Today we explain the concept of Modern Monetary Policy. Something that many people do not know about, but could become very important in the near future.

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Episode 027 – Modern Monetary Policy

Rick Zich:          This is Market Insights from Southwest Investments, where we dig into current events and how they affect the markets, but also how they might impact your financial future.


Welcome to Southwest Investments. I’m your host, Rick Zich. I’m an advisor here, and joining me is Bart Schannep. Bart, welcome to the show.


Bart Schannep:  Thank you, glad to be here.


Rick:                 You know, we kind of rely a lot of your information that you’ve provided here at the company, and one of the most interesting things that we’ve talked about recently is this thing called modern monetary policy, is that.


Bart:                 Modern monetary policy, yes.


Rick:                 Let’s dig into that.


Bart:                 OK. First of all, number one, it’s not modern. It is Keynesian. This is the economic philosophy of debt, or spending more than the government has to keep the economy afloat during recession or tough times.


Rick:                 Keynesian kind of lost favor, is that why we’ve changed the name?


Bart:                 Yes. Keynesian definitely has lost favor. Now, that doesn’t mean we haven’t stopped borrowing money. We just borrow money in good times and bad times. Even though our economy, up until recently, has been very strong and very profitable, the government still borrows way more than they, you know, we spend way more than we bring in, and so the government continues to borrow.


Well, with the stimulus packages having to do with offsetting the economic impact of the coronavirus, two trillion, which may morph into six trillion, was the first stimulus. I don’t know how much the second stimulus was supposed to be. When you just put trillions of dollars, you tend to lose the number value quickly.


Rick:                 Yeah.


Bart:                     But instead of going out and borrow all that money, the thought now is to implement modern monetary theory, or policy, which would be, simply, printing the money.


Rick:                 This is not new.


Bart:                 No.


Rick:                 Number one, because, obviously, Keynesian brought this out.


Bart:                 Yeah.


Rick:                 Most recently, this is something that has happened with Japan.


Bart:                 Correct, correct. The Bank of Japan is, acts essentially, as the Federal Reserve of Japan.


Rick:                 Here like.


Bart:                 Yeah. There equivalent. What they’ve done is, when they ran into a problem of their upper limits borrowing too much money, and, in effect, risking the creditworthiness of the country, they have been quietly printing more money. What did that do? Nothing. It worked in their favor. Why is that? Because their economy was growing, and in a growing economy, even though you think, OK, more currency, more cash, in the same economy leads to inflation. That’s the definition of inflation, too much money chasing too few of goods, but if the economy is growing, you might not notice it.


Rick:                 A good example of something that is totally opposite of that, I can recall when my wife went to Zimbabwe, she got, like, a quarter-trillion note. It was a crazy number.


Bart:                 Right.


Rick:                 That was because their economy was failing.


Bart:                 Correct.


Rick:                 They were printing money, and printing money, and printing money.


Bart:                 But not expanding their economy.


Rick:                 But not expanding.


Bart:                 And not growing, and so because of that, yes, that’s right. In a closed-circuit, in a closed box, more paper currency drives up inflation. If the economy is faltering or shrinking, it really drives up inflation.


Rick:                 Right, so here we are.


Bart:                 So here we are. Granted, we’re still in the coronavirus situation, but as we move on and move beyond and get back onto a growth pattern, we may be able to print our way out of this problem. Now, the feds have a target. They’re looking for two, two-and-a-half percent inflation. That’s what they consider a healthy level of inflation. You get more than three percent, starts getting a little more problematic.


Rick:                 That’s right.


Bart:                 But that two, two-and-a-half percent’s a sweet spot. That’s where the feds are aiming. They have not been able to get that inflation.


Rick:                 They’ve been saying this for years.


Bart:                 Yes. Well, the problem is, the two drivers of inflation in the U.S. economy are labor prices and energy. Both of those have not been a problem. Labor prices have been fairly steady. Only up until about the last year has it started to rise, and energy has been going down. So.


Rick:                 Yeah, as of late, oil prices.


Bart:                 Well.


Rick:                 Are negative.


Bart:                 Yeah, that’s right.


Rick:                 For many, but.


Bart:                 Negative, yeah, never mind real recent.


Rick:                 Right.


Bart:                 But, so, how are we going to get out of this problem? How are we going to borrow all of this money? We’re not. We’re just going to start printing it.


Rick:                 Very good. Well, thanks so much Bart for sharing that insight. It’s definitely an interesting way of looking at it, and we’ll see if it comes true. Thank you for joining us this week. We look forward to seeing you next week.