Simply scary and a confirmation on how MMT was in play even before it became a “theory”
(which its not really) “If they can get you asking the wrong questions, they don’t have to worry about the answers”
- The Great American Novelist Thomas Pynchon, Gravity’s Rainbow
This is my new favorite quote as it explains how politics works and since Greenspan how
central bank operates. The policy makers force us to ask the wrong questions and hence until
recently they have not worried about the answers.
Basically, the “success” of central bankers and politicians has been to be able to get their
“audiences” to ask the wrong questions:
No one has focused on:
o Lack of productivity
o How ESG kills the ability to actually find a solution for the environment
o How government is crowding out private capital and creating massive fiscal
impulse through its IRA, the CHIP acts and Bipartisan Infrastructure Bill, but
now most importantly how always and through time too much debt kills an
economy’s ability to regenerate growth and increases in real income for ALL of
Debt is ultimate consumption moved from the future to today! The US is adding 5 billion USD
of debt per day, Interest payment is 1.000 billion a year and growing and the current- and
fiscal deficit makes the US extremely sensitive to funding from overseas as its own saving rate
comes in way short of what’s needed.
This will have material impact on activity going forward with positive real rates capital will
flow to better and higher return, but in the short term all the “support MMT acts” will crowd
out private investments and create hollow growth which is unsustainable.
YCC (Yield Curve Control) is already here
We are also de facto in quasi-YCC (Yield Curve Control) monetary policy in the US. The
Federal Reserve (Fed) does not want rates to go up for political and economic reasons. The
US cannot afford a 10-year Treasury yield in excess of 500 basis points (bps), and Fed Chair
Jerome Powell is very political, as seen by his "sudden focus" on inflation after being
reappointed Chair in 2021.
The Fed also does not want to lower rates because it is still dealing with a generational issue
of a tight labor market driven by lower participation rates (more people retiring early). The
short-term impact is a system where rates are approaching their maximum (500 bps in 10-
year yields?). We have reached the point where the "cost of carry" is growing exponentially
because there is no outlook for either significant debt reduction or lower interest
Here are some further economic data points:
- The student loan forgiveness program ends in October 2023, which will mean that 40
million Americans will have to start paying an average of $200-300 per month again.
This is a huge loss of purchasing power at a time when the Fed's 5.25% interest rate
hikes are starting to impact the real economy. The White House estimated the cost to
GDP at 0.3%, but it is probably closer to 0.5%.