A couple of weeks ago I addressed the concept of Modern Monetary Theory, or MMT, in this column. I was a bit nervous about addressing this type of subject in this limited forum, but I have received more feedback regarding the MMT column than any other column written in the past few years.
MMT is a strange school of economic thought, putting forth the concept a government that uses its own sovereign fiat currency (money not backed by anything else) has the ability to spend and borrow without constraint as long as the government has the ability to print new money to pay for spending and service its debts.
A number of interesting news items occurred this week that brings me to revisit this concept. The first involves the fiscal cliff negotiations. While the main stream debate seems to be rightfully focused on tax rates, the president is asking for something else that is getting less coverage.
The Democrats are asking that the debt ceiling be legislated out of existence. The debt ceiling is a legislative process that requires Congress to approve increases to the national debt. Democrats claim the debt ceiling process is antiquated, and our nation’s finances should not be subject to the partisans in Congress. They want the government to be able to spend without this restraint.
The other item involves the Federal Reserve, which after its meeting this week announced it would continue creating new money ($40 billion a month) to buy mortgage bonds, and going forward it would also be using more printed money to buy U.S. government bonds at the pace of $45 billion a month. This $85 billion of bond buying is anticipated continuing until unemployment is sustainably lower.
The Fed presented the new government bond buying program as a revision to one of its already existing bond buying programs, but the old program (called Operation Twist) involved moving money already invested in bonds into different bonds, while the new program involves printing new money to buy bonds, which is a subtle but substantial difference.
I have a hard time believing that MMT is not being used as a framework in these types of decisions, and I would suggest interested readers take time to learn more about this untested concept.
Whether I am correct about this or not is irrelevant. What the federal government and the Fed are doing is bound to cause unintended consequences. In this regard I have little doubt some fabulous money making opportunities may be created as financial assets react to these aggressive economic policies over the next few years.
At the same time, however, it is also hard for me to dismiss the increased risks and volatility likely to be created as well. We are heading full steam into uncharted waters; we will all need to remain vigilant.