In a recent post, we discussed the negative effects of large governmental deficits outpacing economic growth. In this environment, interest rates and prices tend to stay depressed. Savers are punished, and growth is lacking.
What can end the effects of this deflationary cycle? With rates near zero or negative, Central Bankers’ tools are less effective. The public, wanting new solutions in the face of faltering monetary policies, will eventually elect leaders to enact “new” fiscal policies. One of the new policies being discussed, Modern Monetary Theory (MMT), is proposed as a panacea for jump starting segments of the economy. Modern Monetary Theory involves the wholesale printing of money to satisfy government priorities and obligations.
Advocates for Modern Monetary Theory contend that the stimulus it provides will eventually spark enough economic growth to offset its anticipated negative effects, which include increasing debt service and potentially higher inflation. Some politicians, economists, and pundits argue that something needs to be done to fuel continued growth, and, in their eyes, Modern Monetary Theory is likely to be that something. What once seemed impossible—the printing of large amounts of money with no regard for its implications and potentially negative interest rates—is now being considered. Larger deficits, as noted in our last post, typically result in muted growth and lower economic expectations.
The potential hazards are unsettling. In today’s political environment, we have already moved past an attempt to balance revenues and expenses. Using Modern Monetary Theory as a tool, politicians won’t be able to resist the ability to fund massive U.S. infrastructure, offset or eradicate student debt, shore up of U.S. pension obligations, and subsidize other “wish list” items. It’s easy to see how the concept can be embraced as politically expedient, but as with so many things, it is wise to be wary of the unintended consequences.
Where does it stop? Eventually today’s slower, deflationary environment will likely give way to extreme periods of inflation if Modern Monetary Theory is enacted. That notion seems far away when looking at today’s landscape but should be something we all need to prepare for, if politicians listen to the siren song of Modern Monetary Theory.
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