When I was growing up in the 1980s, no Friday night was complete without an episode of "Fantasy Island."
If you're of a certain age, you remember the runaway ABC hit: Ricardo Montalban as the mysterious "Mr. Roarke" and Hervé Villechaize as his diminutive sidekick "Tattoo."
The white-suited Mr. Roarke would graciously hoist a goblet of white wine and, in a suave Mexican accent, intone "Welcome... to Fantasy Island" to planeloads of arriving tourists - folks who'd forked over mega-bucks in a (usually desperate) bid to make their fantasies come true... with a catch, of course.
It was pure escapism - pretty good TV, too.
If only it had stayed on television...
Turns out, "Fantasy Island" makes for lousy politics, and it's downright terrible for the markets.
Unfortunately, that's what's happening with the "modern monetary theory" craze. It's the favorite "show" of politicos, bond peddlers, traders, pundits, and armchair economists from coast to coast.
I never thought I'd see the day, but here we are. The fact that MMT is gaining traction in our debate speaks to how desperate the folks at the top are in the United States.
Let me show you what's really going on here; you're not likely to get this anywhere else...
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This Is Rock Bottom for a Debt-Drunk Nation
If you were a Hollywood screenwriter, you'd be hard-pressed to come up with a deus ex machina that fits the bill like modern monetary theory (MMT) does. It's the heavenly new theory for dealing with the hellish fact that the United States (like nearly every other major economy) is in debt up to its eyeballs.
MMT's core idea is that any nation that prints its own currency can technically never go broke. Therefore, the theory goes, the United States can run spending deficits almost indefinitely... so long as interests rates and inflation stay low.
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Ahhh! How perfectly wonderful! How simple! How obvious!
Just print more money and spend with impunity; if we need more cash, we can just print it! Abra cadabra, the magical solution for any super-leveraged superpower.
Student loan debt? No problem - just print away!
Need more military spending? Fire up the printing press!
Nationwide opioid crisis getting expensive? No sweat - print away!
Failing roads and collapsing infrastructure? No biggie - print!
Stock market starting to tank? Man the presses!
You get the drift: As per MMT, any national cost or debt can be magically resolved by simply printing more money and ignoring inflation, because according to MMT proponents, inflation (conveniently) never goes up.
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Well, if MMT sounds a little too good to be true, a bit like fantasy... that's because it is.
Funnily enough, there's nothing "modern" at all about MMT. In fact, the French tried it in 1790.
Net result? Well, about 40,000 heads literally rolled right off their shoulders, courtesy of the "National Razor." I've written about this historical lesson in fiscal fantasy-turned-nightmare at some length here...
With populism and demagoguery rising all across the political spectrum, with Trump on the right and folks like Bernie Sanders and Alexandria "AOC" Ocasio-Cortez on the left, it's all too easy to be reminded of Robespierre, Saint-Just, Babeuf, and the revolutionary Terror of 18th-century France.
Naturally, desperate times call for desperate ideas. So it's no surprise that MMT is getting increasing attention from the far left, the media bubbleheads, and a deeply divided and desperate America.
Today, debt-soaked nations like the United States have run out of options. Over the years, we've taxed and we've spent; we've bravely hiked interest rates to 20% to contain inflation á la Paul Volcker; we've deployed trillions of dollars' worth of quantitiative easing.
But still no reported inflation and wage increases to speak of - outside stock prices and Wall Street, that is.
Put bluntly, the Fed has few viable options left in its bag of tricks. If it raises rates, the market tanks. If it taxes, elections are lost. So, sadly, the baton would be handed off from the central bank to the government, in the form of politically driven MMT.
It's sick, it's sad, and it's not going to work. But that doesn't stop wildly unqualified talking heads from boosting it.
Why Dangerous MMT Is Proving Popular
Yes, even former PIMCO economists like Paul McCulley or popular politicians like Alexandria Ocasio-Cortez (who in fact won a national biology prize in high school) still feel qualified to speak of MMT's economic merits.
They argue that low inflation gives the United States free rein to keep printing money. As McCully recently observed: "Last time I checked, the U.S. has missed its inflation target for 10 years running, of which seven or eight were at zero interest rates... Let's look at reality here."
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But it's McCully who's the one who can't see reality. He's never taken a fact- and math-based look at inflation, like you can find here.
As for AOC, I respect her climb from poverty, and her part-time work as a waitress. Her obvious disgust with the wealth inequality and the national embarrassment of our dying and ignored middle class is well-founded.
Like Ocasio-Cortez, I too come from humble origins and worked humble jobs to pay tuition. But unlike Cortez, I studied history and economics and traded in the markets for clients, as opposed to peddling fantasies in exchange for votes.
And like Ocasio-Cortez and McCully (or even PIMCO's other famous alum, Bill Gross), I recognize that when reported inflation is low (or fake) and yields are (for the moment) stapled to the floor, one can at least "theoretically" argue that a nation can print money and go into further debt without much immediate pain.
Indeed, right now, the $15.6 trillion U.S. Treasury market seems to be in the grip of pure fantasy about massive debt levels in practice - about as much as the MMT crowd are in principle.
And as we've seen in Japan, a country can literally send its debt levels to the moon if it forces interest rates (i.e. the cost of that debt) to the floor and lies about inflation.
Bill Gross even says he admires what Japan has done to revive its economy. The former "Bond King," once a vocal critic of post-crisis money printing, now sounds like a near-convert to MMT. Gross suggests the U.S. government could even double its deficit.
But calling Japan a success story is like calling Lance Armstrong a clean athlete.
But as debt-crazy as Japan is, the United States is about to get even crazier, with current and projected debt levels reaching the highest in history:
Despite such insane debt levels, "experts" like Ocasio-Cortez (who know as much about markets as Dr. Seuss does about open-heart surgery) will tell you not to worry. "Deficits don't matter," they smile, "because inflation doesn't exist and rates only go down, never up."
Welcome again... to Fantasy Island.
Unfortunately, history confirms that debt cycles always end painfully - and by "always," I do mean "every damn time."
Even if the Fed continues to lie about inflation and keep rates low, the United States can still go into a low-rate recession that ends in a rising-rate death spiral.
It Will Be Ugly When Fantasy Island Falls
To be sure, it is theoretically possible to print trillions and buy every bond in circulation to keep rates down. And that will work for a little while. But you can't do it without stimulating fatal inflation and its rising rates. Claiming it could be otherwise is the equivalent to thinking one can drink 20 martinis without a hangover.
And so, like Berkshire Hathaway's Warren Buffett or even BlackRock's CEO, Larry Fink, I'll call MMT what it really is: "garbage."
As Fink recently - and correctly - said in a Bloomberg interview: "I'm a big believer that deficits do matter. I'm a big believer that deficits are going to be driving interest rates much higher and it could drive them to an unsustainable level."
But for now, at least, in this second decade we've wasted rolling around in cheap money on Fantasy Island, there's been plenty of borrowing - primarily from governments. Plenty of fantasy fun and faith in fantasy solutions.
On Fantasy Island, where money-printing and can-kicking are popular national pastimes, sobriety and a clear-eyed view of math, economics, and history aren't welcome. The politicos of all stripes and bond peddlers who've made out like bandits in a credit bubble will scream all the louder when reality threatens to intrude.
But ultimately, of course, investors are much better served by facts, numbers, and blunt speaking. In fact, investors who listen will likely be among the only ones left standing when Fantasy Island is flattened by Category 5 Hurricane Reality.
In the interim, and as always, stay informed, honor your common sense, and seek out the facts. If you haven't already, you're invited to go and check out some of my favorite strategies and investments for making money during both a melt-up and a melt-down. Go here and grab the free report; it's not too late to get started.
Your Financial Future Is at Stake (Are You Prepared?)
If you're like most Americans, you've felt a sense of market turmoil ahead. We could be in for another white-knuckle ride... a "Great Reckoning," if you will.
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About the Author
25-year run as a hedge fund portfolio manager, family office chief investment officer, managing director and general counsel. Internationally recognized expert in credit and equity markets as well as macro risk management.