MMT: The case against Modern Monetary Theory

The deficit reality is that we are in effect borrowing from our collective economic futures

Stephen King

 A printing press for dollar bills at the US Bureau of Engraving and Printing in Washington © Getty Images

In a world in which government debt is rapidly rising, it’s hardly surprising that there’s growing interest among investors in Modern Monetary Theory. After all, one of its central claims is that budget deficits are, from a financing perspective, an irrelevance. So long as increased government borrowing doesn’t lead to inflation — and, at the moment, there really isn’t much of it around — we can all afford to relax.

As Stephanie Kelton notes in her book The Deficit Myth, governments with access to a printing press are “currency issuers” (exceptions include, most obviously, members of the eurozone). As such, all their spending could, in principle, be financed via the creation of cash. 

Taxes may serve other purposes — the redistribution of income and wealth, the discouragement of “sinful” behaviour — but, in the world of MMT, they serve no useful macroeconomic role.

In the real world, however, taxes are crucial. The fundamental difference between government finances and those of companies and households is not access to a printing press but, instead, the coercive power to raise taxes. 

A company making a severe loss cannot reduce that loss by imposing taxes on everyone else. A government can. A worker receiving a pay cut cannot force others to make up the difference. A government can. 

Armed with this knowledge, creditors are understandably willing to accept mostly lower returns on government bonds than on other investments. Put simply, the risk of government default in the face of an adverse economic shock is lower than for other would-be borrowers.

Admittedly, there are limits, dictated largely by the political capacity of a government to raise revenues in difficult circumstances. Emerging markets often end up resorting instead to devaluation, default or inflation. In anticipation, borrowing costs spike.

Still, imagine for a moment that governments embrace MMT. Imagine too, as MMT proponents suggest, that control of the printing press is taken away from unelected central bankers and given to “accountable” elected fiscal representatives. Would we be any better off?

Far from it. Giving elected representatives the keys to the printing press is the equivalent of giving a gambling addict the keys to the casino. For many politicians, the primary objective is to remain in power. As such, they will too often be incentivised to pursue instant gratification at the expense of longer-term stability.

In the early-1970s, the UK embarked on what became known as the “Barber boom”, thanks to the efforts of Conservative chancellor of the exchequer Anthony Barber to engineer an election victory in 1974. As it turned out, the Tories lost and, two years later, the UK ignominiously had to accept a bailout from the IMF. Central bank independence provides a useful bulwark against such behaviour.

More importantly, inflation and taxes are, in many ways, simply two sides of the same coin. Those governments without access to tax revenues can instead “debase the coinage”. 

Supporters of MMT claim this will never happen, yet history suggests otherwise: after all, it has been a tried and tested policy of kings and queens over hundreds of years. 

Too often, those with access to the printing press are prepared to take undue risks in the hope that “this time it’s different”.

In truth, inflation helps solve the financing issues that proponents of MMT claim no longer exist. Negative real interest rates, a result of higher-than-anticipated inflation, serve to redistribute wealth away from private creditors (pensioners, for example) to public debtors. Much the same could be achieved through a wealth tax. 

At this point, we come full circle: the distinction between the printing press and taxes begins to break down. 

Thanks to Covid-19, government debt is rising rapidly and, for that matter, appropriately. In the face of recurring lockdowns, we are better off allowing companies and workers to enter a period of economic “hibernation” in the hope that, once the virus is under control, they can thaw out. The alternative of multiple business failures and mass unemployment is of no use to anyone. 

In the process, however, we are in effect borrowing from our collective economic futures. At some point, some of us will be presented with a bill which, if hibernation policies succeed, we will be in a reasonable position to pay. 

The political process will decide whether that bill comes in the form of higher taxes, more austerity, rising inflation or eventual default. That, I’m afraid, is the deficit reality.

The author is HSBC’s Senior Economic Adviser and author of ‘Grave New World’ 

Peru president’s ousting underlines resurgent Latin American populism

Martín Vizcarra’s impeachment signals more trouble ahead for region’s pragmatists

Michael Stott, Latin America editor 

Within hours of being impeached, Peru’s Martín Vizcarra abandoned the presidential palace and went home © Peruvian Presidency/Reuters

The human toll and the economic damage wrought by the coronavirus pandemic have hit Latin America harder than any other developing region.

As tens of millions of Latin Americans slide back into poverty and gaping inequalities of wealth and opportunity worsen, populists have gained fresh force. It was only a question of time before they claimed political scalps among the region’s market-friendly technocratic governments.

Peru’s pragmatic centrist president Martín Vizcarra was the first. After congress voted 105-19 to impeach him on Monday over corruption allegations, Mr Vizcarra chose not to fight. Within hours, he abandoned the presidential palace and went home, leaving a country in turmoil.

Mr Vizcarra denies the corruption claims. He is well-liked by Peruvians and investors. 

He was not planning to seek re-election in April.

None of that was enough to save him from a rancorous, populist congress amid one of the worst coronavirus emergencies. A long strict lockdown devastated the economy but failed to save the country from the world’s second highest per capita virus death tolls. 

“Peru has been a populist case study waiting to happen,” said Christopher Sabatini, Latin America fellow at Chatham House. “There has been this anti-corruption fever in Peru going back to [the 1990s]. Anti-corruption is a tool wielded most effectively by populists and there’s a toxic combination of a collapsed party system and corruption fever which is now biting Vizcarra.” 

Peru’s new interim president is the head of congress, Manuel Merino. To the alarm of investors, Mr Merino has backed a number of populist initiatives, including twice allowing Peruvians to withdraw early part of their pension savings, plus a law freezing debt service to banks and a law suspending highway toll payments. 

“The economic crisis after the pandemic is huge and many lawmakers are trying to appear helpful to people,” said Maria Luisa Puig, who follows Peru for the consultancy Eurasia. “They are eager to win public support.”

Mr Vizcarra’s ousting was only the latest sign of the force that the coronavirus pandemic has lent to Latin America’s populists.

Evo Morales is greeted by residents of his hometown Orinoca, Bolivia after returning from exile © Paolo Aguilar/EPA/Shutterstock

In neighbouring Bolivia, former president Evo Morales made a triumphant return on Monday to a country he fled last year after his efforts to secure a fourth consecutive term in office were clouded by accusations of electoral fraud. 

His Movement Towards Socialism (MAS) won an overwhelming victory in elections last month, a stinging rebuke to a conservative caretaker administration backed by the US and the EU.

Latin America’s two biggest countries, Brazil and Mexico, are governed by populist leaders who enjoy a close working relationship with Donald Trump. They have played down the pandemic and kept their popularity high by resisting tough lockdowns and emphasising the need to keep the economy going, despite some of the world’s highest death tolls.

Next to face the populist tide will be Ecuador, where presidential elections are held in February. In a now-familiar script, President Lenín Moreno’s centre-right, investor-friendly government has rock-bottom opinion poll ratings amid the devastation wrought by the pandemic and leftwing populist Andrés Arauz is mounting a strong challenge.

Later next year, it will be Chile’s turn. Latin America’s former model economic performer has seen its investor-friendly image eroded by a wave of riots protesting at inequality and poor public services. Billionaire president Sebastían Piñera will not be running again and November’s contest in a country once feted for its moderation is likely to be fought between populists from the left and right. A communist mayor is among the front-runners.

Shannon K O’Neil, senior fellow for Latin America at the Council on Foreign Relations in New York, noted that Latin Americans had been demanding more from their governments even before the pandemic. Now, she said “it’s a perfect space for populists to come in whether from the left or the right. This is very fertile ground for outsiders to take political advantage.”

Monsters of the deep

Illicit fishing devastates the seas and abuses crews

Here’s how to hook the culprits

“Consider the subtleness of the sea,” warned Herman Melville in “Moby Dick”; “how its most dreaded creatures glide under water...treacherously hidden beneath the loveliest tints of azure.” 

Nearly 170 years later, another marine horror is just becoming visible. Satellite and other imagery has revealed “dark fleets” of fishing boats that turn off their transponders and plunder the ocean’s bounty. Illegal, unreported and unregulated fishing accounts for a staggering 20-50% of the global catch. 

It is one reason fish stocks are plummeting: just a fifth of commercial species are sustainably fished. Illegal operators rob mostly poor coastal states of over $20bn a year and threaten the livelihoods of millions of small fishermen. 

North Korean coastal waters have been so pillaged that its fishermen have to motor their rickety craft far out into stormy seas to fill their nets. Thousands have drowned.

A huge amount of illicit fishing happens on licensed boats, too. They might catch more than their quota, or falsely declare their catch as abundant albacore tuna instead of the more valuable bigeye. 

In port fisheries inspectors are always overstretched. If an operator is caught, for instance, fishing with too fine a net, the fine and confiscation are seen as a cost of doing business. Many pay up and head straight back out to sea.

The damage from illicit fishing goes well beyond fish stocks. Operators committing one kind of crime are likely to be committing others, too—cutting the fins off sharks, or even running guns or drugs

Many are also abusing their crews. Tens of thousands of migrant workers, mainly from South-East Asia, man the world’s fleets. Many toil at sea in vile conditions with violent masters, sometimes for years at a time. A lot of them are in debt bondage; and a fishing boat is a lot harder to escape from than a factory.

Too often, the ultimate beneficiaries of this trade are hard to hook because they hide behind brass-plate companies and murky joint ventures. Pursuing them requires the same kind of sleuthing involved in busting criminal syndicates. 

An initiative led by Norway to go after transnational-fisheries crime is gaining support. 

Much more cross-border co-operation is needed.

At sea, technology can help. Electronic monitoring promises a technological revolution on board—Australian and American fleets are leading the way. Cameras combined with machine learning can spot suspicious behaviour and even identify illicit species being brought on board. They should be compulsory as a condition of access to the exclusive economic zones that define a country’s control over resources such as fish. 

They should also be made compulsory even when vessels are on the high seas. Equally, national regulators should set basic labour standards at sea. If countries fail to follow the rules, coastal states should bar their fishing fleets from their waters. Fish-eating nations should allow imports only from responsible fleets.

Above all, governments should agree at the wto to scrap the subsidies that promote overfishing. Of the $35bn a year lavished on the industry, about $22bn helps destroy fish stocks, mainly by making fuel too cheap. 

Do away with subsidies and forced labour, and half of high-seas fishing would no longer be profitable. Nor would that of China’s environmentally devastating bottom-trawling off the west African coast. 

Such abuses would disappear overnight. Some of the money that was saved could help restore coastal fisheries for millions of small-scale fisherfolk—underwriting temporary moratoriums on fishing and creating no-catch zones. And it could help establish fish farming, nourished by insect larvae. 

Fishing does not have to be a fishy busines.