Thursday, January 24, 2019

A Powerful Note on How Destructive Modern Monetary Theory (MMT) Is

Dr. Joe Salerno
Modern Monetary Theory is picking up steam amongst Democrats, especially the extreme left. An MMT economist,  Stephanie Kelton, was chief economist on the U.S. Senate Budget Committee 2015 minority party staff and an economic advisor to Bernie Sanders' 2016 presidential campaign.

She was named one of Politico's 50 "thinkers, doers and visionaries transforming American politics in 2016."

She is now more popular than ever.

In an interview earlier this month with Business Insider, the Marxist-Leninist congresswoman from the Bronx, Alexandria Ocasio-Cortez, said modern monetary theory should "absolutely" be a part of our conversation about the economy.

But it is an extremely dangerous theory. In a Note, Dr. Joe Salerno has put out a brief commentary on the extremely negative consequences of MMT if it were to be adopted as policy.

Salerno's comment is only two paragraphs long but it gets to the severe problems with MMT. His critique should be understood and memorized. Whenever MMT is raised, it must be attacked by the points made by Salerno.-RW 

As I read through articles on MMT (Modern Monetary Theory) this morning, it strikes me that not only is it a recipe for massive inflation but it will also cause chronic depression and capital consumption from the get-go. The newly printed money will not cause an initial economy-wide boom because it will not be injected through credit markets driving down interest rates and stimulating investment.  Rather it will go directly into the Treasury,  allowing the government to immediately increase its spending on welfare programs, guaranteed-job programs, the "Green New Deal," and wasted "investment in infrastructure."  It will thus siphon off labor and other resources  from productive investment in the structure of production and forcibly increase the consumption/saving ratio and hence overall time preferences, reducing genuine savings and capital accumulation. 
Furthermore, as price inflation begins to rear its head, the increase in taxation aimed at "sopping up excess purchasing power" by the private sector, will further increase the public's time preferences, reduce voluntary saving and eventually cause capital consumption.  Everyone will have jobs and rising money incomes and there will be a boom for government contractors so it will not look like a typical depression, but living standards will progressively decline.  Also, the private sector will progressively shrink relative to the State sector because BOTH the fiscal inflation AND the later increase in taxes to offset its inflationary price effects will divert resources to the State sector.  And of course the recurring increases in taxes will not arrest  the inflation, because the government will continue to run fiscal deficits by financing its ever increasing spending with new money. This would be the worst of both worlds: massive inflation proceeding hand in hand with chronic depression. (The above originally appeared at 
(ht Jeff Deist) 


  1. Mark Jeftovic has an excellent new article on the horrors of MMT at Zero Hedge. Towards the end, he focuses on what it would mean for the government to try and "soak up" the extra liquidity during the inevitable inflationary phase:

    Were an MMT system inevitably go awry, the outward manifestation would be of course manifest as inflation, so central planners would of course try to get ahead of it by draining more liquidity, faster, by increasing taxes. As this fed on itself and accelerated, the populace, as if being swept up in a hyperinflation isn’t bad enough, would be sandwiched between hyperinflation and hypertaxation!.

    Think of an MMT crisis as an economic black hole sucking all value from further and further future generations into a gravitational vortex of the present moment, where all value collapses in on itself and disappears forever.

    People seem on board with OAC’s 70% marginal tax rate on highest earners but in a failing MMT regime the hypertaxation effect would occur through the highest marginal tax rate threshold coming down.

    People don’t mind Dwayne Johnson paying 70% on his income over 10M, but how will they feel when they’re paying 70% on any income over 300,000? 100,000? 40,000? How about an 80% tax rate on income over $20,000/year and a loaf of bread costs $250 today and $3,500 in a week? (When your marginal tax rate is then 92% on all income over $1,000/minute?)
    That’s what a nightmare MMT scenario looks like. At least in Venezuela they’re only getting squeezed on one side of the vice, and their central planners are trying to go the other direction than MMT-ers, attempting to tie their currency to something tangible (failure of execution however, is hampering this).

    Compared to what I see as the inevitable “dual death spirals of MMT”, letting all those banksters fry in 2008 looks a lot more palatable in retrospect. David Stockman’s Great Deformation shows how the economy would have fully recovered by 2010 or 2011 instead of being where we are now: trapped at the Zero bound and headed toward democratic socialism and MMT.

  2. My thoughts on the Jeftovic piece:

    1. The “taxing it back to cure inflation” part was excellent. What a nightmare. But what is the actual likelihood that your elected representatives are going to vote to raise taxes on the populace during an inflationary crisis as is described?

    2. As Mises pointed out in 1912, the entire theory is “acatallactic” and thus does not deal at all with exchange or pricing. Therefore, there would be no honest prices and the regime would be fatally afflicted with the socialist calculation problem.

    3. The entire plan is nothing but a massive Cantillon Effect. The wealth purchased by the government with new money is actually extracted surreptitiously from the wealth of average people who do not get the new money first. The illusory free lunch does not exist.

    4. The MMTers talk more of the government just spending new money into existence. There’s no need for the muss and fuss of borrowing or government debt. The excess of spending new funny money over tax receipts is the “deficit”.

    5. The market does not fail and does not lead to mass unemployment. The problem the MMTers are trying to solve does not exist but for the existence of their beloved fiat funny money system.

    6. The MMTers howl about “democracy”. If there is a consensus to do something, just do it. There’s no need for government force. If there is a democrat consensus, that means that at least a majority of voters want to pay taxes to do something. MMT is implicitly based upon there being no consensus of the first two types.

    7. Therefore, the public will not understand what is happening when things inevitably go wrong and there will be amble opportunity for politicians to scapegoat the easiest targets. All the while, the system will allow those in charge to essentially control the nation’s entire economy as the impoverished public desperately seeks food and shelter in an oppressive Venezuelan-like hyper-inflationary environment.

  3. MMTers deserve some credit. They've uncovered the mechanism that creates and perpetuates the Hell envisioned by Lewis in The Great Divorce.