COVID-19 and Modern Monetary Theory (MMT): MMT Assumes Debt No Longer Matters
In March, Congress passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Act calls for $2 trillion in added federal spending aimed at combating the negative economic impacts of COVID-19.
This package will add on to the already mammoth $1.25 trillion 2020 federal deficit. With 2020 forecasts of a 20% decline in GDP, total federal public debt for the year soars to 150.2% of GDP. This is an increase from 2019's record of 105.2%.
But who ultimately pays for the interest and principal on this debt?
There are only three outcomes, all negative, from this unrestrained spending: 1) higher taxes, 2) elevated inflation, or 3) rising interest rates.
Disagreeing, the so-called modern monetary theorists (MMT), as apologists for excessive government, argue that sovereign governments do not need to borrow or raise taxes since the sovereign can print more fiat money. That is the money is simply dollars the government put into the economy, and did not tax back. The Green New Dealers have embraced this vapid so-called model to support their proposed rapidly expanding federal spending programs.
The U.S. Federal Reserve appears to have embraced MMT by buying and holding more than $4 trillion in U.S. federal debt in the 2008-09 recession. In March and April of 2020 accompanying CARES, the Fed pledged to purchase as much government-backed debt as needed to bolster bond markets. That is, they will support whatever deficit spending is approved by Congress and the President.
This action termed monetizing the debt, unless reversed after the downturn, results in large increases in the money supply with the ultimate outcome of higher inflation and elevated nominal interest rates. To quote Nobel prize winning economist Milton Friedman, "Inflation is always and everywhere a monetary phenomenon...."
After the last recession, the Fed maintained most of its recession purchased U.S. Treasury bonds only to add to them in 2020. Post-2020 Pandemic, the Fed must jettison a high share of these bonds. Otherwise, contrary to MMT, future generations will pick up the tab with rapid inflation ala Venezuela.