skilled people. It’s difficult to imagine how the system will be built to achieve that. At the same time, it is inevitable that we are headed in this direction.  

Eoin Treacy's view

The final paragraph above puts me in mind of Plato’s progression of democracy through tyranny and back again. Someone can only be considered wise after the fact and if recent events have told us anything it is that history is endless revisable.

The only possible way these kinds of policy decisions can be framed is to clearly define the scope for the objective beforehand and to resist deviation or mission creep. Anyone who thinks that is possible with the political environment we are presented with today is either naïve or delusional. However, I agree, an attempt at fiscal and monetary cooperation is inevitable as a response to the next crisis.

The net effect will be to trash the value of fiat currencies. It could well represent a significant boost to gold prices but also to asset prices generally because the primary motivation behind modern monetary theory is to blow out deficits to previously unimaginable levels and flood the economy with capital.

It is unlikely to be approved without a crisis to drive the transition but it does represent what could be a significant bullish catalyst for recovery.