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Saturday, October 19, 2019
HomeMarket CommentaryEveryone wants helicopter money. Don’t you? (Part II of Mad Cats, Free Dollars & Policy Fat Cats)

Everyone wants helicopter money. Don’t you? (Part II of Mad Cats, Free Dollars & Policy Fat Cats)

We finished part 1 of Mad Cats, Free Dollars & Policy Fat Cats with this quote that shows the core ideological tenet of so called Modern Monetary Theory: “Money is an infinite public reserve that has been choked off at its source. Unlike money’s private users, moreover, only government wields the capacity to furnish all persons with meaningful employment and sufficient access to the common store of wealth.”

This view is actually not a very modern view, but we will spare readers the history of this idea. Let’s examine why this idea is entertained by the society at large right now. There are two reasons for that.

Reason #1

We already discussed in part of 1 of this article HERE. Abstract logical play with definitions that makes it very hard to argue, since MMT sort of invents new marketing terms like “Net Private Saving” (again, more in part 1). We showed the absurdity of “Net Private Saving” in part 1. But if one accepts MMT’s terminology, it is internally consistent and logical. Even the usually eloquent proponent of sound money James Rickards of the Daily Reckoning had to admit:

“When I first encountered these arguments, I knew they weren’t right. Both my gut feeling and my more rigorous approach to my own theory of money told me MMT was wrong. But I must admit, their arguments were more difficult to answer than I expected. I had a tough time uncovering the logical flaws.

Their points are internally consistent, and they did have a point. After all, the Fed did create all that money and it didn’t produce a calamity. Who’s to say they couldn’t do a lot more of it?”

James Rickards famously warned of dangers of hyperinflation in 2009 when Fed started QE and he turnout to be wrong. I myself have forecast inflation in 2010 as a result of Fed’s policies and was criticized, because it did not happen, as I predicted.

Reason #2

And this leads to Reason #2 that MMT is gaining traction. It is the supposed success of Fed’s QE policies. Federal Reserve created trillions of dollars to ‘fight the crisis’. Inflation did not happen. So why couldn’t we create trillions more to give everyone some money? People’s QE!

And herein lies a paradox. Federal Reserve represented by Jerome Powell may argue against MMT, but he has no leg to stand on. Was it not Ben Bernanke who famously outlined a thought experiment of ‘helicopter money’ and in fact implemented it? And MMT is nothing if not helicopter money at its core. So, MMT is really the creation of the Fed. If QE works, why wouldn’t MMT work? QE is for the rich and MMT is for the people, right? Besides, QE created inequality and we need to fix that.

And this is where the strength of the MMT lies. People look at the widening inequality gap that is fueled by the Federal Reserve money creation, and ask, why not us? What’s good for the goose is surely good for the gander, is it not? And establishment economists, having long defended Fed’s QE policies, have no answer to this. Actually, they do have the answer, but it cannot be uttered publicly, so they will bumble through nonsense arguments thereby further emboldening MMT proponents. The real answer that they would like to give is as follows:

“Yes, we have printed trillions of dollars and gave it to the banks. Banks passed it onto the corporations who have massively bought back stock. Banks passed it onto the ultra-wealthy who invested in assets that generate high return. But inflation did not happen precisely because banks channeled all of that money into financial assets. And that is where they largely stayed. So, there was inflation, but inflation that is good for asset holders. If we print the money for the rest of the people, they will not keep it parked in financial assets, such as stocks, bonds and houses. They will actually use it fuel consumption. Wealthy people largely did not need to take their gains from the QE fueled investments to fund consumption, their consumption was funded already. But Modern Monetary Theory will put the money in the hands of people who will consume and inflation will pick up in a big way, until it is far too late to do anything about it. Certainly fanciful scheme concocted by the MMT proponents (who hardly believe in it themselves) – that Congress will raise taxes to fight inflation is ludicrous from start to finish (as we discussed in Part 1).”

But the Fed and establishment economists cannot utter that factually correct explanation. They cannot admit that MMT was essentially at the core of what they did, except it was MMT targeted at a fraction of the population, called by a different name and defended with another set of twisted logical assumptions.

And that is why MMT appears stronger than it is and will likely be tried over the next few years, regardless of who is in the White House or Congress. The results will be good at first, but devastating in the long run. Not that current Fed policies will not get us there, but MMT will supercharge the path to the financial ruin.

The only way to fight MMT is to stop any kind of helicopter money and come back to the free markets. Take away Fed’s ability to stimulate and over-stimulated an already hot financial market, for that is what they are doing. The short term results of getting off monetary heroin are going to be painful, but in the longer run prosperity and capital formation can return to the global economy.

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