Modern Monetary Theory (MMT) became a hot topic earlier this year when congresswoman Alexandria Ocasio-Cortez and others proposed it as a way to pay for the Green New Deal and other projects.
Basically, some MMT proponents say we don’t have to restrain government spending because we can always just print money to pay for it. It’s an uncapped government spending program.
Many of us don’t like that idea. Government is notoriously bad at allocating capital. Nonetheless, I believe MMT, or something similar, is coming to America in the near future – regardless of whether we adopt it as an “official” policy.
Here’s why. The current annual U.S. federal deficit is $896 billion, according to the Congressional Budget Office (CBO). The national debt stands at more than $22 trillion.
This year, the U.S. will pay out more than $500 billion in interest on that debt. By 2024, it is estimated that interest costs will surpass defense/military spending. The CBO says that interest costs could surpass $1 trillion by 2028 (but I suspect it will happen even sooner).
Digest that for a second. We will soon be spending $1 trillion on the interest costs of our debt. To put that into perspective, total government revenue (from taxes) totals about $3 trillion per year.
The federal deficit isn’t the only headwind facing the economy. There’s also $15 trillion in corporate debt and $13.7 trillion in household debt. And there’s $210 trillion in unfunded federal liabilities going out 30 years or so. Those are benefits promised but not accounted for with current taxes.
A large portion of government borrowing is already paying to keep up with interest payments. Low interest rates, which punish savers and reward borrowers, are basically required when we have all this debt “helping” the economy. Naturally, this sort of situation can get rather ugly rather quickly.
We have two primary options to resolve this. We can slash government spending by 50% and slowly start paying off the debt (seems unlikely). This option requires short-term sacrifice for long-term gain.
Or we can take the “easy” way out and print money to pay for all the things we can’t afford. That’s MMT in a nutshell. It sacrifices the long-term viability of the system for a short-term gain. And it seems inevitable in many ways.
Don’t Underestimate MMT
Many investors I’ve spoken with don’t take MMT seriously. They see it as an economic fantasy that would never happen in the real world. Printing money to pay for everything? It seems crazy, and it is. I get it.
But I see it as a real threat. And something likely to happen in the next decade.
Where else is Uncle Sam going to get the money to fund our soaring deficit spending and interest costs?
Taxes? No, we can’t tax our way out of this one. That would not go well.
Unless we cut government spending dramatically, there will need to be some kind of economic voodoo, such as MMT.
Of course, this will bring unintended consequences. The big risk is that MMT, or something like it, could ruin the credibility of the dollar. Because, generally speaking, when you start printing money to pay all your bills, it doesn’t end well.
Another consequence? The inevitable corruption that happens whenever the government is handing out big contracts, for example. Such financial engineering could also result in nasty inflation or stagflation down the road.
Questioning the Future
Our current debt problem begs two questions. First: How long will other countries keep buying U.S. bonds? As long as the dollar remains the primary reserve currency of the world, I bet most will hold on to their Treasurys. After all, you still need the dollar if you want to buy oil internationally, although this is slowly beginning to change.
And a second, more long-term question: How much dollar printing would the rest of the world be willing to put up with? I don’t know. But I believe any major money printing program would accelerate the decline of the dollar as the world’s reserve currency.
Eventually, all the big deficit countries will have to get around to slashing spending. MMT, and other shenanigans we’re likely to see, are just tactics to delay that. And in some ways, they are efforts to keep the current establishment in place (another reason I say we get to slashing ASAP).
Unfortunately, I think we’re a long way from slashing spending anytime soon. Until we get serious about it, I’m assuming we’re headed to a future where MMT is the reality.
Good investing,
Adam Sharp
Co-Founder, Early Investing