Why Modern Monetary Theory (MMT) is Risky in Our Globalized Economy

Joe Biden, Vladimir Putin, Angela Merkel, Xi Jinping and other world leaders. Imagine them standing in a pool of gasoline. Now, Biden has 10 matches, Putin has 5 and so on… it doesn’t matter how many matches they have or who lights the first one, they’ll all burn together.

This concept is called Mutually Assured Destruction (MAD). It’s a doctrine of military strategy that shows the potential outcome of nuclear warfare. An attack and retaliations can devastate all sides.

These analogies lend a hand when trying to explain the global monetary system. Countries have leveraged up in tandem to stay competitive. They have to or they fall behind. And Modern Monetary Theory (MMT) has added fuel to the dangerous situation.

Modern Monetary Theory National Debt

In short, MMT say countries with their own fiat currency – like the U.S. – are not constrained by their tax income and other revenues. Unlike us citizens, the fed can spend without limits. The money taps are open and debt levels are hitting new highs. 

Total public debt in the U.S. has climbed from below $400 billion in 1970 to about $27 trillion today. That’s an increase of 6,650% and to compare, inflation is up less than 600% over the same timeframe. 

Most numbers standalone don’t tell us much. That’s why it’s important to compare them and look at the bigger picture. So, to get an even better understanding, let’s compare total U.S. debt to GDP…

Modern monetary theory has led to an increase in total national debt to GDP from 1970s to 2020

Since the 1970s, it’s climbed from just above 30% to about 136% mid-2020. That’s a wild jump and it looks unprecedented. Although, unlike most sources on this topic, I’ve dived deeper. I’ve pulled data going back close to 100 years. This will give us an even better understanding due to longer credit cycles and other big world events.

Total U.S. Debt to GDP 1920s to 2020 shows big MMT debt runup

Total U.S. debt to GDP came in close to 120% in the 1940s… and can you guess why? … Well, World War 2 was expensive and it messed with the country’s productivity. 

I’m not going to compare one of the world’s deadliest wars – roughly 75 million deaths – to the recent pandemic – about 2.3 million deaths worldwide so far. But nonetheless, you can see the U.S. has surpassed record high debt levels. And this trend will likely continue… 

Janet Yellen, the previous fed chair and now Secretary of the Treasury, has said… 

“While the pandemic is still seriously affecting the economy, we need to continue extraordinary fiscal support… We need support for the economy from both monetary and fiscal policy.” 

There’s no doubt more stimulus will help… Although, at what cost? Will the short-term benefits outweigh the long-term downsides? 

When it comes to individuals borrowing money, they’re borrowing from themselves at a higher future cost. Of course, on occasion that can make sense like buying a house… but more often than not, borrowing money leads to a worse long-term outcome. 

MMT Economic on a Global Scale

MMT is the world’s biggest economic experiment and we don’t know how it will unfold. The secondary impacts are mind boggling to think through. For example, many people that oppose MMT fail to factor in currency competition and global trade. 

As I mentioned before, countries have to leverage up together to stay competitive. It’s a dangerous game and they’re kicking the can down the road. 

To make the situation a little riskier, the U.S. and other countries own some of each other’s debt. As a result, if one country defaults, it could send huge shockwaves throughout the world. It could lead to a big credit contraction. 

To put this in perspective, I’ll leave you with an old adage… if you borrow $1,000 from a bank and can’t pay it back, you have a problem. But if you borrow a $1 billion from the bank and can’t pay it back, the bank has a problem.

Invest mindfully,

Brian Kehm

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