OK. It’s time for more magical thinking.

MMT.

Huh?

It’s called the “modern monetary theory”. (Wall Street thinks it should stand for Magic Money Tree.)

One of its biggest proponents is Dr. Stephanie Kelton of SUNY Stony Brook. (Yes, she’s the economic advisor for Bernie Sanders.)

Just in time for the election, an MMT bible was published. It’s a quick read (only 573 pages). The authors are William Mitchell (University of Newcastle, Australia), Randall Wray (Bard College, NY), and Martin Watts (also from Newcastle.)

Here’s some of its premises.  While the spending of one family can be cut back- that spending  actually provides the income to yet another. So, if every family were to adopt austerity, the end result would be a depression. The government, on the other hand, can spend money and, thereby, put currency into everyone’s coffers.

Keynesian economics believes that government spending is good- because whatever the government spends yields economic activity. Taxpayers don’t always spend all the money they have, so it’s less of an impetus to the economy.

In a nutshell, this theory holds that as long as a government has its own currency (which means none of the European Union nations), budget deficits and debt prove to be no issue. Because the government can simply turn on the printing press and issue more money. (This is the end result of what happened when President Tricky Dick [Richard Nixon] abandoned the gold standard behind currency back in 1971.)

Another corollary of MMT is that choosing interest rates above zero only affords the investor class a leg up. The theory assumes corporations base their investment decisions on growth prospects, not the cost of money. Also, MMT asserts that loans are not a function of the cash on hand (deposits) that reside in banks. After all, borrowers keep their cash in the bank- so loans are only a function of the demand for business to borrow money. (Hold on to your hats- this means that loans create deposits, not the maxim we all grew up with- that deposits create loans.)

This also means the Fed doesn’t have to sell treasury bonds or raise taxes. Instead to spend money, all the central bank has to do is to print more money.

MMT also asserts that inflation is not a function of excessive growth- but because businesses have too much control over pricing issues.

The proponents tried to inveigle Larry Summers and Paul Krugman into their ranks. Except both of these folks agree with me. (Or is that I agree with them?- and do I care which way it goes?)

Here’s the issues as I see them with MMT. The MMT assumes that the government (read Congress) is only constrained by material and labor resources- otherwise it can spend money anyway it sees fit to do so. (In other words, inflation is the limiting factor.)

Sounds good, right?

But, you see that premise encircles the real problem. Governments don’t always control the economy as well as they claim. So, they are forced to cut spending and increase taxes to stabilize the public debt and to reduce burgeoning deficits. Ideally, this should be done when the economy is thriving , when the GDP [gross domestic product] is growing quickly, and when inflation is only a risk- not already looming.

After all, when was the last time you heard that the government has the wisdom to know when it’s time to slam on the brakes? Let’s see…

Not in 1981, when the US decided that tax cuts and military spending was exactly what was needed for the economy, despite the reigning double-digit inflation. Nor, in 2011, when the GOP Congress demanded a dramatic reduction in the deficit while growth was weak (or was that anemic) and deflation was the biggest threat on the horizon.

(I did explain already (check Monday’s and Tuesday’s blogs) that both of these actions were not done to stimulate the US economy. Rather they were the foundation of the program to destroy the safety net the US has maintained for its citizens at risk.)

Another glaring example. What should have happened two years ago, when the US economy was thriving.  Instead, the GOP passed the Tax Cuts and Jobs Act. Now, with deficits swelling and the economy slowing, we are going to have to effect some very painful corrections.

The final issue (OK, the last one I will discuss today) with MMT?  Countries need credibility- and printing tons of money does not secure those thoughts. Credibility requires a government to provide an independent central bank, non-existent (or low) inflation, strong governance, and an equally strong justice system. Think of Germany between the World Wars, Venezuela right now…

Yes, magical thinking exists on the left, as well as the right.  Especially among those who believe ideology and slogans are more valuable that what works.