22 Nov A QUIET DAY…MMT WAS A TOPIC OF CONVERSATION BEHIND THE SCENES
As widely noted the fiscal deficit is over $1 trillion for the first time since the financial crisis. The total debt is in excess of $22 trillion and the markets are suggesting that such amounts are not of any significance.
All are convinced of the Federal Reserve’s inflation fighting prowess as the 10 year is yielding around 1.80% down from about 3.25% last year.
Are the markets wrong believing exponentially growing debt levels do not pose any danger to the economy?
Several leading Democratic presidential candidates are advocating even greater spending to pay for progressive ideas such as the Green New Deal and Medicare For All under the dubious philosophy of Modern Monetary Theory (MMT).
MMT theorists believe governments can spend exponentially as long they are borrowing in their own currency. In other words the government can print money to pay for aggressive social legislation and such will not cause inflation or have any major negative economic effect.
MMTs are relying upon the direction of interest rates of the last 10 years to partially support their argument.
MMTs were largely disregarded and were in the far monetary fringe until nine months ago and the change of power in the House. Today advocates have been invited to testify to Congress about MMT. In a pre-hearing report, the Democratic majority on the Committee stated “interest rates have steadily declined to record lows even as the debt has soared to record highs, thus suggesting further borrowings could be utilized to fund various programs without any ill effects.”
Wow! This is scary.
There are ample examples of the economic disasters of an over leveraged state [and businesses/industries]. Perhaps the most infamous example was the Weimar Republic which literally printed money to pay WWI reparations. As all know reparations was a primary cause of the rise of Hitler and WWII.
Changing topics, as noted above equity markets were quiet amid conflicting signals about the outlook for trade. Oil gained another 3% on supply concerns closing at a 2 month high. Treasuries were down about a point.
Last night the foreign markets were up. London was up 1.18%, Paris up 0.33% and Frankfurt up 0.21% China was down 0.63%, Japan up 0.32% and Hang Sang up 0.48%.
The Dow should open nominally higher as trade is still dominating the headlines. The 10-year is up 5/32 ot yield 1.75%.