Modern Monetary Theory

NOVEMBER 2020

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Modern Monetary Theory By Victor Adint How is this possible? Why would every American and most every citizen of the world accept the dollar in Modern Monetary Theory is based exchange for real goods and services when it has no on the idea that the government can intrinsic value? The US Dollar is the currency of trade finance spending by printing money. around the world, it is considered a hard or safe-haven By doing this, we will not have currency. It is the reserve currency of foreign central to pay taxes to fund more entitlements, to combat banks, and it is even used as an effective currency by climate change or to guarantee every American a job citizens of some foreign nations. (government or government sponsored). Faith, trust, legacy and an independent Central The theory is so intoxicating that it is gaining support Bank (Fed) and it could threaten the foundation of our economy and our prosperity as a nation. Everyone needs to The US Dollar is one of our most precious assets as a understand what it is, its promises, and the very real nation. It represents the confidence the world has in risks it represents. our economy, in our independent Central Bank (the Fed), in our discipline to uphold a promise, a prom-ise Monetization and expectation that we will support and protect its Currently, the Government (Treasury) collects taxes value and that others will accept it as a stable and and issues debt to finance Government spending. Our valuable currency. independent Central Bank, the Federal Reserve System Foreign nations ship us the product of their national (Fed), creates money to buy this debt. This debt must labor effort, valuable goods, and resources in exchange be paid back by the US Government. for something that has no intrinsic value. Most of MMT seeks to monetize this debt. This means that the these US Dollars are kept as a dependable storer of Government debt owned by the Fed can be forgiven value or are invested in the most trusted security in the or converted to debt that pays no interest and does world, US Treasury Bonds. We gain the most from this not come due. In so doing, the Fed can print money and MMT believes we do not need to balance trade to buy debt from the Government and forgive this because we can do this in perpetuity while printing debt, thereby, allowing the Government to effective- money to fund jobs for Americans who lose them to ly print money to fund spending. Some argue this is foreign trade. already happening because the Fed has been creating The Illusion can be compromised money to fund quantitative easing and economic stim- ulus and because the profits of the Fed are paid to the Because of dollar strength and stability, we can US Treasury. print money to finance our spending as a nation. We have an unlimited supply of something worthless but This is not the case, to my knowledge, yet; the Fed something that everyone, nonetheless, believes has real has not truly monetized the debt. The US Govern- value. This illusion, this trust, will likely be shattered if ment must repay its debt. Yes, it can issue more debt we abandon all real or perceived discipline at the to raise dollars to make its debt service payments, and printing press. If this happens, it is possible that the yes this can continue in perpetuity, theoretically. But Fed and Government will not be able to maintain congresses’ appetite for debt may have limits, and the confidence in the dollar which will lead to a drop in long-term impact this will have on the trust and value the value of our currency and economic of the dollar is unknown. hyperinflation. Intoxicating: logical and fantastical Victor Adint is a Wealth Advisor with Raymond James The theory is intoxicating and follows a well- Financial Services, Inc. specializing in working with thought-out economic logic that does make academic executives and business owners. His Branch is located sense. However, it requires that the government be at 229 W. Main St, Suite 1, Los Gatos CA 95030, incredibly competent in balancing money supply, full 408-402-3059. Securities offered through Raymond employment, and taxes to manage inflation. All done James Financial Services, Inc., member FINRA /SIPC. while eliminating any real or perceived discipline Investment advisory services offered through around the US Dollar and without this having any Raymond James Financial Services Advisors, Inc. impact on the value of the US Dollar. The opinions in this newsletter are those of the author The US Dollar is a Fiat Currency. This means that it and not necessarily those of Raymond James. has no real intrinsic value as a physical object and is Raymond James does not offer tax or legal services. not exchangeable for a physical asset like gold. It is You should discuss any tax or legal matters with the just printed paper or numbers on a screen; numbers appropriate professional. that have value simply because people believe they have value.