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Markets, Debt, Inequality … the need for a Modern Money Tree

13 min readNov 5, 2019
By some measures this had been the most overvalued stock market in history

Over the span of the 119 years since 1900 there have been 36 equity bull markets. During each, the general pricing of stocks has gone high enough to become overvalued. Hence the ensuing bear market, which is often just a case of mean reversion. Prices that went too high come back to fair value. Sometimes they drop low and the market temporarily becomes undervalued.

We recently experienced the longest bull market in history. And by some measures stock prices had become more overvalued than at any other point in history.

The top 10% of the wealth elite owns almost 90% of stocks. That’s one reason, among others, why that 10% has become obscenely rich and why inequality has become so exaggerated.

Stock valuations were bound to fall from where they were in the winter of 2020. The decline will take away some of the super-affluence of the wealthy, but it will also affect the whole economy at the expense of the general populace.

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Howard Schneider in Reuters 8/7/2019: “With interest rates stuck at historically low levels and inflation weak, central bankers wonder if they have the tools to weather the next downturn, and what can lift the economy if they don’t. To MMT adherents, that is emblematic of a system that needs changing in favor of one where Congress simply spends what is needed to ensure full employment and adequate demand, the Treasury writes the checks, and the Fed prints the money to cover them.”

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Statistically, these seem like relatively good times. Infant mortality rates have been declining. Life expectancy around the world has almost doubled in the past century. Medical and hygiene advances have saved many lives. Recent decades have witnessed a general decline in violence and improvement in regard to most measures of health, education, and welfare.

However, when examined more carefully, we can see that the socio-economic and vital statistics conceal significant “externalities” and disparities. For example, while the world’s GDP increased substantially since 1970, there has been a vast die-off of the creatures with whom we share the earth. And, as we know, economic growth has benefited the wealth/power elites disproportionately. GDP may be rising, but so is inequality.

Perhaps less recognized is the fact that our “golden age of progress” has been based upon an accumulation of debt and under-funded future obligations. This is a worldwide phenomenon, but let’s focus on the United States: In 2018 dollars (i.e., adjusted for inflation) Gross Domestic Product was about $4 trillion in 1970. The total of public and private debt in that year was $2 trillion, half of GDP. By 2018 the GDP had gone up by a factor of five to $20 trillion. But the total of public and private debt had soared to over $70 trillion, more than three times GDP. Debt increased by a factor of 35 over that span of time!

Regarding under-funded obligations, one example among many is the pending crisis involving pension and retirement reserves. According to a 2015 analysis by the World Economic Forum, there was a combined retirement savings gap in excess of $60 trillion, spread between eight major economies: Canada, Australia, Netherlands, Japan, India, China, the United Kingdom, and the United States.

It would take very high levels of economic growth to meet the expectations of future retirees, to enable student loans to be paid off, to cover corporate and consumer debt, etc. Toward that end the world’s central banks have been pushing down interest rates hoping to spur growth. Low rates have been the norm for over a decade.

In financial circles the benchmark public debt instrument is the US Treasury note of 10-year duration. Historically its yield has been between 3% and 7% with an average of about 5%. But since 2011 it has been under 3%. The dividend yield of S&P-500 equities has been even lower.

Pension funds usually project returns of approximately 8% to achieve the investment goals that will enable retiree payouts. That figure is based on an expectation of 10% return from stocks and 5% return from bonds. A 60–40 ratio of stocks to bonds gives a total portfolio return of 8%. That’s geeky stuff, but the important thing to understand is that there has been an expectation of and a fiduciary need for 8% return on investments. Late capitalism has lately been returning no such thing.

Policymakers have become concerned about the degree to which financial obligations are underfunded worldwide. Meanwhile, Greens — paying attention to a deeper level of “obligations,” i.e., the imperatives for ecological sustainability — point out that remediation requisites are even more “underfunded.” Environmental depletion, pollution, and exhaustion is actually another kind of debt.

THE ILLUSION OF PROGRESS

So: the relatively good times have been built upon a not very good, not very solid edifice of depletion and debt accumulation. How and why has this pattern of social and ecological irresponsibility developed . . . and mostly been ignored?

Industrial capitalism flourished between 1750 and 1950. The economy soared, though in a kind of “two steps forward, one step back” fashion. The steps back, from a GDP standpoint, were a consequence of geopolitical and economic systemic instabilities — wars, revolutions, depressions, inflations. One response to the traumas and instabilities (and inequalities) was the growth of the socialist movement during the first half of the twentieth century. This motivated the power elites to make very deliberate efforts to stabilize the system after World War II.

It took the elites a while to recognize that government-based management of the system was in their interest. Most sovereign federal governments were relatively laissez-faire during the early period of capitalism. National-level budgets were constrained. Revenues for public finance flowed predominantly to municipalities, states, and provinces.

In Europe, by 1800, there had started to be a trend in the direction of centralization. This was a factor in the vigorous debate between Alexander Hamilton and Thomas Jefferson in the newly established United States. Hamilton wanted to see a higher degree of federalism, with a goal of having the country become a world power like England. Jefferson advocated localism, sovereignty for the states, and a minimalist central government that would refrain from geopolitical entanglements. But the zeitgeist favored Hamilton’s inclination. Later in life even Jefferson succumbed to the siren song of great-power aspirations when he became president.

The trend toward overweening federalism advanced in a gradualistic way. During the first half of the nineteenth century the central government was still relatively unobtrusive and fiscally frugal. It got by on revenues just from excise taxes and tariffs. By the latter half of that century its growth would require much more in the way of revenues; so there was a push for income taxation. It eventually resulted in an amendment to the constitution in 1913. After that, both expenditures and revenues expanded at an accelerating rate. But they more or less expanded in tandem. Except during years of major wars, running significant deficits was viewed as problematic. It was considered indisputable that, like a household or a business, government, over time, should strive to balance revenues and expenditures in order to avoid a build-up of debt.

There were debates about whether or not the government ought to be more proactive in terms of national economic management, but in our country, until the time of the Great Depression, the consensus still favored a relatively free-market orientation. For example, rather than stimulative fiscal policy (deficit generation) the Progressives of the early part of the twentieth century advocated trust-busting and monetary inflation to bolster the economy and address inequality (inflation so that farmers could more easily manage their debts).

In Europe, the dramatic growth of the socialist movement motivated many countries to institute more extensive social welfare programs. There was less pressure for such in the US, but the need to build out the infrastructure for the industrial state forced the American government to take some steps in the direction of economic management.

The Depression motivated bigger steps.

INTERVENTIONS TO SAVE THE SYSTEM

Between 1930 and 1935 the elites were alarmed about the growing resentment toward a system that had seemed to collapse. During prior decades the writings of Marx and other European socialist theorists had been translated into English. By the time of the Great Depression radical ideas had reached a critical mass of circulation, even in the US. Workers were aware that Marx had described how the capitalist system tends toward instability and impoverishment; how he stipulated that progress will mean moving on to socialism, the “next higher stage of history.” The 1917 Bolshevik insurgency in Russia was a watershed in that regard. By 1935 socialists could point to a whole sequence of real-world events to make a case that the revolutionary epoch had arrived. Left-wing parties experienced waves of growth. The elites decided that they had better pay a lot more attention to managing the system in order to ameliorate instability. They turned to Keynesianism as a theoretical basis for greatly increased central government engagement with the economy.

John Maynard Keynes had said that proactive deficit spending could keep effective demand from collapsing as it did during the Depression. The acceptance of this doctrine led to a major transition of policy. Deficit spending was no longer considered an impropriety; rather, it became viewed as a policy tool. But a temporary one. There was still the idea that the government should balance out revenues and expenditures over time. If deficit spending was enacted when the economy was in danger of contracting, then surpluses should be run during periods of expansion.

Keynesian-inspired deficit spending became orthodoxy after WWII. Growth was stimulated, but governments tended to ignore the specification to run surpluses when the economy was robust. Spending kept unemployment low and profits high. Given the green light to run deficits, politicians in power couldn’t resist abusing the privilege. For a while, during the 1960s and 1970s, the consequence was inflation — not only in terms of profits, which the elites desired, but also in terms of wages. The latter was considered problematic. It was viewed as a cause of cost-push inflation and a potential constraint on profits. Corporations responded by off-shoring production.

The term “late capitalism” refers to the period of globalization. It has resulted in a number of new phenomena. In particular, two trends relevant to our current discussion have been: (1) the additional manufacturing and mining capacity in Asia, Africa, and Latin America that has led to a general state of productive over-capacity relative to demand; and (2) the associated lower wage rates which have suppressed wage levels throughout the system. Both of these consequences are deflationary, as was evident in the Great Recession of 2007–2009. During that crisis the central banks got concerned that a 1930s-type of depression might be unfolding. They initiated extreme counter-measures such as zero rates of interest on the instruments they control directly (like the US Federal Funds rate) and unprecedented purchases of bonds with the objective of lowering yields. The latter policy was given an obfuscatory name (“quantitative easing”) to deflect attention from how radically the banks were expanding their balance sheets through bond purchases.

These measures seemed to work for a while. Economic contraction was reversed and deflation was avoided, but the unconventional fiscal and monetary policies failed to generate truly strong rates of growth. The tepid post-crisis expansion since 2009 has not allowed the central banks to reduce their balance sheets, normalize interest rates, or end their extraordinary monetary interventions. What has transpired is that they’ve produced a very selective kind of inflation — not in consumer prices, but rather in elevated prices of financial assets. This has exacerbated inequality, because the Top 10% own almost 90% of privately-held stocks and bonds.

Billion-dollar fortunes have been spawned while wages have stagnated. It’s obscene, of course, but it also will be ultimately counterproductive. The general valuation of the stock and bond markets normally has some relation to the underlying productive economy. By 2019 it reached an unprecedented hyper-level. The disconnect can’t continue. It’s not likely that stronger economic growth will resolve the disparity. Rather, the valuation of financial assets will start falling again when the boomlet ends.

WHO, IN DEBT, HASN’T DREAMED ABOUT HAVING A MONEY TREE?

Keynesian-inspired fiscal policies have generated an enormous amount of sovereign (governmental) debt in all the leading economies. For example, over the last twenty years the national debt of the United States has increased 320% — from $5.7 trillion in 2000 to $18.2 trillion in 2019. During the same period GDP (from which tax revenues are derived) has gone up about 100%.

Looking at their household finances, a couple might say: “We’ve been having trouble matching income and expenditures. At the rate things are going we’re going to drown in debt.” According to a 2017 GOBankingRates survey, less than half of Americans (43 percent) have as much as $1,000 in their savings accounts. Forty percent have trouble matching income and expenditures at least one month per year and thus have to incur credit card debt. Does that seem irresponsible? Well, the federal government hasn’t matched annual income and expenditures since 2001!

Every once in a while the government runs a surplus, but the preponderance of deficit years assures that the national debt keeps growing. 1835 was the only year in history when the country was debt free! Either Uncle Sam needs lessons in household parsimony or he needs a money tree.

Or he needs to embrace MMT.

JUST PRINT IT

“In terms of managing the system, we need to go beyond Keynesianism. Unless and until we are fully utilizing the productive capacity of our economy, pay no mind to revenues; just print money and spend it.” So say advocates of Modern Monetary Theory.

Don’t tax. Don’t borrow. Don’t worry about balancing revenues and expenditures. Don’t think in terms of deficits at all. Think, instead, about systemic stability and about achieving a full employment economy.

Yes, they say, the federal government could act as if it has a money tree. It can approach expenditures that way because it issues and controls the kind of money it taxes and spends. This would not apply to state governments or to countries that are “not sovereign” in regard to the issuance of their currency (i.e., the value of their currency is pegged to the dollar and thus they can only print an amount that retains that peg).

There is a lot of complex technical stuff written about it, but the bottom line of the movement is actually simple — MMT’ers say: “Why should we have people unemployed while productive assets are not being fully utilized? Under those conditions everyone suffers. Naturally, the unemployed suffer the most, but we all suffer to the extent that economic output is below its optimum potential. So: move those unemployed people into under-utilized sectors and get the economy humming!”

They say: Clearly the private economy can’t do it. The history of the capitalist system shows that without government expenditures unemployment varies in a cycle. Rarely does it drop below three percent; at times it soars to over ten percent. What a waste! The MMT’ers would have government spend enough to reduce involuntary unemployment to zero at all times. Surely, there’s lots of work to be done. Super-fund sites need to be cleaned up. Affordable housing needs to be built. A whole backlog of infrastructure repairs is pending. Commercial buildings could use energy retrofits. Solar panels need to be deployed.

Implementation of a Green New Deal, alone, could eliminate all involuntary unemployment. The MMT’ers say: If the electorate indicates approval of a Green New Deal and the cost will be $30 trillion over the next twenty years, let the government print $30 trillion to fund it. Pay no attention to raising revenues to cover the expense.

Pay no attention to raising revenues to cover the expense?!

Most people would say: WTF! . . . MMT’ers say: Why not?

FROM THERE THE DISCUSSION GETS PRETTY TECHNICAL

Mainstream economists critique MMT by claiming that the value of the currency would fall and/or interest rates would rise and/or government expenditures would crowd out private sector investment . . . and/or “just print” is just outrageous. Naturally, MMT’ers have formulated answers to all the various critiques. Notably, they are very explicit about how to deal with the inflation potential of money printing. Once an economy has been stimulated toward the achievement of full employment, the government has to monitor for excess demand. Demand beyond supply capacity could, indeed, generate inflation. At that point it would be appropriate to raise taxes or issue bonds in order to remove excess liquidity from the system.

In other words: Taxing and borrowing are not needed to raise revenues. Rather, they are tools to use to dampen inflation tendencies when such arise.

Critique and counter-critique about these ideas has been going on within the confines of the academic journals for several decades. The controversy came to prominence when a leading MMT advocate, Stephanie Kelton, Professor of Public Policy and Economics at Stony Brook University, became an advisor to Bernie Sanders’ 2016 presidential campaign.

The technicalities of the discussion are likely to cause the eyes of any non-economist to glaze over. And it’s likely that no one will ever know who’s right until the theory is put into practice in the real world. But the elites are becoming attuned to the possibility that MMT can solve problems regarding debt and under-funded obligations. Keynesianism had opened the door to acceptance of continual deficit spending. MMT could be the “next big thing” in terms of salvational policy revolutions.

THEY’LL KEEP TRYING TO SAVE THEIR SYSTEM

Management of the unruly system has been an issue since at least the Depression of the 1930s. Left-liberals have long advocated substantial government intervention. The power elite conservatives were dragged kicking and screaming toward realization of the necessity to be proactive. During the twentieth century it was the specter of socialism that motivated them. Now it’s the specter of low-returns capitalism, unfunded future liabilities, and the potential for a debt deflation crisis.

Fiscal policy, tariffs, subsidies, monetary policy, quantitative easing, currency manipulation: The dynamic toward increasing management of the system continues unabated. Arguably, MMT is the next logical step. Printing money for expenditures without regard to revenues is a radical post-Keynesian notion. So is the insistence upon an always-full-employment economy. Adam Smith would shudder at the idea of a capitalist economy so managed and manipulated, so centralized. But it might well come to pass. Only then will we know whether Stephanie Kelton is justified in saying that the government can always afford new programs because it can issue currency without taxing or borrowing — or Bill Gates has it right when he describes MMT theory as “crazy talk.”

What’s certain is that the elites will try to skew systemic benefits in their direction no matter what theories or policies are au courant at any point in time. Greens will continue to need to work toward the creation of a world where money trees are not needed, where the “money changers are driven from the temple,” and where power elitism, plutocracy, corporate domination, and ecological irresponsibility are viewed as sorry historic artifacts. We should have no delusions about monetary management of any kind under conditions of late capitalism.

(Parts of this article appeared in the Fall 2019 issue of Green Horizon Magazine.)

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Steven Welzer
Steven Welzer

Written by Steven Welzer

A Green Party activist, Steve was an original co-editor of DSA’s “Ecosocialist Review.” He now serves on the Editorial Board of the New Green Horizons webzine.

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