Modern Monetary Theory (MMT) is an unorthodox way of economic thinking that contradicts many ideas of mainstream economics. It was actually introduced in the 1990s, but did not gain significant popularity before the late 2010s. Lately, it has been scrutinized and even ridiculed a lot. This is presumably for two reasons. Firstly, it has unfortunately been hijacked by politicians as a theoretical justification for their agenda. This has created the impression that it is a partisan tool. Secondly, its opponents claim that the interest rate spike after 2021 renders the promises of MMT obsolete.
#2 what is "deficit spending"? It is nonsense. You cannot spend a deficit. You cannot spend by having a deficit, nor by not having a deficit. Governments running MMT systems (most of them) spend in one and only one way, by instructing their central bank to mark up bank accounts, using a computer. No deficit is involved.
The government surplus/deficit is an accounting residual you only know at the end of an accounting period. If full employment has been achieved no one should care what the number is, positive or negative. That they *do* care is a cause of massive economic misery for the poor.
MMT is for me first and foremost a tool to understand what is happening and what will likely happen. I don't view it as a policy tool. Therefore, from my perspective, a government cannot run an MMT system. It just conducts a certain economic policy and MMT can help understand the consequences.
"It postulates that all economic policy can be conducted with deficit spending. "
not really. You've got to drive demand for the 'otherwise worthless' currency, so at an absolute bare minimum MMT tells you you've got to tax or impose fines or something, in the currency only you (Gov) can issue, or lend via agent commercial banks (chartered by the state). So it is Fiscal Policy that achieves monetary economic goals, and no other goals per se (real production is the aim, but via rampant corruption and rentiers not always realised).
Thank you so much, I'm glad you enjoyed it! I think MMT offers a fascinating view if we remove political capture and instead use it to understand what is happening and what will happen (as opposed to what should happen).
On a different note, I have been recently proposed to look into TLT expecting rates to go down with this long dated call option TLT US 01/16/26 C95. I know you said in the past you are betting for TLT to be in a range. TLT feels like macro porn to me and I feel sometimes emotional when thinking about it as being right or wrong feel more rewarding intellectually than just betting on SP500 being up or down, because it has the upward drift. At first sight, I would say that TLT option makes sense. But if the framework you have been discussing is correct, despite some small reduction in deficit impulse next year, rates might remain higher for longer, recession will not be allowed to happen and that TLT trade can be just a waste of time of make you little money if any.
Despite the extremely imbalanced investor allocation to bonds, it is in my opinion more likely than not that TLT has positive forward returns from here. But I do indeed believe that stocks will benefit from that more. In the long run, TLT and SPX typically have a similar trajectory, both in return and in volatility, but for now SPX is way more attractive in my view. But I am just one guy with an opinion. I am wrong more often than I'd like haha.
Thanks! Wow, lots to discuss. On the analogy of the Government being like a corporation (Apple), I see that issuing more Treasury bonds (Apple shares) dilutes holders of currency in a similar way that new share offering dilute Apple shareholders. So inflation is in fact dilution. What about incentives? Apple incentive is to make a profit, but the Government is on purpose making a loss (deficit = operating loss = revenue < expenses). But making a loss per se cannot be the incentive. How to make sure Government has the right incentives? Not sure this has an answer.
That's indeed the question. I do have sympathy with Austrian economics in that regard as it argues that allowing the market to puke out excesses is important to avoid bubbles. If investors can always be certain that the deflation phantom will be fought with deficit spending they might become complacent. So for me MMT's ideas are primarily a tool to understand what is happening, not what should be happening. I feel like deficit spending as a liquidity driver is insufficiently understood by most as they tend to focus on the perceived risks that come with it. Eventually it will be understood, that might be the time to reduce risk in the portfolio. I am also entertaining the scenario right now that we will see a rebound in tax receipts that will shrink the deficit.
#2 what is "deficit spending"? It is nonsense. You cannot spend a deficit. You cannot spend by having a deficit, nor by not having a deficit. Governments running MMT systems (most of them) spend in one and only one way, by instructing their central bank to mark up bank accounts, using a computer. No deficit is involved.
The government surplus/deficit is an accounting residual you only know at the end of an accounting period. If full employment has been achieved no one should care what the number is, positive or negative. That they *do* care is a cause of massive economic misery for the poor.
MMT is for me first and foremost a tool to understand what is happening and what will likely happen. I don't view it as a policy tool. Therefore, from my perspective, a government cannot run an MMT system. It just conducts a certain economic policy and MMT can help understand the consequences.
Needs a bit of editing: e.g, #1
"It postulates that all economic policy can be conducted with deficit spending. "
not really. You've got to drive demand for the 'otherwise worthless' currency, so at an absolute bare minimum MMT tells you you've got to tax or impose fines or something, in the currency only you (Gov) can issue, or lend via agent commercial banks (chartered by the state). So it is Fiscal Policy that achieves monetary economic goals, and no other goals per se (real production is the aim, but via rampant corruption and rentiers not always realised).
Wow this is an amazing piece on MMT. I’m working on a MMT primer for my substack but i think i’ll scrap it 😂 You did an amazing job!
Thank you so much, I'm glad you enjoyed it! I think MMT offers a fascinating view if we remove political capture and instead use it to understand what is happening and what will happen (as opposed to what should happen).
On a different note, I have been recently proposed to look into TLT expecting rates to go down with this long dated call option TLT US 01/16/26 C95. I know you said in the past you are betting for TLT to be in a range. TLT feels like macro porn to me and I feel sometimes emotional when thinking about it as being right or wrong feel more rewarding intellectually than just betting on SP500 being up or down, because it has the upward drift. At first sight, I would say that TLT option makes sense. But if the framework you have been discussing is correct, despite some small reduction in deficit impulse next year, rates might remain higher for longer, recession will not be allowed to happen and that TLT trade can be just a waste of time of make you little money if any.
Despite the extremely imbalanced investor allocation to bonds, it is in my opinion more likely than not that TLT has positive forward returns from here. But I do indeed believe that stocks will benefit from that more. In the long run, TLT and SPX typically have a similar trajectory, both in return and in volatility, but for now SPX is way more attractive in my view. But I am just one guy with an opinion. I am wrong more often than I'd like haha.
Thanks! Wow, lots to discuss. On the analogy of the Government being like a corporation (Apple), I see that issuing more Treasury bonds (Apple shares) dilutes holders of currency in a similar way that new share offering dilute Apple shareholders. So inflation is in fact dilution. What about incentives? Apple incentive is to make a profit, but the Government is on purpose making a loss (deficit = operating loss = revenue < expenses). But making a loss per se cannot be the incentive. How to make sure Government has the right incentives? Not sure this has an answer.
That's indeed the question. I do have sympathy with Austrian economics in that regard as it argues that allowing the market to puke out excesses is important to avoid bubbles. If investors can always be certain that the deflation phantom will be fought with deficit spending they might become complacent. So for me MMT's ideas are primarily a tool to understand what is happening, not what should be happening. I feel like deficit spending as a liquidity driver is insufficiently understood by most as they tend to focus on the perceived risks that come with it. Eventually it will be understood, that might be the time to reduce risk in the portfolio. I am also entertaining the scenario right now that we will see a rebound in tax receipts that will shrink the deficit.