By Jon Maier, CIO at Global X Funds
Last year, I quickly dove into the discussion about Modern Monetary Theory (MMT). It was well before COVID-19 and a bit before Andrew Yang’s dark horse presidential campaign started making waves with his progressive universal basic income (UBI) model. Once on the periphery of the nation’s political and economic discourse, MMT and UBI continue to move into the mainstream. And I expect recent fiscal and monetary policy responses to the coronavirus pandemic to keep MMT and UBI headed in that direction. But in my view, the government’s responses actually continue a trend. I think we’ve been living in an MMT-type simulation since the 2008 financial crisis.
Inadvertent MMT in Action
As Modern Monetary Theory goes, government spending for a monetarily sovereign country like the U.S. should be limitless. Large deficits are irrelevant because the government can just print more money. MMT’s efficacy is highly debatable. As I mentioned last year, nothing is free. A debt always comes due, one way or another. To say otherwise is naïve. Federal Reserve (Fed) Chair Jerome Powell agreed: “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong.”1
But a global pandemic has a way of bending traditional thought processes. To steward public health, governments around the world had to implement the social distancing and shelter-in-place policies that we’re all adjusting to. Of course, shuttering the global economy comes with a hefty price tag, the likes of which we’ve never seen. Workers and businesses of all sizes, big, medium and, perhaps most significantly, small, need monetary relief.
Powell and the Fed “committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time.”2 Many global central banks followed suit. The Fed quickly cut the fed funds rate to zero, implemented an aggressive quantitative easing (QE) program, and launched liquidity facilities to keep credit flowing. The Fed’s measures comprise an open-ended monetary policy response that continues to grow in scope. Today, the Fed’s balance sheet is approximately $7 trillion and rising fast.
Fiscal responses vary. Several European countries essentially froze their economies by paying their workers to stay home. In something of a pseudo basic income strategy, Denmark, the Netherlands and the United Kingdom planned to backstop companies by paying a percentage of worker salaries, as long as companies agreed to no layoffs.
In the U.S., the White House and lawmakers on Capitol Hill went in a different direction. After the typical haranguing, Congress passed the bipartisan, $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES). Among the highlights, the bill includes $1,200 one-time payments for many individuals (income caps apply), a $500 billion corporate liquidity fund (some accountability was a sticking point), $377 billion for small businesses, and enhanced unemployment provisions.
Though expansive, the bill seems to guarantee more for corporations than the small businesses that employ a significant portion of the country’s workforce. More than 3 million workers filed for unemployment in the U.S. last week. I would say with a high degree of certainty, that this is just round one.
A Growing Portfolio of Limitless Spending
Conceivably, the $2 trillion CARES Act could be just the start of what individuals and businesses in the U.S. need as the odds of a lengthy global recession grow. So if the government can provide wide-ranging monetary relief on the fly, it’s as progressive economic thinkers would say, “Of course the government can afford social programs like universal basic income and universal health care, or the Green New Deal to fight climate change (not too likely now).”
We don’t have to look too far back to find another CARES Act-like move. The $831 billion American Recovery and Reinvestment Act of 2009, which looks paltry in comparison, helped stem the economy’s downward spiral during the Global Financial Crisis (GFC). Other measures included Fed rate cuts to zero and the government’s purchase of toxic assets through the Troubled Asset Relief Program (TARP).
The way the government spent to get the economy out of the GFC—and will have to spend in the coronavirus era—could boost the theory that deficit spending is not just necessary and effective, but that it’s also potentially harmless. And when real interest rates are negative, money costs “nothing.” The government can keep printing money at will to remove the uncertainties inherent to market economies.
Among the major risks is that one assumes the government can spend wisely, which is a big leap of faith. Another risk is that a bottomless government wallet could lead to hyper-inflation. But here again is the GCF example: the government spent plenty to dig out the economy from the financial crisis, yet historically low inflation followed in the subsequent decade. Even if inflation risk increased, the argument goes, that’s where policymakers enter the picture. Tax policy is core to MMT because it’s a primary mechanism to keep prices low and money moving through the system.
There should be a way toward more thoughtful and progressive federal spending. But spending without consequences goes against logic. Increasingly, though, we have examples where the government has to step in and spend without regard for the bill. In 1930, economist John Maynard Keynes, the pioneer in deficit spending as fiscal policy, posited that “all modern States” decide what is money and what is not.3 In extraordinary situations like this pandemic or a financial crisis, money’s the way out. The question is, what’s on the other side?
1) Bloomberg, “Jerome Powell Says the Concept of MMT Is ‘Just Wrong’,” Feb 26, 2019.
2) The Federal Reserve, “Federal Reserve announces extensive new measures to support the economy,” Mar 23, 2020.
3) Keynes, John Maynard, “A Treatise on Money,” 1930.