The Fed has signed up for Modern Monetary Theory (MMT), printing new money at will to fund the federal government’s $3 trillion coronavirus bailout. MMT, also known as Magical Monetary Theory, has a long history of failure and this time will be no exception. Prepare for what’s coming next.
America’s central bank, the Federal Reserve, has funded trillions to help citizens pay bills and bail out failing businesses and financial institutions. They and the U.S. Treasury are handing out billions, some are just cash grants, some are loans, some loans can be forgiven.
Thank you, Fed! Thank you, federal government!
Where does all this money come from? Their secret is that they can create money out of thin air and spend it as they wish. This is really fantastic. The Fed creates this monetary miracle by “printing” money. OK, they don’t actually crank up the printing presses to do this. Instead they buy Treasury debt or corporate debt on the open market and then pay for it by crediting the seller’s bank account with the purchase price. They don’t pay with existing money; they create new money. They do this by just typing a credit into the seller’s bank account. It’s amazing: money created out of thin air; bits and bytes generated on a computer screen.
Because they can create money at will, they can bail out Uncle Same whenever they wish. When the federal government spends more than it takes in from taxes, it has to borrow the money to pay for it. The Fed, being accommodative to the needs of the U.S. Treasury, buys this debt with freshly “printed” new money, enabling the government to spend as much as they want. Without the Fed’s help, with the government’s needs being so great (trillions of dollars), the debt markets would otherwise be overwhelmed by the government’s demand for funds. I should point out that the Fed is not legally permitted to buy the government’s debt directly from the Treasury. Instead they have “primary dealers”, banks, buy the debt from the Treasury and then they sell it to the Fed. The Fed pays them with new money. Pretty nifty.
Since February they’ve pushed $3 trillion into the economy this way. $3 trillion is a crazy number. $3,000,000,000,000. Lots of zeroes. It’s another way of saying 3,000 billion dollars. The government is proposing another $3 trillion in bailouts. $6,000,000,000,000? How much do you have in your bank account right now? Probably a lot fewer zeroes.
All this spending means the government piles up a lot of debt. Right now it’s equal to about 130% of U.S. GDP. In other words, 130% of the entire U.S. economic output a year. But no one cares. The federal government knows darn well that they will never have to pay it back; they’ll just keep paying interest on the debt … forever. And at interest rates at less than 1% (for a ten-year note) they can keep going until they can’t. Of course, they hope that day will never arrive.
That $1,200 you got for free was funded this way. Ditto the government’s loans to businesses, large and small, though the small guys are asking when the money is coming. You can check out the bailout spending bills here.
Spending without taxation! This is a brilliant concept. Why didn’t they think of this before? If the government can just print money to fund their spending why do they still tax us? Think of the possibilities. All that infrastructure repair and improvement that everyone says we need? All the welfare programs like Social Security, Medicare? Why not universal free health care for all? Or free education? Free childcare? Free housing? These and more can be easily funded by printing money. The prospects make me dizzy thinking about it.
This is such a great idea you must ask why no one has told us about this before? Guess no more. Some brilliant economists have figured it out. It is called Modern Monetary Theory (MMT). The Fed seems to buy into it.
If it sounds too good to be true, you would be correct. First, it’s not modern, it’s as old as Rome. It has been tried many times over the centuries and In every case where governments have printed money to pay for things, the result has been cycles of boom and bust, inflation, hyperinflation, economic stagnation, depression, and social disorder. MMT is a crackpot idea. It has never worked. It is the monetary equivalent of the Perpetual Motion Machine—it ignores the laws of economics.
MMTers simply don’t understand what money is or the mechanics of the business cycle or the concept of malinvestment and the destruction of capital. Proponents confuse pieces of greenish paper with wealth and, as history has repeatedly proven, you can’t print your way to wealth and prosperity. If they were correct why aren’t Zimbabwe and Venezuela the richest countries on the planet? (The MMT answer: They just didn’t do it right.)
If you wish to learn the details of Modern Monetary Theory you can read The Deficit Myth by the high priestess of MMT, Professor Stephanie Kelton. She has an answer for everything because she believes she and others magical thinkers like her are smarter than the rest of us. She was an economic adviser to Bernie Sanders. Or, you can read a thorough critique of her book by Robert P. Murphy, a respected Austrian theory economist who eviscerates the concept. Murphy is just one of many economists who
ridicule reject MMT.
MMT places no limit on government’s ability to spend which means government can command economic resources and control the direction of the economy. Just because there are more pieces of green paper floating around doesn’t mean that the resources it can buy have magically increased as well. They will outbid you for these resources. You will end up paying more for them. Prices will go up. Price inflation.
The truth behind MMT is that its proponents want to control the economy. That is, they seek power. They think a handful of Progressive economic mandarins sitting in their government offices in Washington D.C. can make better decisions than the rest of us 320 million Americans. This is the height of arrogance; they view us mere mortals as ignorant, irresponsible children who need their wise, guiding hand. History has proven that when the few substitute their decisions for the freely made choices of the many (the choices of the marketplace), the result is disaster.