Today I want to discuss modern monetary theory an offshoot of Keynesian economics. In this post, we will discuss what it is and why it became popular, and why its impact is going to be devastating for the US economy. Most importantly, we’re going to discuss why its demise will get us back to sound money principles in the US and also boost silver and gold prices.
Before diving into the details of Keynesian economics, it’s important to point out I believe that when this school of economic thought goes out of vogue or becomes less popular, we are going to see a significant spike in precious metal prices like gold and silver. In sum, it will be a huge shift back to sound money. Perhaps not all the way but a big step.
What will make this happen?
This will be when confidence in the US dollar erodes, and the US government is forced to return to sound money principles. It’s important to note we could have an economic crisis, and with the Keynesians advising the government, they will more than likely advocate for just printing more money. In time though, if this occurs, we will get rapid inflation and eventually the people will lose faith in the dollar.
Shifting gears a bit, I want to talk about why MMT is just so dangerous.
And I’m going to use the terms MMT and Keynesian economics interchangeably because most of the concepts between MMT and Keynesian economics are pretty much the same.
In sum what MMT says, that is very dangerous in my opinion, is that government spending and this is fiscal, not the Fed, should not be constrained by fear of rising debt. Those who support Modern Monetary Theory say government deficits and debts don’t matter.
Before we dive into MMT more, it’s important to point out that unlike many hard sciences, much of economics has many unsolvable questions. Because of this, we get theories and lots of theories. For example, if an economist believes that a consumption tax will boost tax revenue more than an income tax, there’s no way to really test it. As a result, different schools of economic thought have arose in economics. Keynesian is one of the schools of thought.
How did the Keynesians become so powerful?
Founded by British economist John Maynerd Keynes, the school of thought, emphasizes controlling the demand side of the economy. This of course is through govt spending to put capital in the economy.
Keynesian Economics rose in popularity during the great depression. This is because FDR implemented the policies, and it has been widely said Keynesian Economics got us out of the Great Depression. This is debatable, but we’ve seen Keynesian principles, such as government spending, applied in other crises such as the 07-08 financial crises and the covid stimulus checks.
Now, in my opinion, there’s much wrong with this school of thought, but let’s examine why it is wrong.
What is Keynesian Economics?
According to Keynesian economics, they believe in the event of an adverse economic event like a recession, government intervention should occur. They advocate for things like additional spending when economic activity declines. They also support direct payments to people and of course actions from the Central Bank like cutting interest rates. Even worse, Keynesians state since the government is the issuer of money, unlike households, government deficits and debts don’t matter.
There’s been numerous Keynesians touting this for years. Paul Krugman, who writes for the New York Times is one of the leading proponents that deficits and debts don’t matter. Krugman emphasizes the money multiplier effect of government spending, meaning if the government spends money through a project, that same money will propel the economy to grow even more than what the government spent. This logic is severely flawed and assumes the government knows how to efficiently spend money and invest in profitable projects.
Krugman also argues that much of the debt problem is political not economic. I agree that it is certainly a political problem, but the issue is that Economists like Paul are advising the White House and Congress that they can spend without recourse.
Many Keynesians also believe that as long as economic Growth outpaces the debt, we have no problem. However, this problem is flawed too. The last few years our economy has been considered strong by some measures, what will happen when unemployment increases, or we are pulled into a major conflict?
In January 2024, NPR talked with Stony Brook Professor Stephanie Kelton about the national debt. Professor Kelton wrote a book on the subject titled “The Deficit Myth”. I haven’t read it or plan on it but have read several interviews with her and her thoughts.
Professor Kelton stated that many compare the national debt to household debt and notes this is a mistake. She says the government is the issuer of money and hence the government can never run out it.
And to me, she said the quiet part out loud here.
The problem with this line of thinking is Yes, the government can never run out of money, but that doesn’t mean it can’t devalue everyone’s dollars and cause massive inflation.
Unfortunately, in these articles no one bothered to ask her the question “If the government can just spend into oblivion won’t that devalue the dollar”?
The Inflation Argument
Keynesians might try and argue that inflation can be controlled through taxation.
However, Taxation hurts productivity and hurts small businesses and entrepreneurship because they always get the brunt of it, and that drives economic growth. Economic growth drives revenue as everyone’s standard of living increases. With higher economic growth, and a higher GDP, the govt naturally will collect more in taxes because people will be spending more. So, the key here is that productivity ultimately drives higher govt revenue, not taxes. If people are struggling, then taxing them is not going to matter.
Inflation is certainly a key concern for many like me. Modern Monetary theorists dominate the mainstream media, academia and government. As the national debt continues to rise, this blatant disregard for debt and deficits, in my opinion, puts us in a dangerous position.
As stated earlier much of economics is theory. We don’t know much of what is going to happen. Still, it seems reckless that the government is able to keep spending and spending with no repercussions.
The National Debt
My biggest gripe with Keynesian Economics is their disregard for deficits and debts. Much of their believe stems from the fact that we have been able to run deficits for decades and the economy is grown. Still, it’s important to point out that these deficits and are debt have gotten bigger and bigger.
Much what we have been able to get away from has to do with the fact we are world’s reserve currency, and that debt is not being used in any sort of efficient manner.
Even worse is that this type of mentality can lead to an economic catastrophe. If and when US citizens lose confidence in the dollar, it will simply be catastrophic for everyone in the US.
Read How loss of confidence caused hyperinflation in Zimbabwe
It’s similar to an addict who is trying to get off a drug. You don’t just keep giving them the drug. If you do, then down the road they are going to be even worse.
Quantitative Easing
The Fed’s balance sheet has ballooned since 2020. This really began in 2007-2008 though. Back then, the Fed had cut interest rates to zero but needed to stimulate the economy further. That’s when the Fed began its quantitative easing program or asset purchase program. Quantitative easing or QE is generally when the Fed expands its balance sheet. In 2008, in order to expand its balance sheet, the Fed bought Treasuries and Mortgage-backed securities to help stimulate the economy. In 2020, the balance sheet spiked even more significantly to 8 trillion as the Fed increased bond buying and conducted reverse repo operations. It’s come back down to around 7.2 trillion today.
The key takeaway though, is we saw newer programs needed to control things in 2008. We saw reverse repos spike in 2020.
Could the United States have a Debt Jubilee? – read here
This raises the question how much can the Fed’s balance sheet handle?
I’ll look at this in depth in a future article, but simply stated, there has to be bounds or limits. This is because they allow the bonds to roll off the balance sheet. Remember in doing that, many of these bonds, when they reach maturity even if undervalued don’t realize a loss. Most of their treasuries were financed when interest rates were low, and since bond price and bond yields move inversely, if they were forced to sell and mark to market, there could be big losses.
Thanks for your time and let me know any comments!
