Economic policy

The New World Order of Economic Policy

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I’m not one to subscribe to conspiracies. But it seems really strange how we got here.

Just over a decade ago, Hank Paulson went to Congress and demanded a “bazooka”-sized bailout to calm global financial markets. They offered a price of $700 billion. At the time, a number that size was unknown. Today, Washington throws away trillions of dollars like its nickels and dimes.

There’s always the problem of budget drift – every year your spending increases a little more, so you don’t really notice how much more you’re spending. But that spending has increased by several orders of magnitude in the past few years alone.

This is where it gets weird. A secret cult has taken hold of our financial system. A “New World Order” of economic policy, if you will. One that promises unlimited growth and prosperity and will deliver it all without any negative repercussions.

It’s called the cult of Modern Monetary Theory (MMT).

The rules of modern monetary theory

MMT is an obscure economic theory that suggests that countries with sovereign currencies are not operationally constrained by income when it comes to spending.

MMT had a rather obscure beginning – as most cults do – in the 1970s, when economist Warren Mosler began discussing some of its core ideas. These ideas have spread, like everything else, thanks to the Internet. Today, Stephanie Kelton, former chief economic adviser to Sen. Bernie Sanders’ (I-Vt.) 2016 and 2020 presidential campaigns, is known as his chief advocate.

It’s a dangerous idea that plays out in real time.

First and foremost, MMT asserts that deficits don’t matter for several reasons.

According to its cult members, government balance sheets are not like those of a family. When you spend more money than you earn and save, you end up going bankrupt. This is not the case with governments.

This is because any sovereign country (one that controls its own currency) can never go bankrupt because it can always print its own currency to pay its debts (to be fair, you can do that too, but that’s called de counterfeit).

Not only that, they say deficit spending is the only way to spur growth. MMTers actually believe that government deficit spending is a good thing because, wait, the government deficit is someone else’s surplus.

The second main point of MMT is that the bond market – the mechanism by which our government borrows money to finance its deficits – is not necessary. Bonds only provide a place where people can safely invest their money (how they would determine returns is a mystery to me).

Instead, MMT would propose to merge the Federal Reserve with the Treasury Department so the Fed can print the money and the Treasury can target where it goes. It doesn’t matter that the Treasury is part of the executive branch that reports to the president and that the Fed is not officially part of the government. They’ll just cut out the middleman.

Finally, if the bond market is not necessary, taxes are absolutely necessary, for three reasons.

First, you need to have taxes to make your currency relevant. In other words, US dollars are needed because you have to pay your taxes in dollars. You are captive to the currency of your country.

Second, in the rare event that the economy overheats and inflation starts to rise (due to all the creeping “surpluses” the government is handing out), taxes are a way to drain cash from the system to cool the economy. economy (so is it a good idea to raise people’s taxes because their cost of living is skyrocketing?).

Finally, and perhaps the most important reason, taxes are a means of redistributing wealth.

What could go wrong?

It is easy to understand the appeal of this monetary cult. Who wouldn’t want to live in a country where the government offers growth and prosperity at will. But I’m afraid their belief system is missing an important point.

Dollars are measures of value – they have no value on their own. MMT detaches the dollar from any sense of real and productive value, rendering it worthless.

For decades, interest rates – the “price” of the dollar – have been falling, making it cheaper to access and less profitable to hold.

Today, faced with galloping inflation, our economy is more dependent than ever on cheap money.

The Fed will try to control inflation by raising interest rates. And that has the potential to lead to a major revaluation of a whole range of assets. So far, Fed Chairman Jerome Powell has signaled that the Fed is removing the training wheels from the market (and it should). Equities will have to learn to fend for themselves. But if they can’t, we all risk falling into the cult of MMT.

And if spending were to resume before the Fed could get inflation under control, precious metals would likely come back into the limelight. I would expect current underperformers such as the Aberdeen Standard Physical Palladium Shares ETF and Aberdeen Standard Physical Silver Shares ETF to be worth looking at.

The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.

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Tim Collins worked for years as a financial adviser before setting up his own hedge fund, which would acquire shares in companies like Facebook, Twitter and AirBnB in private markets ahead of their IPO. He is now co-author Confidential public lighting investment newsletter with Bob Byrne, and his writing and commentary has been featured on RealMoney and RealMoneyPro on TheStreet.com for over a decade.