Saturday, April 11, 2020

New and Coming Soon


A new short movie produced by The Econ Ideal.

MMT and the Pandemic Panic
The Covid-19 crisis has unleashed Modern Monetary Theory madness.

Printing unlimited fiat money is unsustainable – the Gold Standard was abandoned long ago.

End the Fed need not resemble Animal Farm
Replacing the Federal Reserve system and fiat money with sound money and free markets will require a revolution.

A new short movie produced by The Econ Ideal.

Our unstable markets and economy were not ready for exogenous events. 

A decade of monetary stimulus and the consequences of more.

What can we really believe?

Fueled by a decade of monetary stimulus. 


The Fed is buying corporate debt for U.S. government ownership
The means of production is in peril – communism is not the answer.

Regulations and financial repression still cripple our economy
Main street investors and small business incubators have an uphill battle.

Freedom of Opportunity and New Markets
“There is no alternative” should not be the rule. 


A new short movie produced by The Econ Ideal:

Only government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless. -Milton Friedman

Sound Money and the Threat of Modern Monetary Theory

Saturday, April 4, 2020

MMT and the Pandemic Panic

The Covid-19 crisis has unleashed Modern Monetary Theory madness.

History will tell whether the economic shutdown response by the U.S. and other nations to the Covid-19 pandemic was the right one. The crisis has given Modern Monetary Theory (MMT) and its disciples, MMT’ers, a platform to call for unlimited stimulus and debt monetization, now even coupled with an emotional plea for “social justice” [1]. This is ironic, since the inflation caused by fiat money printing is highly regressive, the opposite of social justice if that justice is meant to aid economic participants of low and moderate income. “A quick fix” by dropping massive amounts of cash has unintended consequences. There really is no substitute for a fully functioning economy and markets. MMT’ers have used the opportunity to flood the airwaves and opinion pieces worldwide with false information about the sustainability of MMT [2]. 

Credit markets have once again wavered as the Fed has struggled with its Open Market Operations to stabilize the Treasury market during the month of March 2020 and bring down interest rates so that they are in line with the Fed Funds Rate, reduced yet again to 0-0.25%. Zero/negative interest rate policy (ZIRP) is here for the foreseeable future, and that means financial repression for bond and cash holders. We already know that ZIRP has an unintended consequence of slowing the growth of capital investment and loans [3], and the growth coming out of this recession will be as anemic as the last one. 

It is not just ZIRP as far as the eye can see that has me worried. The Fed’s response [1] has for the first time included the purchase of corporate debt, including junk. The next step is the Fed’s outright purchasing equities, just right around the corner, particularly if the equity markets continue to decline from the already 25-30% drop of the February 2020 all-time highs. How long will it take the Fed to load up its balance sheet to the tune of some $23T, the approximate level of the national economy? This smacks of government ownership of the private sector, something common to communist countries, not a republic built on the principles in our declaration of independence and constitution. 

The MMT’ers are finally in charge here, with strong influence over the Fed and Treasury. This is a national security issue, one that will only be addressed once the consequences become acutely felt by so many people that a revolution against the movement will ensue. What will it take: a major currency crisis, knocking our reserve status away; hyperinflation, causing a regressive depression; interest rate shocks, whereby rates sharply move higher, causing yet more financial instability and recession. 


Modern monetary theorists are flooding the system with myths

Printing unlimited fiat money is unsustainable – the Gold Standard was abandoned long ago

Leading up to and shortly following the Federal Reserve’s recent announcement for the purchase of Treasuries, MBS and other assets in “the amounts needed to support smooth market functioning and effective transmission of monetary policy” [1], we saw a plethora of Modern Monetary Theorists (“MMTers”) appear in the financial media with calls for unlimited quantitative easing (QE) from the Fed and unlimited stimulus (“Helicopter Money”) from the Treasury [2,3]. The same calls abounded by the way for the U.K.’s Bank of England and Exchequer. 

Let me make this clear: Printing unlimited fiat money through “asset” (or distressed debt) purchases or outright helicopter money drops into the economy is not sustainable. There are all sorts of end consequences: inflation/hyperinflation, reserve currency damage, otherwise failed zombie companies and distressed debt essentially owned by the government (taxpayer), moral hazard, lemon socialism. 

Deflation need not apply here – I’ve heard enough false and erroneous arguments that boil down to “if we don’t flood the system with money (liquidity), we will get a massive deflationary depression like that of the 1930s Great Depression or the supposedly ongoing post 1990 deflationary recession of Japan”. Likewise, we hear that the Fed’s policy response of zero interest rates is needed indefinitely to avoid a depression. And finally, MMT’ers are using this crisis to claim that sound money and free markets. e.g. monetary standards and unmanipulated markets, are a failed experiment of the past. These are tired arguments that deserve to be killed outright, so here goes. 

Deflation during 1930s Great Depression, and other Great Recessions

The deflation during the early 1930s Great Depression was primarily caused by an overwhelming use of fractional reserve banking to leverage deposits for loans to businesses that were insolvent and eventually failed, exacerbated by several periods of bank runs (panics) by depositors. Even the Fed admits this in one of its policy papers [4], though not quite in my direct terms here. The Fed apologetically writes that it should have then “flooded the economy with additional liquidity to stop consumer prices from falling”, with “liquidity” defined as money injected into the system “by purchasing Treasury securities, which increases bank reserves and, all else equal, lowers nominal interest rates.” 

The problem here is that the deflation, however deep, acute and transient, was a result of an unstable fractional reserve banking system to begin with. Yet this fundamentally unstable model has perpetuated in multiple forms throughout the last century, causing Japan’s Great Recession post 1990 and the U.S. Great Recession in 2008.

Central bank policy makers in Japan (the Bank of Japan, BoJ) responded by buying up massive amounts of bad debt of essentially every type, including its own government debt, resulting in a $5T balance sheet that has exceeded the national economy [5] and persistently negative interest rates. The BoJ didn’t just buy bad debt that will sit on its books in perpetuity, it also bought equities. Japan hasn’t suffered from asset and various consumer price deflation in years – the official inflation numbers reported are understated like they are here in the U.S. What Japan suffers from is a policy response that has caused persistent inflation combined with slow growth, the latter a result of negative interest rates. 

The Fed in 2008 corrected its apologetic actions from the Great Depression by applying massive monetary stimulus injections into the system, through QE and other “liquidity” programs [6] that included bailouts to distressed financial institutions. Like the BoJ, the Fed bought massive amounts of bad debt, notably mortgage backed securities (MBS), so much so that the federal government became the primary participant and guarantor in the mortgage market. Put another way: The U.S. government has nationalized the mortgage market, following a failed model based on the fundamentals of fractional reserve banking. Like the BoJ, the Fed continued to buy up bad debt via several rounds of QE, for years following 2008, swelling its balance sheet to over $4T. Meanwhile, the Fed Funds Rate had been driven to near zero, asset and consumer price inflation in various categories soared, yet economic growth has been anemic, in part due to negative real interest rates and the continued interventions to prop up a fundamentally unstable system. 

Sound Money

MMT’ers routinely make the argument that market failures and depressions of the past were caused by tight monetary policy, and notably monetary standards such as the Gold Standard. MMT states that monetarily sovereign countries (countries that issue fiat money, or inconvertible paper money made legal tender by government decree/monopoly) are not constrained by revenues in issuing debt (spending). So far, we’ve seen Japan and the U.S. start to follow this path, with the BoJ and the Fed essentially acting as hedge funds to enable MMT. China, who surpassed Japan in 2018 as the second highest debtor nation [7], has caught on to this game. How sustainable is this, and are MMT’ers right about sound money and monetary standards, such as the Gold Standard?

First, the U.S. abandoned the Gold Standard long ago – well before the 1971 Bretton Woods conference where the U.S. unilaterally terminated convertibility of the U.S. dollar to gold, officially marking the dollar a fiat currency. The first notable break with the Gold Standard goes back to the Civil War in 1862, with the government taking on war debt it could not pay for. Greenbacks were fiat money not convertible on demand at a fixed rate into specie. After the war, it took some 15 years to return to a Gold Standard. Credit and fractional reserve banking gained substantial traction in the U.S. after 1900, and the first major financial crisis in 1907, the 1907 Banker’s Panic, was caused by the unstable fundamentals of fractional reserve banking. Having tired of bailing out the banking system, J.P. Morgan helped push for the creation of a Federal Reserve banking system, which could act as a “lender of last resort”, but also facilitate credit markets, including stable management of the Treasury market. The 1913 Federal Reserve Act only required 40% gold backing of its demand notes. Banking panics of a similar nature plagued the U.K. in its centuries of monetary history, causing numerous financial crises and deep recessions [8], with a central banking model from the beginning, and a lack of commitment to a true standard. The U.K. moved to abandon the standard completely in 1931, as it coped with immense bank runs and the Bank of England losing massive reserves. FDR took the U.S. off the Gold Standard in 1933 for much the same reason, and when it was “reinstated” in 1934, the convertibility was devalued by 40% (the Gold Reserve Act). A chronology is shown in Fig. 1, a log plot of USD in mg of gold, from 1787 to 2020, courtesy of

The question to ask here is this: Is the problem a Gold Standard (or any sound money standard), or the unstable fundamentals of fractional reserve banking? A Gold Standard, or the instability of too much debt issuance? My answer is the latter. MMT’ers cannot have the unlimited debt growth with the limited monetary standard. So, they did away with the standard. Meanwhile, money supply growth, inflation growth and debt have exploded exponentially. Fig. 2 is a reprint of a graph I made in 2011 [8] succinctly showing this. Also, meanwhile, we live with repeated financial crises and recessions. As the Fed continues to be influenced by MMT and employ the policies that define it, we can expect its balance sheet to swell to the national economy level of $23T and beyond. 

Free markets vs. manipulated markets

We have not had free financial markets in the U.S. and elsewhere for some time. Markets have become both managed and manipulated. When there is a crisis due to too much bad debt, over leverage, asset price inflation, and the underlying instability of fractional reserve banking, the responses have migrated to “liquidity” injections and interest rate policy, the Open Market Operations (OMO) that were strengthened in the 1933 Banking Act. The MMT’ers behind this didn’t foresee the root cause of the problem, so the problem will recur until the system reverts back to a free market. 

MMT’ers have led us to believe that only “managed” markets will truly save us from the next financial crisis. The problem is that they’ve had the reigns of our markets for almost a century, influencing bad policy and promoting instability through unsustainable systems. They cannot show us a time in modern history where free markets have failed, so they promote false claims to support the continuance of manipulated markets. 


Tuesday, March 31, 2020

End the Fed need not resemble Animal Farm

Replacing the Federal Reserve system and fiat money with sound money and free markets will require a revolution.

Many of us who subscribe to the concepts of sound money and free markets (e.g. the Mises school of economics) have long discussed the prospect of ending the Federal Reserve, a technocratic system that fosters manipulated markets and enables massive debt monetization [1,2,3]. It is increasingly clear that this will require a revolution approaching the scale of the original American Revolution. Thomas Jefferson’s experience led him to succinctly comment in 1787: “I hold it that a little rebellion now and then is a good thing, and as necessary in the political world as storms in the physical.”

Revolutions invoke memories of major war. Rebellions often end up quelled, whereby the state of the system may only get worse.  

The whole debate over the Federal Reserve can be turned into Animal Farm. The Fed’s policies are loaded with Moral Hazard – policies that are highly regressive and promote the “some economic participants are more equal” flaw, an injustice to the many other economic participants. 

Many of us would rather see free markets and sound money over manipulated markets/financial repression and fiat money. This translates into a drastic reduction in the government that people have become dependent on. Humans need to put liberty first, and that involves letting go of government fiat and largesse. That doesn’t mean not having a rule of law and the process to enforce it, nor does it mean letting go of national security measures. These laws and measures can protect liberty, but care is needed since their structure can also reduce or remove liberty. Always a cost/benefit. 

I see plenty making the derisive argument “yes, it’s a flawed system, but what do we replace it with? It might be something worse, so let’s not try.” This is a defeatist argument – we need not succumb to the cynical world view of Orwell’s Animal Farm. I’m optimistic that we can replace the current system with a better one, free markets and sound money, liberty and opportunity, but not “equal” and “more equal” authoritarianism, which is what we have a good dose of today. 


Saturday, March 28, 2020

Moral Hazard

A new short movie produced by The Econ Ideal:

Moral Hazard: an economic virus linked to Lemon Socialism, Bailouts, Fiat Money, Easy Monetary Policies, Debt.

We were already in a recession before Covid-19

Our unstable markets and economy were not ready for exogenous events.

It may come as a surprise to many, but the U.S. and several other countries were already in a recession before the late February/early March start of the exponential expansion of Covid-19 cases worldwide, post Wuhan, China. 

This is a controversial subject, but it is important for those serious about econometrics and the dynamics of economics not to shy away from sobering analysis of the data and the deleterious effects of policy from monetary authorities (Central Banks) and governments. 

In recent papers below, I established that the reported numbers for U.S. real GDP were some +4% points over the actual, accounting for an understated PCE deflator, overstated additions to private fixed investment, and seasonal smoothing tricks for defense and government spending, indicating that real GDP is negative, and has been for some 16+ years [1]. 

The source of this economic anemia in the U.S. is multifold, but primarily tied to structural problems of lower productivity and industrial production, and a persistent negative balance of trade. The U.S. has become predominantly a service economy, with significant wage gaps amidst rising under-reported inflation, and a large portion of long-term discouraged workers that are not included in reported unemployment numbers. 

The short story is that the U.S. was on edge for a black swan event to further destabilize its economic status. Equity and bond markets have been propped up by a decade of massive ongoing monetary stimulus provided by the Federal Reserve, so much so that they were ripe for sharp declines, certainly from any exogenous event, such as Covid-19. I’d include in that the oil market shock, a follow-on destabilizing event from expected demand destruction that has commensurately roiled the broader equity and bond markets. Debt loads were and are at an all-time high [2]. 

The last 2-3 weeks of market turmoil have shown us that corporations and governments were not, and are not, prepared to handle such a shock. High debt loads are the culprit of such instability. Companies are not saving for their work force, they are loaded with debt, encouraged by cheap money policies. 

The antidote will become worse than the contagion. Massive monetary easing programs have been announced daily from the Fed and other central banks, but none more so than the U.S. Fed and Treasury. The Federal Reserve buying corporate debt for U.S. government ownership is a radical move that will serve to prop up debt-loaded ailing companies that should otherwise fail. This will weaken our reserve currency over time and will prevent ailing companies from the default that would have happened without the exogenous events. Moral hazard and lemon socialism are thriving. This is regressive for many economic participants that might otherwise have the opportunities to save for retirement and invest in small business ventures.