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Magical Money Tree

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Magical Money Tree

Nancy Bush is a veteran bank analyst. The following does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.

I have found that the best way to deal with the present environment of political craziness and societal chaos is through humor. Yes, through plain old chuckling, laughing and sometimes guffawing at the antics of our President, his enemies (and sometimes his allies) in Congress, the various clowns in the media and in the loosely-defined "pundit class," and at the ranks of the various foreign leaders who are equally as clueless as our own.

I have reserved my greatest guffaws for some of the "new" economic theories that are being thrown around by both sides of the political spectrum to justify ever higher levels of government and individual debt. In truth, this is no laughing matter — if there is one thing that will stop our present positive economic momentum in its tracks and will send the stock market off the rails, it will be the reappearance of consumer credit quality issues as rates rise (as they inevitably will, Fed "patience" notwithstanding.)

Credit card debt ended 2018 at $870 billion — the highest level ever recorded and a total that surpasses the 2008 nominal peak — and while this may be a byproduct of a stronger consumer and better employment levels, some of the trends underlying these numbers should give us all pause. Roughly $68 billion of credit card loans are 90 days-plus delinquent and an increasing number of these delinquencies are coming from those Americans who are older than 50. The inevitable question — are Americans in retirement using credit cards to buttress living standards that cannot be sustained from retirement savings? Add to credit card debt the much agonized-over levels of auto loan losses, and consumer debt trends are a tad worrisome, coming as they do in the midst of good economic times.

But concerns about consumer debt pale in comparison with the issue of the U.S. deficit and how rapidly rising levels of government indebtedness may impact us all in the future. The fiscal deficit was $310.3 billion for the first four months of fiscal 2019, versus $175.7 billion for the same period in 2018, as tax cuts combined with higher spending on government debt and on Social Security and defense programs combined to produce some scary results. At this rate, the $1 trillion deficit level projected by the Congressional Budget Office for 2020 will be achieved this year — although perhaps we can hope for receipts in the upcoming tax season to delay the achievement of this dubious milestone for a few months longer.

But we can apparently all take solace in the fact that the U.S. fiscal deficit really doesn't matter, after all. That is the premise of a new — well, newly resurrected — school of economic thought known as Modern Monetary Theory (MMT) that seems to have arisen in its latest iteration from the camps of Democratic Socialist (and presidential candidate) Bernie Sanders and his Congressional soulmates, chiefly Congresswoman Alexandria Ocasio-Cortez. To say that this theory of how the economy should work is "heterodox" does not seem to fully express the weirdness of it.

In MMT, money is created by the government for the purpose of paying taxes, and since the government is the source of money, it can print money without consideration for deficits. In the newest interpretation, the government should implement the Green New Deal, make sure that everyone is employed, provide Medicare for all, and do all those social programs that have been put off due to concerns about the budget deficit, and simply print all the money needed to get this done. If inflation was the result, then the government would simply levy enough taxes to take excess money out of the system, thus resulting in no inflation. And BTW — in MMT, the natural rate of interest is zero.

There are so many questions that arise from this theory that my head explodes every time I think about it. Obviously, in the MMT world, there is no need for a Federal Reserve System, since monetary policy is simply a function of how much money the government needs to print to enact its social goals. There would be no need for a mechanism of monetary policy transmission, thus no need for banks (a pleasing byproduct for the MMT-ers, I suspect), especially since there would be no incentive to save money. What about housing — who would provide a mortgage with a zero rate? Would housing simply be provided by the government under its mandate of fulfilling all social goals? And since taxation would have the goal of removing "excess printed money" from the system, would tax rates thus change every year — or every month? It would be the ultimate nanny state, with government providing everything and the "rich" (those who did not flee the country, that is) providing the means.

The push-back has been fast and strong, from all sides of the political spectrum. Fed Chairman Jerome Powell on Feb. 26 said this: "The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong...U.S. debt is fairly high to the level of GDP, and much more importantly, it's growing faster than GDP, really significantly faster. We are going to have to spend less or raise more revenue." So old-fashioned, isn't it?

Even Larry Summers, an economist with whom I agree on just about nothing, said this in a recent media interview: "It takes ideas that have a little bit of validity and extends them to a grotesque point where they defy the laws of arithmetic. So I believe MMT is very much misguided, the premise that somehow you can always print enough money to cover all of your debts." And BlackRock Inc. CEO Larry Fink — not one of Bernie's BFFs, I presume — succinctly called the theory "garbage."

In other words, there's a Magical Money Tree (a different sort of MMT) out there from which dollars can be picked to eliminate income inequality, climate change, disparities in health outcomes, etc. — all painlessly and all without killing the tree. Sadly, the emergence of such thought and the fact that it is being taken seriously indicate to me that the lessons of hyper-inflation and economic collapse in Latin America (most notably in Venezuela, where a form of MMT is being practiced right now) have been sacrificed to the political careers of a few politicians who have only a passing knowledge of the history of economics and the realities of private sector work. Even I have a hard time seeing the humor in that.