If "we're all modern monetary theorists" now, one thing's for sure...
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Whatever any of us thinks about the medical realities of the COVID-19 outbreak and government responses to it, these are the cards we’ve been dealt. Politicians left and right have turned pork-barrel politics into a pork freight train.
All this “spend like there’s no tomorrow” thinking ignores the fact that there is a tomorrow.
The spending will have to be paid for… somehow.
There are only two ways for governments to pay for things: directly through taxation; or indirectly, through inflation.
Debt doesn’t change this inflexible reality—it merely postpones the need to resort to one or the other of these methods of payment.
This is why there’s been an increasing call for taxing the rich from the left. Even they know that ultimately, there’s no such thing as a free lunch. Someone has to pay for all the stuff they want to give away for free. Unfortunately for them, it turns out that the rich can’t be plundered enough to pay for all the free goodies desired by the masses. Worse, “progressive” measures that punish wealth creation also slow an economy, hurting everyone.
Enter so-called modern monetary theory (MMT). As others have pointed out, there’s nothing modern about this theory, but it’s still music to profligate government ears. MMT provides intellectual cover for printing all the money they want.
Dan Alpert is an adjunct professor at Cornell Law School and a prominent MMT advocate. Given the current economic shutdown, he’s pleased to see almost all politicians jumping on the spend like there’s no tomorrow bandwagon. “We’re all modern monaterists now,” Alpert says.
Alpert argues that experience since the Crash of 2008 shows that governments—at least some of them—can print all the money they want with no adverse effects. Inflation has been low and is expected to remain low. We may even be entering a deflationary period. That makes the big-money bazookas a great thing, offsetting the scourge of deflation with healthy inflation.
There are several flaws in this thinking:
That last point is key…
Printing money to fight deflation is the siren’s lure for smart people who should know better, seducing them down the path to hyperinflation.
By the time central bankers realize they’ve gone too far—feeling all the while that they had no choice—it’s too late. High inflation shakes confidence, begetting higher inflation.
The USD, which has seemed invulnerable for so long to so many people, may be uniquely vulnerable to this endgame. The perception that this can’t happen to the greenback makes it all the more likely that the Fed will overshoot.
Once foreigners realize and admit that the dollar is in trouble, there’s likely to be a massive rush to the exits. That would add to the inflationary pressure, as all those trillions of dollars held overseas flood home. The price of imported goods would also rise on the USD’s resulting weakness in foreign exchange.
History shows that once a currency enters a death spiral like this—even a currency as mighty as the USD—its days are numbered.
Whether—or when—the US dollar ends up going the way of the Zimbabwe dollar remains to be seen.
Regardless, it may be true of society writ large that “we’re all modern monaterists now.”
If so, one thing’s for sure. After a brief initial deflationary period (which seems likely to be far shorter than mainstream economists expect), we’ll see a multi-year period of record inflation ahead.
And that’s extremely bullish for monetary metals: gold and silver.
It’s even more bullish for related stocks, of course, as they typically offer substantial leverage to their underlying commodities.
If you agree… you know what to do.
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