Charles Goodhart, a brilliant banking historian and professor at the London School of Economics, recently said that “I have never seen a theory so criticized, in theory, and actually followed in practice.” He was talking about MMT, Modern Monetary Theory.
Some of last year’s pandemic measures, and even more so the latest $1.9 trillion deficit-funded package, look suspiciously like an MMT moment: fiscal policy is willing to shower money on anything and everything they like, while everyone else worries about inflation numbers. The Federal Reserve backstops the bond market by buying hundreds of billions worth of bonds every month. Unbelievably large, and largely unprecedented, the Federal government deficit last year (over $3 trillion and on track to rival that this year), has the Treasure wrestling economic control from an otherwise supreme central bank.
In a recent interview on Bloomberg’s Odd Lots podcast, Stephanie Kelton, one of this fringe economic theory’s foremost proponents, responded to co-host Tracy Alloway’s question about what would make her reconsider the MMT position. The answer: “If all these stimulus packages were passed by Congress and the checks somehow bounced.”
What she means, technically, is that the Treasury General Account (TGA) at the Fed could go as negative as Congress wants it to. If it doesn’t, that is if the Fed doesn’t allow the Treasury an overdraft – let alone an unlimited such – MMT’s supposedly objective description of the world is undermined.
What’s revealing about this interchange is that it also undermines the narrative of 2020 and 2021 as an MMT moment; we haven’t had the ultimate test of the theory, and the TGA balance tells us so:......To Read More....
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