MMT Has Lit Fuse on Inflation Powder Keg

An economic framework called Modern Monetary Theory (MMT) governs the financial world today, but fails to account for the consequences of its practices.

Bullion.Directory precious metals analysis 26 March, 2021
By Peter Reagan
Financial Market Strategist at Birch Gold Group

What is MMT?

Before we get to that, it helps to know what MMT means. It is a theory that states:

monetarily sovereign countries like the U.S., U.K., Japan, and Canada, which spend, tax, and borrow in a fiat currency they fully control, are not constrained by revenues when it comes to federal government spending. These governments do not rely on taxes or borrowing for spending since they can print as much as they need and are the monopoly issuers of the currency. Since their budgets aren’t like a regular household’s, their policies should not be shaped by fears of rising national debt. [emphasis added]

Put more simply, the Federal Reserve can create as much new money as it wants to pay off old debts and fund new government spending. Meanwhile, most individuals don’t concern themselves with the rising national debt (like you most certainly would if your own personal debts were growing).

With such powerful “magic” at their fingertips, Modern Monetary Theorists don’t pay much attention to the fundamentals of the economy. After all, they’ve been taught that the fundamentals don’t matter.

For example, if you’re concerned about the Fed’s nasty habit of running up the national debt and inflating the money supply, MMT tells us not to worry:

With a public debt approaching $30 trillion and a money supply that has increased by 25% in the last two years, the worry seems justified. However, Modern Monetary Theory (MMT) says we have nothing to worry about.

“Nothing to see here,” says the MMT economist. “There’s no devaluation of the dollar or the potential for Weimar-style inflation, so move along.” It’s this attitude that has caused deficit spending – “printing money” to buy off debt – to become the norm.

But saying there’s no devaluation or inflation risk doesn’t actually make the consequences go away…

For example, the U.S. dollar index has dropped almost 10 points since March 2020, and seems to be slow to recover. It still hasn’t returned to its March 2002 value. That’s right: the global purchasing power of your $1 today is worth about 24% less than $1 all the way back in March 2002.

And as the dollar continues to get weaker under MMT, the closer it gets to losing its status as the world’s reserve currency.

Combine that increasing weakness with other economic factors, and the potential for explosive price inflation – the inflation that MMT says we shouldn’t worry about – becomes a real possibility.

Regardless of their constant assurances, Modern Monetary Theorists might not have a case for much longer.
 

Signs Point to the Return of “Inflation Nation”

If something isn’t broken, it doesn’t make sense to fix it. In other words, MMT has worked for decades, so why try to fix it? Well, this kind of thinking could be where Modern Monetary Theory has gone wrong.

According to Dr. Michael Busler, “printing money” like the Fed has done could turn into a disaster. The good news is, the last time inflation got out of control there was a solution:

In 1981, Milton Friedman and others convinced policy makers that it was the increase in the money supply that led to the double-digit inflation of the 1970s. So, reducing the rate of growth of the money supply would reduce inflation.

While the solution wasn’t perfect, putting a stop to the Fed’s “printing press” worked back then, and inflation eventually subsided.

Economists might need to revisit those ideas soon, because there are already signs of “inflation warming up” right now:

• Biden’s war on fossil fuels has already driven up the cost of energy. (And restrictions to oil drilling on federal land and the Keystone Pipeline cancelation might push gas and energy prices higher.)
• According to Robert Wenzel: “The price of lumber per thousand board feet is at $1,044, according to Random Lengths. That’s an all-time high, and up 188% since the onset of the lockdowns, COVID-19 panic and massive Federal Reserve bank money printing.”
• Food price inflation remains high, increasing at least 3.6% month after month since April 2020.
• According to the American Institute of Economic Research, even housing is getting expensive: “Housing prices increased from 9 to 15 percent in 2020.”

Of course there are more examples of rising inflation all around us, and consumer inflation expectations are rising along with them (currently at 3.09%).

Even worse…
 

The Fed Is Uncertain About “How Much” Inflation We’ll See

Setting aside the fact that Powell and the Fed have been notoriously under-reporting “real” inflation over the last few years, you can plainly see the uncertainty about projected inflation in the Federal Reserve’s most-recent economic outlook:

The corresponding 70 percent confidence intervals for overall inflation would be 1.1 to 2.9 percent in the current year, 1.0 to 3.0 percent in the second year, and 0.9 to 3.1 percent in the third year

That wide of a range for predicted inflation over the next two years doesn’t inspire much confidence, and only increases uncertainty. (Would you put your money in a savings account if the banker offered you a “70% confidence” of an APY between 1.1-2.9 percent?

Wouldn’t you at least ask where the rate would be the other 30% of the time?) The combined lack of certainty and wide range in the Fed’s projection almost renders it useless.

Enough about unknowns. Here’s what we know for sure:

• We’ve seen the federal government run a $3.1 trillion deficit in 2020 (the largest since World War 2)
• So far, the 2021 deficit is on pace to beat 2020
• The Federal Reserve’s balance sheet is approaching $8 trillion (nearly doubled over the last 5 years)
• The amount of money in circulation (M2) has increased about 40% since January 2020
• Meanwhile, the 10-year Treasury rate which bottomed at 0.52% in August 2020 has tripled, standing at 1.63% today
• We’re seeing inflation in energy, food, housing, and basic materials like lumber
• We’ve heard Chairman Powell announce a dramatic shift on inflation policy (2% inflation is “over the longer run” which means the Fed intends to deliberately push inflation higher)

If short-term inflation starts to run hot like it did in Weimar or in the 1970s, that would put the final nail in the Fed’s projections. And their only tool to fight inflation? To raise interest rates (which they’ve already stated won’t happen till 2023 at the earliest).

It’s a good time to consider what you’re going to do when bread starts costing $10 a loaf.
 

Hedge Against Inflation to Protect Your Wealth

If Weimar-style inflation hits the U.S., your savings are at risk. And it doesn’t seem likely that modern monetary theory is going to help.

The possibility of extreme inflation, hyperinflation like in Venezuela, always lurks behind the curtain. Especially in an economy as large as the U.S. with so many trillions of dollars floating around (and remember, according to MMT, an infinite number of dollars can still be printed).

Examine your savings to ensure it has a solid foundation that responds well to uncertainty. Diversify your holdings with different types of assets that thrive in different economic situations.

Consider adding physical gold and silver for an even better chance at preserving your savings, even when inflation runs hot.

Because, unlike modern monetary wizards, you cannot pretend you can just print as much money as you need to prop up your personal economy.

It is only the beginning folks, price inflation is going to expand across most consumer markets in the months to come.

-Robert Wenzel

This article was originally published here

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