Modern Monetary Theory Isn’t the Future. It’s Here Now

The infrastructure act signed into law last week marked a defeat for the faction of progressive economists in ascendancy in 2020. For these advocates of modern monetary theory, the insistence by both political parties that all the $550 billion of new spending be matched by offsetting revenue, known as “payfors,” goes against their belief that money is merely a tool for government.

This is a temporary rhetorical setback. The reality is that MMT’s ideas have insinuated themselves deep into government, central banking and even Wall Street—and the infrastructure act is in fact deficit-financed anyway.

MMTers detest payfors as wrongheaded thinking about money. Money only exists because of government spending, and under MMT, the government should just create as much as it needs to finance its projects. In a tight economy—like we have now—MMT might want offsets to new spending. But higher taxes or lower spending elsewhere would be aimed at avoiding inflation, not at balancing the budget.

The government hasn’t embraced MMT. But important elements of it are now accepted by much of the economic and financial establishment, with major implications for how the economy is run.The most important claim of MMT is that a government need never default on debt issued in its own currency. The lesson of 2020 was that MMT is right.

“We got five or six trillion dollars of spending and tax cuts without anyone worrying about payfors, so that was a good thing,” says L. Randall Wray, an economics professor at Bard College in New York and a leading MMT academic. “In January [2020], MMT was a crazy idea, and then in March, it was, OK, we’re going to adopt MMT.”

It isn’t just MMTers who say the world took a turn toward a new way of thinking.

“Governments have lost their fear of debt,” says Karen Ward, chief market strategist for EMEA at JPMorgan Chase’s asset-management arm. “They were terribly worried about bond markets and investors punishing them. What they saw last year was record high levels of debt at record low levels of interest rates.”

Central banks that had struggled for a decade to boost inflation using monetary tools found that fiscal tools were far more powerful. Government spending does far more for inflation than quantitative easing, it turns out, and central-bank calls for more fiscal action to boost the economy are more likely to be accepted next time deflation looms.

Key parts of MMT haven’t been adopted, particularly its call for government to guarantee everyone a job. But the MMT critique of the status quo, where the central bank modulates the number of unemployed people to control inflation, hit a nerve. The Federal Reserve shifted in favor of running the economy hot to reduce inequality. Employment has become more important in its thinking, and its move to a target of average inflation means it is willing to accept higher inflation than previously.

Still, the Fed is (rightly) worried about inflation and is tweaking its tools to try to influence the economy with monetary policy, something MMTers think just doesn’t work. As Mr. Wray points out, it wasn’t when trillions in benefit checks landed in bank accounts last year that inflation went up; prices went up when the recipients went out and spent the money. “Money doesn’t cause inflation,” Mr. Wray argues, a view that infuriates monetarist economists. “Spending causes inflation.”

In the next downturn it is going to be very difficult for governments to resist calls to provide huge support, now that it has been shown that bond markets don’t care. That should mean recessions are shallower, debt is higher, the government is more involved in the economy and, assuming the Fed doesn’t accept that its tools are useless, interest rates are higher on average than in the past. Bond markets aren’t pricing in anything of the sort, though. The 30-year Treasury yield is only 2%, well below the 3.2% average of the 10 years up to 2020.

Under full-blown MMT, payfors would be ditched for a mix of micro-planning of the resources needed for new projects, and an assessment of the overall impact on the economy—and potentially, higher taxes.

MMT is both right and wildly optimistic that higher taxes could slow an overheated economy and bring down inflation. The flip side of last year’s demonstration of the power of fiscal policy is that higher taxes can suck demand out of the economy much more effectively than the Fed’s interest-rate tools.

There was a brief moment when it looked as though Democrats might impose higher taxes on billionaires as part of the payfors for the roughly $2 trillion social-spending bill, although they were dropped on first contact with reality. MMTers mostly aren’t worried about  Biden’s spending plans causing inflation anyway. But MMT prescribes that if tax rises are needed to slow demand, billionaires wouldn’t be the target: The rest of us would.

“It makes more sense to have a broad-based tax that would reduce demand across the broader economy, especially people who have a propensity to spend of 98%, which is the majority of Americans,” Mr. Wray said.

Other MMT ideas have infiltrated their way into the heart of the establishment, but the idea that the government should raise taxes on ordinary Americans, let alone that it should do so to control inflation, is exceptionally unlikely to be accepted.

That is a bad thing, because MMT’s ideas encourage more spending, and if that results in more inflation in the longer run, MMT is right that higher taxes are the simplest way to reduce demand and prevent a surge in prices.

James Mackintosh

By: James Mackintosh / Senior columnist, markets, The Wall Street Journal

Source: Modern Monetary Theory Isn’t the Future. It’s Here Now. – WSJ

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Reopening Stocks Lead The Market Higher After Strong Jobs Report, Pfizer Announcement

The stock market rallied to record levels yet again on Friday after a better than expected October jobs report, a big announcement from Pfizer and a slew of strong corporate earnings results all helped boost investor optimism about America’s economic recovery.

Key Facts

All three major averages touched new highs: The Dow Jones Industrial Average rose 0.6%, over 200 points, while the S&P 500 gained 0.4% and the tech heavy Nasdaq Composite increased 0.2%.

The United States added back 531,000 jobs in October—better than the 450,000 expected by economists, according to data released by the Labor Department on Friday.

The long-struggling labor market is showing signs of improvement, notching its best monthly showing since July, while the unemployment rate ticked down to 4.6%—its lowest level in more than a year.

A major announcement on Friday from vaccine maker Pfizer also helped boost stocks tied to the reopening of the economy: The company said it will seek FDA approval for its antiviral pill, which reduces the risk of hospitalization and death from Covid-19 by 89%.

Although the Pfizer announcement caused shares of other vaccine makers such as Moderna, BioNTech and Merck to plunge, travel and leisure stocks widely rallied on the news and led the market’s gains on Friday.

Solid earnings also helped drive optimism, including from the likes of Uber, which reported its first-ever adjusted quarterly profit as demand for ride-sharing recovered, and Airbnb, which had its “strongest quarter ever” as travel continued to rebound.

What To Watch For:

While reopening stocks have performed well recently, several pandemic favorites have struggled. Shares of at-home fitness equipment maker Peloton plunged over 30% on Friday after reporting dismal quarterly earnings—making CEO John Foley no longer a billionaire. Other companies have also seen their businesses take a hit from the reopening of the economy: Smart TV company Roku and online education company Chegg both reported lackluster earnings this week.

Tangent:

The Federal Reserve said on Wednesday that despite labor shortages, supply chain constraints and inflation fears, the U.S. economy was recovering well. The central bank announced that it would begin reducing the historic level of stimulus it has been providing markets since the Covid-19 pandemic began. Fed chairman Jerome Powell also clarified his stance on high inflation, saying it was “expected to be transitory.” Markets have since rallied on the news.

Key Background:

The stock market has continued to hit fresh highs in recent weeks: The S&P 500 rose over 5% in October for its best month so far in 2021 and is up nearly 2% so far in November. Optimism around the reopening of the U.S. economy has grown, in large part thanks to third-quarter corporate earnings that have proved resilient despite higher costs and inflation fears. Of the 445 companies in the S&P 500 that have reported results so far, nearly 81% have beaten expectations, according to Refinitiv.

Further Reading:

Peloton Shares Plunge Over 30%—And CEO John Foley Is No Longer A Billionaire (Forbes)

Stocks Hit Fresh Records After Fed Says It Will Taper Pandemic Stimulus (Forbes)

U.S. Economy Added 531,000 Jobs Last Month—But 7.4 Million Americans Are Still Unemployed (Forbes)

Billions Wiped From Covid Pharma Heavyweights—Including Moderna, Regeneron, Merck—As Pfizer’s Antiviral Pill Triggers Selloff (Forbes)

Follow me on Twitter or LinkedIn. Send me a secure tip.

I am a New York-based reporter covering billionaires and their wealth for Forbes. Previously, I worked on the breaking news team at Forbes covering money and markets.

Source: Reopening Stocks Lead The Market Higher After Strong Jobs Report, Pfizer Announcement

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Census Figures Show Americans’ Incomes Fell in 2020

Americans last year saw their first significant decline in household income in nearly a decade, government data showed, with economic pain from the Covid-19 pandemic prompting government aid that helped keep millions from falling into poverty.

An annual assessment of the nation’s financial well-being, released Tuesday by the Census Bureau, offered insight into how households fared during the pandemic’s first year. It arrives as Washington debates how much more to spend to bolster the economy during the worst public-health crisis in a century.

Median household income was about $67,500 in 2020, down 2.9% from the prior year, when it hit an inflation-adjusted historical high. It came as the U.S. last year saw millions lose their jobs and national unemployment soar from a 50-year low to a high of 14.8%.

The last time median household income fell significantly was 2011, in the aftermath of the 2007-09 recession.

The Census Bureau’s top-line income figure includes unemployment benefits but doesn’t account for income and payroll taxes nor stimulus checks or other noncash benefits like federal food programs. If those had been counted, the median household income would have risen 4% to $62,773.

As was the case with the income measure, the report offered conflicting takes on poverty trends because of differing definitions and approaches to the topic.

The bureau said the traditional poverty rate in 2020 was 11.4%, an increase of 1 percentage point from 2019 and the first increase after five consecutive years of declines. That translated to 37.2 million people in poverty, an increase of 3.3 million from 2019. For a four-person household, the threshold for meeting the definition of poverty was about $26,000 in 2020.

The official poverty measure doesn’t reflect how much a household pays in taxes, and it also omits noncash government aid like tax credits, housing subsidies and free school lunches. A broader poverty measure that accounts for such expenses and income actually fell last year to 9.1%, down 2.6 percentage points from 2019.

The decrease, coinciding with an increase in the official poverty rate, highlighted the role of the government safety net, which was expanded during the pandemic. The two poverty yardsticks have tracked closely for a decade, but last year was the first time that the supplemental measure dropped below the official measure.

Without the first two rounds of stimulus checks issued last year, the broader poverty measure would have risen by almost a percentage point instead of dropping, the bureau said.

Specifically, stimulus checks moved 11.7 million people above the poverty threshold if their effect was calculated alone. In the same manner, expanded unemployment programs did so for 5.5 million people. Refundable tax credits, such as the earned-income tax credit, did so for 5.3 million people. The Social Security program, however, remained the largest safety net program, lifting 26.5 million people above the poverty line.

“The increase in poverty would have been even larger if it were not for the ample fiscal support provided over the past year,” said Shannon Seery, an economist at Wells Fargo & Co.

After continued direct federal payments made to households in 2021 and enhanced unemployment benefits that expired in early September, Ms. Seery said, an improving unemployment picture should help households.

“With a robust demand for labor, exhibited by the record 10.9 million job openings in July, and average hourly earnings rising across industries, the current environment should help lure workers back to the job site,” she said.

The bureau also said Tuesday the proportion of Americans without health insurance for all of 2020 was 8.6%, essentially unchanged from 2018. About 28 million Americans lacked health insurance, according to the survey.

Median earnings in 2020 of those who worked full time, year-round increased 6.9% from 2019. The 2020 female-to-male earnings ratio was 83%, essentially unchanged from the previous year.

The distribution of incomes changed little. The top fifth of households—with incomes above $141,100—collected 52.2% of household income, while the top 5% alone—with incomes above $273,700—collected 23%. The bureau reported that the income shares collected by the lowest groups dropped slightly. The lowest fifth of households—making less than $27,000—collected 3%, down from 3.1% in 2019. The second fifth—with incomes from $27,000 to $52,000—collected 8.1%, down from 8.3% in 2019.

In 2020, median household incomes decreased 3.2% in the Midwest and 2.3% in the South and West, the bureau said. The change in the Northeast between 2019 and 2020 wasn’t statistically significant.

Median incomes were highest in the Northeast ($75,211) and the West ($74,951), followed by the Midwest ($66,968) and the South ($61,243). Households with the lowest levels of educational attainment logged the greatest declines in their incomes. For those headed by someone without a high school diploma, incomes dropped 5.7%, while those headed by someone with some college education or a bachelor’s degree or higher recorded a 2.8% decline.

The road ahead for the U.S. economy looks more uncertain than earlier in 2021. In recent weeks, growing evidence has built of lost momentum as Covid-19 cases rose again. Supply-chain challenges and a lack of workers for lower-paying jobs also are weighing on economic growth.

Rocky Smith Jr., a 41-year-old union worker who cuts metal parts down to size after they exit a furnace, said things are looking up for his family of four in Muskegon, Mich. After being laid off in April 2020, he said, he wasn’t hired back until July 2021.

Mr. Smith said he is now making more than $20 an hour at his full-time job. His wife, he said, resumed working during his unemployment and the family skipped meals out and other luxuries.

“We rolled with the punches,” said Mr. Smith, a former boxer. “Life hit us, but we made it work.”

By: John McCormick and Paul Overberg

Source: Census Figures Show Americans’ Incomes Fell in 2020 – WSJ

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Why Wall Street Is Afraid of Government-Backed Digital Dollar

Imagine Imagine logging on to your own account with the U.S. Federal Reserve. With your laptop or phone, you could zap cash anywhere instantly. There’d be no middlemen, no fees, no waiting for deposits or payments to clear.

That vision sums up the appeal of the digital dollar, the dream of futurists and the bane of bankers. It’s not the Bitcoin bros and other cryptocurrency fans pushing the disruptive idea but America’s financial and political elite. Fed Chair Jerome Powell promises fresh research and a set of policy questions for Congress to ponder this summer. J. Christopher Giancarlo, a former chairman of the Commodity Futures Trading Commission, is rallying support through the nonprofit Digital Dollar Project, a partnership with consulting giant Accenture Plc. To perpetuate American values such as free enterprise and the rule of law, “we should modernize the dollar,” he recently told a U.S. Senate banking subcommittee.

For now the dollar remains the premier global reserve currency and preferred legal tender for international trade and financial transactions. But a new flavor of cryptocurrency could pose a threat to that dominance, which is part of the reason the Federal Reserve Bank of Boston has been working with the Massachusetts Institute of Technology on developing prototypes for a digital-dollar platform.

Other governments, notably China’s, are ahead in digitizing their currencies. In these nations, regulators worry that the possibilities for fraud are multiplying as more individuals embrace cryptocurrency. Steven Mnuchin, former President Donald Trump’s treasury secretary, said he saw no immediate need for a digital dollar. His successor, Janet Yellen, has expressed interest in studying it. Support for a virtual greenback cuts across party lines in Congress, which will have a say on whether it becomes reality.

At a hearing in June, Senators Elizabeth Warren, a Massachusetts Democrat, and John Kennedy, a Louisiana Republican, signaled openness to the idea. Warren and other Democrats stressed the potential of the digital dollar to offer free services to low-income families who now pay high banking fees or are shut out of the system altogether.

Kennedy and fellow Republicans see a financial equivalent of the space race that pitted the U.S. against the Soviet Union—a battle for prestige, power, and first-mover advantage. This time the adversary is China, which announced this month that more than 10 million citizens are now eligible to participate in ongoing trials.

The strongest opposition to a virtual dollar will come from U.S. banks. They rely on $17 trillion in deposits to fund much of their core business, profiting from the difference between what they pay in interest to account holders and what they charge for loans. Banks also earn billions of dollars annually from overdraft, ATM, and account maintenance fees. By creating a digital currency, the Federal Reserve would in effect be competing with banks for customers.

In a recent blog post, Greg Baer, president of the Bank Policy Institute, which represents the industry, warned that homebuyers, businesses, and other customers would find it harder and more expensive to borrow money if the Fed were to infringe on the private sector’s historical central role in finance. “The Federal Reserve would gain extraordinary power,” wrote Baer, a former assistant treasury secretary in the Clinton administration.

Some economists warn that a digital dollar could destabilize the banking system. The federal government offers bank depositors $250,0000 in insurance, a program that’s successfully prevented bank runs since the Great Depression. But in a 2008-style financial panic, depositors might with a single click pull all their savings out of banks and convert them into direct obligations of the U.S. government.

“In a crisis, this may actually make matters worse,” says Eswar Prasad, a professor at Cornell University and the author of a book on digital currencies that will be published in September. Whether a virtual dollar is even necessary remains up for debate. For large companies, cross-border interbank payments are already fast, limiting the appeal of digital currencies. Early adopters of Bitcoin may have won an investment windfall as its value soared, but its volatility makes it a poor substitute for a reliable government-backed currency such as the dollar.

Yet there’s a new kind of crypto, called stablecoin, that could pose a threat to the dollar’s dominance. Similar to the other digital currencies, it’s essentially a string of code tracked and authenticated via an online ledger. But it has a crucial difference from Bitcoin and its ilk: Its value is pegged to a sovereign currency like the dollar, so it offers stability as well as privacy.

In June 2019, Facebook Inc. announced it was developing a stablecoin called Libra ( since renamed Diem). The social media giant’s 2.85 billion active users worldwide represent a huge test market. “That was a game changer,” Prasad says. “That served as a catalyst for a lot of central banks.”

Regulators also have concerns about consumer protection. Stablecoin is only as stable as the network of private participants who manage it on the web. Should something go wrong, holders could find themselves empty-handed. That prospect places pressure on governments to come up with their own alternatives.

Although the Fed has been studying the idea of a digital dollar since at least 2017, crucial details, including what role private institutions will play, remain unresolved. In the Bahamas, the only country with a central bank digital currency, authorized financial institutions are allowed to offer e-wallets for handling sand dollars, the virtual counterpart to the Bahamian dollar.

If depositors flocked to the virtual dollar, banks would need to find another way to fund their loans. Advocates of a digital dollar float the possibility of the Fed lending to banks so they could write loans. To help banks preserve deposits, the government could also set a ceiling on how much digital currency citizens can hold. In the Bahamas the amount is capped at $8,000.

Lev Menand, an Obama administration treasury adviser, cautions against such compromises, saying the priority should be offering unfettered access to a central bank digital currency, or CBDC. Menand, who now lectures at Columbia Law School, says that because this idea would likely require the passage of legislation, Congress faces a big decision: to create “a robust CBDC or a skim milk sort of product that has been watered down as a favor to big banks.”

By: Christopher Condon

Source: Cryptocurrency: Why Wall Street Is Afraid of Government-Backed Digital Dollar – Bloomberg

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Critics:

Wall Street is warming up to the idea that the next big disruptive force on the horizon is central bank digital currencies, even though the Federal Reserve likely remains a few years away from developing its own.

Led by countries as large as China and as small as the Bahamas, digital money is drawing stronger interest as the future of an increasingly cashless society. A digital dollar would resemble cryptocurrencies such as bitcoin or ethereum in some limited respects, but differ in important ways.

Rather than be a tradable asset with wildly fluctuating prices and limited use, the central bank digital currency would function more like dollars and have widespread acceptance. It also would be fully regulated and under a central authority.

Myriad questions remain before an institution as large as the Fed will wade in. But the momentum is building around the world. As the Fed and other central banks work through those logistical issues, Wall Street is growing in anticipation over what the future will hold.

“The race towards Digital Money 2.0 is on,” Citigroup said in a report. “Some have framed it as a new Space Race or Digital Currency Cold War. In our view, it doesn’t have to be a zero sum game — there’s a lot of room for the overall digital pie to grow.”

There, however, has been at least the semblance of a race, and China is perceived as taking the early lead. With the launch of a digital yuan last year, some fear that the edge China has ultimately could undermine the dollar’s status as the world’s reserve currency. Though China said that is not its objective, a Bank of America report notes that issuing digital dollars would let the U.S. currency “remain highly competitive … relative to other currencies.”

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