Friday, January 3, 2014

Have We Been Lulled Into Complacency?

Have we been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years? This is a key question we must face. Have these actions really worked or merely masked over major flaws and problems?  And just for fun, consider that by not demanding the right kind of growth and by throwing money at problems we have only delayed and added to festering issues that face us in the future. In what most of us view as a fast moving world many people have come to think if a financial crisis doesn't occur today or in the next few weeks it is simply not going to happen at all.

Several months ago I penned an article saying that America had been lulled with the rest of the world into complacency as we have kicked the can down the road. I continued that as a nation we have yet to feel much pain from the sequester. Not dealing with what we were told was a massive problem has only reinforced the idea that far too much has been made as to the ramifications of an out of control budget. Remember the horror stories surrounding sequestration and the financial cliff? I recall one Sunday morning talk-show host referring to them as draconian and predicting dire consequences. Sidestepping financial responsibility has been rather painless and reinforces the idea that we can continue down this path.

Thinking that we will be able to grow out of our problems is a bit simplistic and a much overused strategy. The theory of growing your way forward is loved and often viewed as a painless easy solution to problems because growth can mask over hard to address deeper rooted structural flaws that undermine our economic system. We often forget how interesting the times we are living through really are and tend to think after some type of setback the worst is largely behind us. As optimism returns a feeling that we have rounded the corner and the promise of better days ahead can easily overtake us.

Modern Monetary Theory often referred to as MMT to its many believers removes much of the risk ahead and guarantees that we will always be able to muddle forward. MMT also known as neochartalism is a economic theory that details the procedures and consequences of using government-issued tokens and our current units of fiat money.  Newly acquired tools like derivatives and currency swaps  allow us to print and  manipulate away problems. While reading an article about the growth of debt in China's non-financial sector I was forced to reflect on how debt is effected by the interest rates. In Europe the ECB had to step in to halt the economic collapse of Spain, Italy and several other countries that were on the brink. What you pay in interest on debt does matter except in the manipulated land of MMT.

This cure to past woes adds a whole new exciting dimension to economics that eliminates any potential of failure and concern that the sun will not come up tomorrow. However there is a major flaw in the concept  of MMT that not only wounds the theory but it is its Achilles heel. What do you do when it becomes apparent the economic efficiency of credit is beginning to collapse? This means that as more money is poured into the system and lower rates are no longer effective in driving the economy forward options evaporate. As the extra GDP growth generated by each batch of loans drops and momentum ends this become the equivalent of pushing on a string and is a sign of exhaustion.

What I'm seeing develop is an "almost surreal" feeling of indifference towards reality. Companies have already ushered saving from interest paid on debt into the earning column and a major reason inflation remains low is they are sitting on a hoard of cash, this has lowered the velocity of money. We must remember the artificially low FED controlled interest rates are a massive one-off or onetime tailwind that is mainly behind us.  When rates stop going lower or reverse the positive effect will ebb and become a major headwind. With massive government debt in many countries and the economy still weak this headwind has the potential to become devastating. The collision of MMT, social unrest over inequality, and other destabilizing factors have the potential to create the perfect storm.

Footnote; Your comments are welcome and encouraged. If you have time check out the archives for other post that may be of interest. Below is an article that list the 10 most crucial problems facing the world, if you have time please take a look.


  1. The theory of MMT brings into question the real value of any commodity or item. The games being played within our monetary system leave me full of fear for future generations. This adds new meaning to the phrase "Ponzi Scheme".

  2. Fiscal and monetary policy are all that mainstream economics has to offer. Macro dominates policy, but micro factors often overwhelm macro. Macro economics forget about micro and often contradict established micro principles, the main ones being opportunity cost and diminishing marginal returns.

    Inflation can't possibly happen if no one borrows and invests. In the past, the government would borrow and spend and cause inflation. That happened in the 60's and 70's. But the state is tapped out and the bond market won't let it borrow much more.

    Businesses aren't borrowing and investing because taxes are too high and regulations too onerous. But macro knows nothing but keeping up the same failed policies. The problem is mainstream macro econ.

    Scot Sumner is posting over at the Library of Econ at He is a major proponent of MMT. He generally ignores posts that show the failure of MMT and his circular reasoning. But in one response he wrote that prices adjust instantly to changes in Fed policy. I pointed out that the stock and bond markets may react instantly, but continue to react over time and that many econometric studies of monetary policy show that inflation can lag up to 5 years. That is so typical of mainstream econ theory which allows no room for time or capital.

  3. Thank you Roger, you make several good points. Where money flows and the lag time of inflation are key factors to where the economy is and where it is going. I often try to look at the "micro economy" through what is occurring in the lives of those I come in contact with through my business and family. This is one method to encourage honesty as to where the economy really is. Technology has quickened the pace at which events are interpreted and change can take place. The pace of change makes things very dangerous to slow movers when a shift takes place. My compliments on your blog, I have included the link below.

  4. I couldn't agree more, Bruce. Time is memories worst enemy. Great point: The longer the good times roll the more complacent and comfortable we become with the illusion and begin to think it real.

    The longer the MMT morphine drip is left in the arm, the more devastating the withdrawals of healing will be.

    Sadly, the worst, or best depending on your view, may be that the current patient will die altogether and a completely new and healthy system (at the beginning anyway) will be born.

  5. Ive never really understood the "taxes are too high for American companies" Ya just got a 4.5 Trillion dollar gift from the fed for cryin out loud!

  6. No MMTer is going to respond to a straw man like this.

  7. A "perfect storm" is quite likely. Rising rates and sovereign borrowers hurting. Higher unemployment and crude prices. And after years of frivolous games to combat DEFLATION (like in the fairy tale of the bored sheppard calling ), when it really appears, they will be out of ammo.

    Germany is already a political basket case. Unstable, divided and likely to get hurt much more than other countries. Why? An insane chancellor and the Bundesbank's I.O.U.s being of questionable quality. Google Target 2 and weep. Greece alone owes > 100 bn Euros. And the politicos deceive the people...

    Germany has turned on the "magnet" by letting anyone who makes it to her borders come in. No papers? No problem! While the government deceives the people by reinstating "border controls". That's like claiming that a WALMART greeter functions as theft prevention agent.