What Goes Around, Comes Around

Title: The millennium in Wall Street. (circa 1906 by W.A. Rogers). Summary: Sheep jumping off plank “elastic currency” over rhinoceros “the new finance” onto pillow of “unlimited credit.”

Modern Monetary Theory (MMT) is a current economic theory/scheme used by politicians who want to fund their pet programs.

This may be the ultimate economic theory used of fiat (paper) currencies with 0%, or less, interest rates we see today. This is a time when politicians don’t have to answer for their actions as they would if a gold standard were in place. Businessinsider.com

MMT is a big departure from conventional economic theory. It proposes that governments who control their own currency can spend freely, since they can always create more money to pay off debts.

Modern Monetary Theory suggests government spending can grow the economy to its full capacity, enrich the private sector, eliminate unemployment, and finance major programs such as universal healthcare, free college tuition, and green energy.

If spending generates a government deficit, this isn’t a problem. The government’s deficit is by definition the private sector’s surplus.

Increased government spending will not generate inflation as long as there is unused economic capacity or high unemployment.

MMT claims that it is only when an economy reaches physical or natural productivity constraints (such as full employment) that inflation occurs because that is when supplies fail to meet demand and prices rise.

MMT is known as “modern” but it is
not new. The idea of unlimited money
or credit has been around for centuries.

The Continental Congress used it when they needed cash to fund the Revolutionary War. They created the Continental Dollar, which was a zero-interest bearer bond. At the beginning, it was not paper (fiat) currency, but it essentially became a fiat currency when Congress changed the rules of redemption in ways that were not fiscally credible. Farley Grubb

What goes Around…

Economic theories aren’t the only things to come and go in a cycle. Interest rates also have their own cycle that rise and fall regardless of whether the world has fiat currency or a gold standard.
The chart below shows the interest rate cycle over the last 200+ years. There have been three complete cycles (from low to high and back to low) since 1800. In 2020, we are at the bottom of the cycle, waiting for the rising part of the cycle to begin its twenty-plus year rise.


The chart below shows the interest rate cycle over the last 200+ years. There have been three complete cycles (from low to high and back to low) since 1800. In 2020, we are at the bottom of the cycle, waiting for the rising part of the cycle to begin its twenty-plus year rise.

Below is from an online letter by financial writer Bill Bonner.
(Courtesy of Pfennig for your Thoughts,5/20/2020)

“No pure-paper money (aka fiat money) has ever survived a complete interest rate cycle.”
Now, (in 2020) we will see it put to the test. In the Panic of 1857, the yield on the U.S. 10-Year Treasury Note rose to 6.6%. It took a lifetime for it to reach the next top, in 1920. Then, another sixty-one years passed before we reached the next top.
In other words, these are generational trends. One generation learns. the next forgets. In a week, we can forget where we left the car keys. …Forty years later we can scarcely remember – or even imagine – the 15% mortgage rates of 1980. And what has happened to the “bond vigilantes” who used to sell U.S. Treasury bonds at the first sign of runaway deficits? Surely, they are in wheelchairs, unable to recall their own names, much less how they lost their fortunes betting against the bond bubble.
And if the pattern holds, in a few years, we’ll regret not having locked in today’s low mortgage rates… if we can remember them!
After this downdraft has flattened the economy, interest rates (and consumer price inflation) should begin to rise. In another 20 years or so, rates should be reaching for another generational top. Perhaps you’ll have to pay 15% for a mortgage. Or maybe it will be more like 50%. Or, mortgage lenders could be almost out of business, as they already are in Argentina. If you want to buy a house there, you’ll have to pay cash.

Relearning the Lesson

Yes, it’s back to school. Now, we learn – again – why, for 180 years, U.S. dollars were linked to gold, rather than simply to promises from the U.S. government.
In a nutshell, it’s because the 1791 generation (when the U.S. dollar first appeared) knew something the generation of 2020 has forgotten: Power corrupts.
And the power to create “money” is so irresistible that no race, no nation, no genius, and no government official has ever resisted it for long.
Eventually, a “necessity” arrives. Typically, it is a war or the threat of insurrection.
In the 1930s, Rudolf von Havenstein, was in charge of printing German money for the Weimar Republic. He said he had to do it to head off a Bolshevik Revolution. Instead, he got the Nazis.
And now, it’s Jerome Powell, Chairman of the Federal Reserve (or Rudolf von Powell) who is cranking hard on our own printing presses.”

…Comes Around

Today we are in a financial era with an historically unusual sequence of events and government policies that are not fiscally credible.
We have governments spending trillions of dollars they don’t have to help people survive the coronavirus pandemic, by issuing debt and printing electronic money they don’t have because they have a modern theory that allows them to do it.
• Economic theories work until they don’t.
• Rising interest rates lower the value of assets.

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