MMT & and the Fracturing of the Free Lunch Crowd
Before my blockchain career, I had a brief stint as a famous economic pundit thanks to a viral cartoon criticizing the Federal Reserve’s Quantitative Easing program. There was plenty that I got wrong in that cartoon (as I’ve discussed before in the New York Times) but my general skepticism of playing money games to fix structural problems or fighting the business cycle has withstood the test of time.
That the second round of QE failed to deliver what was promised by the likes of Ben Bernanke was proven by the fact that we ended up needing many more rounds, and yet significant GDP growth, inflation or wage gains never materialized. What gains have showed up are obviously fickle, as proven by how quickly the Fed changed its mind on “undoing-QE” recently.
What QE did succeed in doing was exploding the wealth gap and inspiring populist uprisings. Central Bankers would like us to believe that when they channel free money to banks and billionaires they are really helping poor people (going so far as writing papers and making videos arguing as much) but unfortunately for them, reality doesn’t agree. When Fed policy causes a jump in the stock market (as discussed here, here, here and here) and Amazon’s stock surges as a result, Jeff Bezos benefits more than his minimum wage earning warehouse employees.
To argue otherwise is prove that central bank economists are even dumber than we thought. Or, to invite others to co-opt the idea. If printing money is good and inconsequential, then why not print money to built roads, give people healthcare or even introduce basic universal income?
That in a nutshell is at the core of MMT, or Modern Monetary Theory, an old idea that’s enjoying a resurgence thanks to support by young political luminaries like Congresswoman Ocasio-Cortez. MMT argues that government can print money to fund itself today, then deal with any resulting inflation by raising taxes or issuing debt tomorrow. A free lunch, followed by a free dessert.
It’s a cooky idea with a lot of complicated pieces, but what is most remarkable about MMT is the fact that it is opposed by a who’s who of the “print money to give to Wall Street crowd.” Take Janet Yellen, former Fed Chairwoman and a great fan of QE. She recently told an audience at a conference that she’s not a fan of MMT because “that’s how you get hyperinflation.” During the same talk, she said that although she doesn’t see a recession on the horizon, the Fed might have to cut rates anyway.
Former New York Fed President Bill Dudley has likened the theory to what’s happening in Venezuela, a daring comparison from the man who helped execute the Fed’s alphabet soup of interventions after the financial crisis, including one that circulated printed dollars to the wives of Wall Street CEOs and the government of Muammar Gaddafi.
I’m going to go out on a limb and speculate that the real reason why MMT is suddenly so popular is because of the hypocrisy of its biggest critics. If you are for printing money to bail out irresponsible companies and dictators, you probably shouldn’t argue against printing money to expand the social safety net. And yet Jerome Powell, the Fed Chair whose easy-money-reversal just made Jeff Bezos significantly richer, has called the theory “just wrong.” Even more hypocritical was Peter Praet, chief economist of the ECB, when he tweeted:
The European Central Bank has expanded its balance sheet by over two trillion euros during Praet’s tenure, and used the printed funds to finance the debt of troubled countries like Italy. It’s also bought the bonds of private companies, including a failed supermarket chain and a fraudulent South African retailer. With chief economists like that, is it any wonder that Europe is tearing itself apart?
MMT might be the second worst idea in economics, but at least its advocates are intellectually honest. The economists who got us going down this path of printing-money-to-cure-all-ills are not. A collision between these two camps was always inevitable. As others have astutely observed, QE is socialism for the 1%. Here comes everybody else.
As a general rule of thumb, all bad ideas eventually devolve to their ugliest form and devour their biggest believers. Communism turned on Trotsky, Facebook sold out its users, and MMT is slowly devouring QE. Those who have embraced free money for some can only resist for so long against politicians arguing for free money for all.
Which brings us to my second and third laws of econodynamics. Although there’s no such thing as a free lunch, there is such a thing as a cheap Bitcoin. The appeal of decentralized money only grows now that the print-money-crowd is in turmoil. Aside from a fixed and algorithmic inflation schedule, the other benefit of crypto in such a world is as a vote. A vote for the growth of the platform, and a vote against a legacy system soon to be consumed by the greater of two evils.
