Modern Monetary Theory: A Double-Edged Sword
In the 1960s, Everett Dirksen, a Republican and the Senate Minority Leader, warned about the potential for federal spending to spiral out of control. His famous quote, "A billion here, a billion there, and pretty soon you're talking real money," rings true today, especially in the context of Modern Monetary Theory (MMT). Supporters of MMT have long argued that the US federal government can run large budget deficits to fund social welfare programs without causing significant economic or financial harm.
MMT: A Saviour or a Threat?
The credibility of MMT, which posits that a government borrowing in its own currency can finance its spending with more debt, took a hit when inflation skyrocketed in 2022 and 2023. However, it appears to be making a comeback. Despite its critics, it's hard to deny that the large fiscal stimulus provided by the current administration has helped counterbalance the tightening of monetary policy, thereby preventing a recession. This has been aided by other stimulative factors, such as the spending habits of retiring Baby Boomers. However, even though the year-on-year inflation rate has decreased, prices are considerably higher now than they were at the beginning of the pandemic.
The Dark Side of MMT
One of the most concerning aspects of MMT is that it essentially promotes intergenerational theft. The Baby Boomer generation has reaped the benefits of government spending without fully funding these expenses with tax receipts. In the process, they've managed to amass a net worth of $79.8 trillion. While it's likely that their children will inherit a portion of these funds, they will also inherit a massive amount of government debt. The total US public debt currently stands at $35.5 trillion, which includes $27.7 trillion of US Treasury marketable debt and $7.2 trillion of intragovernmental holdings. This debt is set to increase at an annual rate of over $1.0 trillion just to cover the net interest outlays of the Treasury.
The Future of MMT
The Treasury recently announced its marketable borrowing estimates, projecting financing of $546 billion in Q4-2024 and $823 billion during Q1-2025. This might explain why the bond yield has risen from 3.62% on September 16 to 4.27%, despite the Fed cutting the federal funds rate by 50 basis points on September 18. The bond market may be starting to worry about the federal deficit and debt, especially considering the upcoming November 5 elections are unlikely to alter the current course of fiscal policy.
Final Predictions
For now, it's predicted that the bond yield will fluctuate between 4.25% and 4.50% through the end of the year. The S&P 500 is expected to end the year around 5800, reflecting concerns about the bond market's reaction to the next administration.
Bottom Line
In the grand scheme of things, a billion dollars here and there may not seem like much. But as the numbers continue to climb, it becomes clear that we're dealing with "real money." Modern Monetary Theory has its merits, but it also carries significant risks. As we move forward, it's crucial to consider the potential long-term impacts of this approach on future generations. What are your thoughts on this topic? Do you believe MMT is a viable solution or a ticking time bomb? Share your thoughts and this article with friends. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
