The Modern Monetary Theory Could Trigger a Rome-Style Collapse

By , Associate Editor, Money Morning@DavidGZeiler

The biggest sticking point to implementing the sort of large-scale social programs championed by American progressives has always been finding the billions, or in some cases trillions, of dollars to pay for it.

Until now.

The left wing of the Democratic Party has seized upon a convenient solution to this age-old conundrum: Modern Monetary Theory, or MMT for short.

In particular, MMT has drawn the interest of Democrats backing the ambitious Green New Deal.

Rep. Alexandria Ocasio-Cortez (D-NY), a leading proponent of the Green New Deal, told Business Insider in January that ideas like MMT need to be "a larger part of our conversation."

The Green New Deal encompasses a variety of progressive policy proposals, including universal healthcare, a job for anyone who wants one, free college, and a conversion to all renewable energy within 10 years (which includes retrofitting every building in America to be carbon-neutral).

But such programs carry a very steep price tag...

Only MMT Can Pay for the Green New Deal

The American Action Forum has estimated the Green New Deal would cost between $51.1 trillion and $93 trillion if implemented over the next 10 years. Averaging the AAF's numbers puts the best-guess estimate at about $72 trillion.

That's $7.2 trillion of fresh government spending per year - a 156% increase over the current federal budget of $4.6 trillion.

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Such a cost would seem out of reach, and yet MMT says we can do it...

How? Simple. The government can just create as much money as it needs to pay for whatever it wants.

And it's technically true. The United States, as can any sovereign nation with a central bank (in our case, the Federal Reserve) can indeed create as many dollars as it wants.

The new twist that MMT brings is the claim that a sovereign government can print virtually limitless amounts of money without consequences.

Needless to say, both history and most economists disagree...

"Modern Monetary Theory Is a Joke"

"The suddenly simple answer to funding the Green New Deal, Medicare-for-all, free college, and two Teslas in every garage making the rounds as Modern Monetary Theory is a joke," said Money Morning Capital Wave Strategist Shah Gilani. "Spending trillions of dollars and printing it to pay for programs is both dangerous and stupid."

Even many liberal-minded economists think MMT is nutty.

Larry Summers, who served as President Bill Clinton's Treasury secretary as well as an adviser to President Barack Obama, used the word "fallacious" to describe MMT in a March 4 Washington Post op-ed piece.

"A valid idea - that traditional fiscal-policy taboos need to be rethought in an era of low real interest rates - has been stretched by fringe economists into ludicrous claims that massive spending on job guarantees can be financed by central banks without any burden on the economy," Summers wrote.

Even noted Keynesian Paul Krugman has denounced MMT. He's gotten into a public debate with the person who many consider the leading expert on MMT theory, Stony Brook University economist Stephanie Kelton.

"It becomes clear that any attempt to extract too much from seigniorage [central bank money printing] - more than a few percent of GDP, probably - leads to an infinite upward spiral in inflation," Krugman wrote in his New York Times column.

And yet the idea of MMT continues to thrive in the progressive wing of the Democratic Party. Of course, with Republicans controlling the White House and Senate, MMT has no chance of getting implemented anytime soon.

But if Democrats can gain control of both chambers of Congress as well as the White House in 2020 - and with the party captivated by brash young socialists like Ocasio-Cortez - MMT could flip quickly from a fringe idea to a "bold" new economic policy.

And while AOC can't run for president in 2020, several of the Democrats who are running are far enough to the left to at least be sympathetic to MMT. That list includes such candidates as Sen. Bernie Sanders (I-VT), Sen. Elizabeth Warren (D-MA), and New York entrepreneur Andrew Yang.

MMT proponent Kelton, who served as an adviser to Sanders' 2016 campaign, revealed to CNBC in March that she is working with at least one of the 2020 Democratic presidential candidates (she stayed mum on who).

It's not hard to see why MMT would appeal to progressive politicians, since it promises to fund at least part of their otherwise prohibitively expensive proposals.

But if they actually try it, the good times will be short-lived...

Using Modern Monetary Theory Would End in Disaster

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The first question we need to ask about MMT is why, if this is such a brilliant idea, haven't governments tried it already?

The thing is... they have.

History is littered with examples of the economic calamity that befell nations that resorted to money printing to pay for things.

Starting with Ancient Rome.

Near the empire's peak in 60 AD, the Emperor Nero started debasing the Roman denarius by reducing its silver content from 100% to 90%. This allowed Rome to mint more coins at the same face value to pay for new public works projects and raise the pay of Rome's soldiers.

Subsequent emperors continued the practice whenever the empire needed more money than was available. Which was often.

By about the year 200, the denarius contained only 50% silver. Meanwhile, inflation took hold, so more coins were required to buy the same things. The emperors responded by accelerating the debasement.

By the year 265, the denarius contained only 0.05% silver. Prices skyrocketed at an annual rate of 1,000% throughout the empire.

People lost faith in the currency and resorted to the old barter system. The lack of a reliable currency also caused a steep decline in Rome's trade, causing more economic damage. That weakened the empire dramatically and set it up for its ultimate collapse.

In the centuries since, other governments have fallen into the same money-printing trap: France in the early 1790s, Weimar Germany in 1923, Hungary in 1946, Argentina in the 1980s, Zimbabwe from 2007 to 2009.

Like those pushing MMT, they were all certain it would work, even when cooler heads advised against it.

And every instance ended in economic ruin.

Undaunted, the proponents of MMT insist it will be different this time...

MMT Can't Change Economic Reality

The MMT folks say that money printing now won't create inflation because it will simply "take up slack in the economy."

They point to the lack of inflation in the wake of years of stimulus from the 2008 financial crisis. But the economy then actually did have a lot of slack, and the money the government injected into the economy (about $831 billion from the American Recovery and Investment Act and $3.5 trillion from Federal Reserve policies) was far less than the tens of trillions the progressives plan to spend.

No doubt, some deficit spending can be helpful during a recessionary period. But the U.S. economy is pretty healthy at the moment. Unemployment is at a 50-year low, and capacity utilization is nearly 80%. (Economists say inflation becomes a concern when capacity utilization rises to the 82% to 85% range.)

MMT proponents also have suggested that taxes could be raised to stave off inflation if need be. Good luck raising taxes on working people who are already falling behind because of government-caused inflation.

The reality is this: Using MMT to pay for expensive, starry-eyed progressive programs would far exceed any slack even in a recessionary economy - much less a strong one.

Should the progressives gain power and implement MMT by spending trillions of dollars we don't have, inflation will result. And the more money they print, the worse it will be.

It's inescapable.

"Trouble Is Brewing": According to Bloomberg's latest report, America could be heading for an economic disaster that would rival the Great Recession. Billionaire Ray Dalio's hedge fund - Bridgewater Associates - has made a $22 billion bet against the market. And Citibank calls our present situation "eerily reminiscent of the mortgage crisis." To see why we believe some of the richest players in the world are preparing for a market collapse, click here.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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