Many of the financial methods used by governments during the COVID crisis are based on something called “Modern Monetary Theory.” This theory, “is neither modern, monetary or a theory, ” says British economist Mervyn King. And in my most eloquent British accent, I agree saying, “Brilliant!”
“There are no magic money trees and no new theories that eliminate hard choices. But there are good and bad policies.”-Mervyn King, “The Ideological Bankruptcy of Modern Monetary Theory”
Mervyn offers this insight: “If you can’t explain something, try an abbreviation. The latest in economics is MMT — Modern Monetary Theory or, in other words, a magic money tree. It’s a simple idea. It costs almost nothing to print money: the cost of printing banknotes is negligible compared with their face value, and even lower when the Bank of England creates money electronically through its so-called ‘quantitative easing’ programme (QE). That money could be given to the public — either directly or indirectly via the government — to enable people to spend more, so raising output and employment. We are all better off.” Economists in both the US and England are reading the same MMT text book!
But of course we know we are not better off with fairyland dreaming. We can simply look to other countries that have tried this, in our own time and over the centuries. For a good summary of the history, read Mr. King’s article here.
The Balance Sheet Must Balance
Our politicians love MMT – and for a while, with low interest rates, it seems to be working. Though our debts are heavy and our high deficits historic, Brian Wesbury, Chief Economist of First Trust, notes that in 2020, “…net interest on the US Federal debt was 1.6% of GDP versus 1.7% in 2019 and about 3.0% in the 1980s and 1990s. Yes, you got that right: in spite of soaring national debt in 2020, as well as a plunge in GDP, the interest burden was smaller as a share of GDP than it was the year before, and roughly half of where it was 30-years ago.” Read Mr. Wesbury’s article here.
We agree with Mr. Wesbury, that this will catch up to us – it is economic reality, and the balance sheet eventually must balance. The debt is real, and must be reckoned with. We will have to draw on our creative, industrious and practical talents as a country to do so.
Time to Be Strategic
For now, there is opportunity for each one of us to prepare financially. You have time to grow your retirement funds, add security to a portion of your investments, and to diversify strategically off the radar screen of the IRS for the increase in taxes that surely will follow. You can simply schedule an appointment here to get things started!
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