Modern Monetary Theory (MMT) Will Fail Canadians
By: Fiorenzo Arcadi & Mike Ambrowics
What is MMT and why has it been on the forefront of investing and political outlets lately? To summarize, MMT stands for Modern Monetary Theory and argues that monetarily sovereign countries are not fiscally constrained by revenues when it comes to federal government spending. Therefore, MMT argues that countries including Canada, the US, the UK, and Japan do not need taxes or borrowing for spending due to their ability to print as much of their currency as they need due to their position as monopoly issuers of their currency. From a fiscal point of view, MMT seems very irresponsible due to increasing public debt levels ballooning inflation and ultimately causing an economic collapse. So why is the theory popular? We will examine this.
For example, if an individual purchases a house for $1 million dollars, that house becomes a tangible asset. However that tangible asset comes with a certain criteria and expectation that someone will eventually purchase that house for $1.3 million, $1.5 million, etc. Now, the person who’s buying the house may have the means to do it and the resources to sustain their mortgage, but again the expectation that it would sell higher still remains at the core of this individual’s thinking and expectation which becomes a self-fulfilling prophecy.
Historically speaking, over 25 countries have experienced sovereign debt default while the number for countries that have experienced and are currently experiencing sovereign debt crises is well over 50. Keep in mind that most of these countries printed their own money. However, their tangible assets deteriorated so rapidly that investors were literally clambering to bank doors to get their money out. Foreign investors are not a bunch of bewildered nincompoops, they are generally a part of astute enterprises that want a return on their investment. Therefore, once the value of tangible assets whether it’s resources, technology, land, etc. rise to the point whereby a country continues to print their own money, then the gig is up.
The American economy is based on the confidence of the American people. Once that confidence is lost the rising expectation deteriorates and systematically deters foreign investment and subsequent growth. George W. Bush asked Ben Bernanke what would happen if America refused to give funds to financial institutions. Bernanke was right, it would have resulted in the largest economic collapse in our world to-date that would make the Great Recession of the early 1900s look minuscule. If the American public refused to pay for their ill mistake resulting from subprime mortgages then the severity of the recession would have lingered for many decades. This is a classic example of Americans rapidly buying into artificially high-growth assets and being left to foot the bill as the expectations collapse. Unfortunately, once the expectation of an asset classes, then opportunity for value immediately increases and continues to grow over time providing that interest rates remain low which hampers financial institutions’ profitability.
China, Japan, and the rest of the world will not buy US treasures without the confidence of the American people. Moreover, China, Japan, and Europe are doing this exact same thing; the printing of their own national currency. In Europe, Greece and Italy have experienced major debt crises and have had to sell tangible assets of their own country at a lower price at the discount of their citizens and their respective savings accounts.
Countries like Canada, Saudi Arabia, Argentina, Venezuela, and so forth, base their economy heavily on tangible resources. Once these tangible resources deteriorate in price they can do their best to print all the money they desire. The real expectation however will still come from foreign investors and world credit agencies that downgrade their sustainable outlook in terms of generating revenue and return. These types of countries can not continue to print money for two reasons: 1) Hyperinflation will essentially render the currency worthless. 2) The desired expectations of investors who are seeking value at low discounted prices will take hold.
The ultimate conclusion is neither here nor there, but the sovereign debt crisis speaks for itself not only as a paradigm of what will happen in the future, but the public that continues to use their savings to bail out financial institutions. This in turn creates a systematic contagion that spreads globally leading to the outright collapse of public expectation. This is our economic theory as an argument to the economists that only assume their grand designs using their own theories rather than the grand designs of the geopolitical scholars that dominate the agenda. As humans, we understand humanity a lot better than economists.