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?

Again, in all the discussions I have read and heard, there is no concern over the U.S. dollar’s role as the world’s reserve currency. The U.S. was granted the role of reserve currency because of its position of power in the post-World War II bipolar political system. But the role of power broker came with a design to be a fiduciary for the system’s financial needs. Printing unlimited currency or issuing ever-increasing debt deprives the global financial system with a responsible trustee. There are many comparisons made between the FED and BOJ as they both embarked on ZIRP. This comparison is faulty and needs to be exposed:
  1. Japan had actual deflation so even though Japanese bondholders received next to nothing in nominal rates, deflation provided returns to coupon clippers with more than 1 percent real rates of return because of lower consumer prices. In the U.S., interest rate receivers have seen negative real rates when the FED was at the zero level. Also, from a currency perspective, Japanese investors owned 97 percent of the JGBs when the BOJ began its stimulus, inflicting almost no pain on foreign creditors;
  2. When the BOJ and the Japanese government began ZIRP, Japan had a massive pool of private savings to cushion the blow, which was/is certainly untrue in regards to the U.S. The Japanese have run up massive fiscal deficits in an effort to ignite inflation and lessen the debt load for nothing relieves the burden of debt more than inflation, but the debt is owed by the Japanese to the Japanese. This is not at all true for the U.S. as it owes massive amounts of money to foreign holders of U.S. bonds. More importantly, the Japanese yen is of limited use as a global reserve currency thus limiting the massive dislocations from its potential debasement through the PRINTING PRESS. The bottom line is that the MMT/GROW THE DEBT leads me to be very concerned about owning any type of longer-term U.S. debt.
Happy anniversary, BOJ. I don’t wish you many more years in terms of ZIRP. When the BOJ embarked upon its policy the GOLD/YEN was at 33,000 yen to an ounce of GOLD. On Tuesday it closed at 144,348 YEN to an ounce of GOLD, near the record high last made in January 1980 (160,000 YEN). I know not what course others may take but I will not be debauched owning long-term sovereign debt.