The Lure of the Big Lie: Modern Monetary Theory and Wall Street’s Obsession with Unprofitable Companies.
By George J. Chanos, Apr 7th, 2019
In the “new economy”, spending has few if any limits and it pays to be unprofitable. Time to start planting tulips?
If you haven’t heard about Modern Monetary Theory (MMT) you will. It’s the economic theory du jour, and it will be all over the news in the months to come — leading up to the 2020 election.
Harvard economist John Kenneth Galbraith once said, “The only function of economic forecasting is to make astrology look respectable.”
MMT is a new way of looking at the economy. It’s very seductive (everyone gets a job), and very different from conventional economic theory.
Most economists believe that macroeconomic policy should stabilize the economy with the lightest possible touch — that it’s better to let markets allocate resources.
That’s been the prevailing economic theory for decades, as popularized by Ronald Reagan’s “trickledown” theory — the idea that less government, and lower taxes, will stimulate the economy.
Relying on the fact that governments control their own currency, MMT argues that governments can spend as much as they want — since they can always create more money to pay off debts in their own currency. They simply print it.
The theory suggests that government spending can be used to grow the economy to its full capacity, fuel the private sector, reduce unemployment, and finance major programs such as universal healthcare, free college tuition, and the New Green Deal.
Sounds great. No need to focus on deficits, we are told. Focus instead on the private sector surplus — that deficit spending creates.
Congresswoman Alexandria Ocasio-Cortez likes MMT. According to Business Insider, she believes that MMT can fund the “New Green Deal,” and should be “a larger part of the conversation.”
Bernie Sanders has Stephanie Kelton as an economic advisor. She’s is a Professor of Public Policy and Economics at Stony Brook University, and one of the primary proponents of MMT.
Kelton argues, “the best way to stabilize the economy and ensure full employment is to have the federal government guarantee every American a job.”
Those that agree with Kelton argue that increasing the deficit so that the government can invest in infrastructure and the labor force, should not make anyone bearish on the stock market. It should make them bullish.
Traditionally, economists have a very different view of money creation or “money printing”. They view it as being inherently bad for the economy.
Paul Krugman, a Nobel prize-winning economist, says MMT’s proponents engage in “Calvinball” (a game in the comic strip “Calvin and Hobbes” in which players may change the rules on a whim.)
Larry Summers, a former U.S. Treasury Secretary, now at Harvard University, recently called MMT the new “voodoo economics.”
Fed Chairman Jerome Powell recently told Congress that MMT is “just wrong.”
Many of us are old enough to remember learning about the Weimar Republic, in which the German government, in defeat after World War 1, printed money to pay its bills. And we know how that turned out. It resulted in hyperinflation. People needed wheelbarrows full of cash just to buy loaves of bread.
More recent examples of governments running the printing presses, to pay for the promises of misguided or opportunistic politicians (resulting in hyperinflation and economic collapse,) include Venezuela, Zimbabwe, and Argentina.
But MMT proponents point to Ben Bernanke’s bailouts of the banks, in 2008 — and ask, why was there no inflation when Bernanke created $1 trillion, by printing money, to bail out the banks?
MMT proponents argue that by insisting on balanced budgets, we’re handicapping ourselves with an underperforming economy, increased unemployment, and lost opportunities.
They point to Japan, that is currently running a government debt of close to 240% of GDP and has not experienced runaway inflation. The inflation rate in Japan is currently -0.29%.
It’s not the printing of money that causes inflation, MMT advocates argue, it’s the lack of goods, or labor, or capacity that triggers inflation, they say.
Only when the supply of labor, goods, or services becomes restricted will inflation become a threat, MMT argues.
MMT economists, like Warren Mosler and Stephanie Kelton, believe that the government should use its position as a monopoly issuer of the currency to ensure full employment.
And they have some support on Wall Street, as noted by a recent New York Times piece entitled Modern Monetary Theory Finds an Embrace in an Unexpected Place: Wall Street. However, recognition of increasing tolerance for U.S. and/or global debt, while helpful in plotting trading strategies, is in no way a validation of MMT as sound economic policy. It simply evidences an increased global appetite for risk.
MMT proponents support the idea of a “jobs guarantee” program, that provides government-funded jobs to anyone who wants or needs one. They argue, that the existence of unemployment, is evidence that net government spending is “too small”.
If MMT becomes U.S. economic policy, the stakes could not be higher.
As Krugman recently wrote in the New York Times, “Do the math, and it becomes clear that any attempt to extract too much from seigniorage (printing money) — more than a few percent of GDP, probably — leads to an infinite upward spiral in inflation. In effect, the currency is destroyed.”
We now have a deficit of 22 trillion. And we’re currently adding a trillion a year. MMT says no problem. We can just print more money.
And if all this is not enough to make your head spin — stop and think about Wall Street’s modern obsession with unprofitable companies.
According to data from Jay Ritter, a University of Florida finance professor, unprofitable companies are now outperforming profitable companies on Wall Street.
According to Ritter, last year, 81% of American companies were unprofitable in the year leading up to their public offerings.
The unprofitable companies are currently outperforming the profitable ones — with median returns of 120% on an annualized basis from their IPO price, vs. 57% for companies that generated a profit.
Big promises, which align with what we want to believe, are hard to resist.
“Bad Blood: Secrets and Lies in a Silicon Valley Startup”, tells the story of the fraud and over-promising that brought down the Silicon Valley sensation — Theranos, and its CEO Elizabeth Holmes.
The company had assembled a “who’s who” board of directors and raised more than $700 million in funding on the promise of new technology that would revolutionize the blood-testing industry.
Theranos provides a cautionary tale, of the perils of overpromising, the risks of confirmation bias, and above all, the lure of a big idea.
Holmes built her company on the promise of revolutionizing an entire industry. She claimed that the company’s miniLabs was, “the most important thing humanity has ever produced.” Her claims created incredible interest in, and support for, Theranos.
Her board, included former Secretary of State Henry Kissinger, former Secretary of State James Mattis, former Wells Fargo CEO Richard Kovacevich, and Bechtel Group chairman Riley Bechtel.
The problem was, the company wasn’t actually able to deliver on its claims.
What all of these brilliant people bought into, according to the book’s author, was little more than “digital snake oil”.
Is MMT, and Wall Street’s fascination with unprofitable companies, any different?
And will politicians like Maxine Waters, who serves as Ranking Member of the House Financial Services Committee and Congresswoman Alexandria Ocasio-Cortez, who serves with her, be better at making these kinds of assessments, than those who were wrong about Theranos? Unlikely. I also wouldn’t rely on Wall Street, who has little if any interest in protecting you, to lead on U.S. economic policy.
So, as “Auntie Maxine” says, “stay woke.”