1/ What is MMT?

MMT is an heterodox economic theory that argues countries that control their currency can print money to cover expenses and spend all they want.

MMT is very attractive to left-wing politicians. If implemented would have serious long-term consequences.

THREAD

2/ MMT does not simply mean increased spending & deficits. Under MMT a government controls its central bank and uses it to buy its debt or monetize deficits directly.

The key to MMT lies in *who controls the printing press*, an independent central bank, or the government.

3/ MMT claims a government can use the central bank to spend all it wants *for as long as doing so does not cause inflation*.

There is a logical impasse in that argument, as can't have one without the other.

4/ Giving government the capacity to spend all it wants generates *expectations* now that inflation will come in the future. This triggers a self-fulfilling prophecy that results in higher interest rates and higher inflation.

5/ Enter the Bond Vigilantes. Bond investors eventually become reluctant to lend to govts that overspend, driving rates higher, reducing lending in local currency in favor of foreign currency debt.

"So do you plan to spend unlimited amounts of money?

Then I can't trust you."

6/ Take Argentina for example, a country where the central bank is controlled by politicians. Argentina excels at printing money. It has defaulted 9 times in history. Few trust Argentina, so it's forced to issue debt in dollars rather than pesos. 81% of its debt is not in pesos.

7/ That's a problem for Argentina, as it can't print money to pay off debt in dollars, as the US can for example. Argentina can't devalue its currency to ease off the debt burden. Quite the opposite in fact: devaluation increases its Debt/GDP levels.

8/ A central bank such as Argentina's can actually still issue as much debt as wanted in local currency.

There are consequences: inflation & devaluation.

9/ Eventually the government must offer extremely high interest rates to attract investors and contain capital outflows.

In Argentina, interest rates are now in the order of 40% per annum. Rates were about 70% a year ago. And that is how you cripple an economy.

10/ That is why developed nations have quasi-independent central banks, where it is hard for politicians to pull the strings and get central banks to print money for political gain. That is why central banks are run by technocrats, rather than elected politicians.

11/ Of course not every country that runs MMT or monetizes deficits immediately becomes an untrustworthy Argentina for the bond vigilantes. The extent of deficit monetization and track record matter. The size of local capital markets is key as well.

12/ Now assume you give governments the control of central banks. Would you really expect governments to use the power of the central bank to spend responsibly? How many governments have a good track record for responsible spending?

13/ Why are bond vigilantes not punishing the US for buying treasuries under QE? Because a) it trusts the Fed to keep inflation under control and b) QE is only similar to MMT on the surface.

Bond market is concerned though about a blue sweep and has been selling off accordingly.

14/ MMT would represent free money for governments, controlled by governments run by elected politicians.

QE represents free money for governments, controlled by an independent central bank run by unelected technocrats. The CB has the ability to sell such debt at any time.

15/ Henceforth, while MMT would be seen as the government providing itself with free financing, QE could be seen as the Fed providing the government with an interest-free callable loan.

Thread still unfinished. This has consequences for asset prices, guess most of my followers know where I'm getting to. Note this is a thread about an ongoing trend with major financial implications that has higher odds of coming true under a left-wing govt. Can happen either way.