This is the perfect time to discuss the effects of zero interest rates as it has been 20 years since the Bank of Japan embarked upon the path of crushing interest rates in an effort to jump-start inflation in Japan. This is very important as we enter into the discussions about the potential for negative interest rates in the U.S. while also entertaining the idea that the U.S.’s growing debt pile and deficit have no consequence as long as the government borrows in its own currency and optimizes its printing press.
This is the premise of Modern Monetary Theory (MMT) that some of the newly elected members of Congress are promoting. It is predicated on the theory advanced by Warren Mosler that the modern state can spend unlimited amounts of money as long as it borrows in its own currency and has the ability to tax and print. Mosler himself offers up that there is “one valid criticism of MMT. And it comes down to this … you either believe in an informed electorate or you don’t.”
The issue of an informed electorate is not defined but if Mosler means a population that votes for even more entitlements, the answer is simple. The failure to define informed is a major problem. The issue becomes even worse when the speaker’s corner for policy makers, Foreign Affairs, publishes an article by two former Obama policy makers, Jason Furman and Lawrence Summers titled, “Who’s Afraid of Budget Deficits?” Summers is not promoting MMT but does encourage massive government borrowing because of the ultra-low real yields, especially on a historical basis, is a very doable proposition. Summers even explains that advocates of MMT goes too far and says this:
“Taxes should be set based not on spending levels but on macroeconomic conditions, and deficit financing has no effect on interest rates. Some politicians have invoked those positions to suggest that the government not worry about debt at all. [Kelton and other MMT supporters claim that this is a misrepresentation of their theory, but it is not clear what their true arguments are, and most of the political supporters of MMT have used it as a justification for ignoring government debt entirely.”
The increasing discussion about any negative impact from the growing deficits of developed governments should set off alarms for all investors. The history of modern history is replete with sovereign governments debauching its currency in an effort to “euthanize the rentiers.” As many economists have noted, Keynes favored a slow, gradual repression of the coupon clippers by pushing copious amount of money into the financial system to keep rates from rising.
It was suggested that Keynes had learned from Vladimir Lenin that to debauch a currency was when unlimited amounts were circulated inflating away any concept of its underlying value. Euthanizing the rentiers was not debauchery. But if the MMT crowd gains control of the levers of finance, WHY WOULD I WANT TO OWN U.S. DEBT?