-Andrew Macken
One of the important debates of today is whether or not inflation will become a problem as the global economic cycle rebounds post-virus, aided by significant fiscal spending in many of the world’s large economies. Interestingly, this question of inflation, or no inflation, is part of a larger ongoing debate on the merits, or otherwise, of an increasingly popular idea called Modern Monetary Theory (or MMT).
The core idea of MMT is that governments who issue debts in their own currency can never default. After all, they can always print money to repay their debts, if need be. (An interesting corollary of this idea is that taxes are not required to fund government budgets – though are still a useful tool to drain money from the economy should it overheat). Indeed, the only limiting constraint on government spending is inflation. And so, as long as inflation remains low, then governments should spend on projects and schemes that are productive.
Should the world’s largest economy adopt a true MMT framework to govern fiscal spending, the investment implications would be enormous. On the one hand, expected economic growth would be materially greater due to significantly increased government consumption. But on the other hand, the rate of inflation and the level of interest rates would also be much higher. Finally, and most importantly, the probability of policy-mistakes would arguably much higher – creating possible scenarios of inflationary spirals and subsequent balance-sheet recessions.
With President Biden announcing a proposed US$1.7 trillion infrastructure spending program before the ink had even dried on his US$2 trillion covid-stimulus package, one might rightly wonder if MMT has already arrived in the US?
Of course, it has not. You see, despite controlling the White House, the House of Representatives and the Senate, Democrats do not have the power to enact any government spending they deem appropriate. Under the arcane rules of the US Senate, Democrats have a limited number of simple-majority-only budgetary measures, called Reconciliation[1]. But by and large, most other substantial legislation requires 60 votes (out of 100), not 51. The probability of either party controlling 60 votes in the Senate is very low for the foreseeable future. As such, long-term political gridlock, not MMT, is the most likely fiscal scenario going forward.
That is, unless the filibuster is ended. And Senate Democrats can end it with their 51 votes.
Enter the “cosmic” forces that may change the filibuster rules and lead the US to a truly MMT-enabled economy. In July last year, legendary civil rights activist and House Representative from Georgia, John Lewis, passed away. As part of his lifetime service to the civil rights movement, he had also spent many years writing proposed legislation for the expansion of voting rights. Today, this legislation is included in H.R.1, also known as “For the People Act of 2021”, which aims to: “Expand Americans’ access to the ballot box, reduce the influence of big money in politics, strengthen ethics rules for public servants, and implement other anti-corruption measures for the purpose of fortifying our democracy…”[2]
This legislation – which, on its face, has nothing to do with MMT – is widely supported by Democrats, but carries little support from Republican lawmakers. Indeed, since the US general election last November, Republican lawmakers in 43 states have proposed at least 250 new laws that would “limit mail, early in-person and Election Day voting with such constraints as stricter ID requirements, limited hours or narrower eligibility to vote absentee.”[3] So the chance of H.R.1. legislation making it through the Senate is effectively zero.
That is, of course, unless the filibuster were to be removed.
Before November’s general election, the probability that Democrats would take control of the Senate was less than a coin toss. But then something extraordinary happened in John Lewis’ home state of Georgia: Democrats flipped two Republican Senate seats to reach 50 seats which, with the Vice President’s vote as the tie-breaker, gave Democrats an effective majority in the Senate. And this gives Democrats the power – assuming all were in favour – to remove the filibuster and pass any legislation they like. And their first priority is H.R.1. As some Democrats believe, this is John Lewis continuing his “cosmic” civil-rights work from the grave.[4]
Under a filibuster-free scenario in which all laws could be passed with a simple majority in the Senate, one could safely assume that long-term US government spending, deficits and borrowings would expand significantly. That is, MMT.
It remains far from clear, however, if Democrats will proceed down this path. Multiple Democratic Senators do not support the removal of the filibuster, including Joe Manchin – arguably the Democrats’ most conservative Senator. This would render the required 50 votes near-impossible to achieve.
The probability is not zero, however. A vote on H.R.1. in the Senate is being slated for late June. And this comes after a momentous vote in May, in which Senate Republicans used the filibuster to block the establishment of an independent commission to investigate the January 6 Capitol riot[5]. Democrats, including Senator Manchin, were furious.
In the broader Democratic party, a sense of desperation appears to be building. There are fears that under new voting laws established by Republican-controlled state legislatures, minority rule in the US could be enshrined into law indefinitely. Multiple Obama-era advisors have been vocal recently, framing the filibuster as an existential issue for the future of American democracy.
“It’s going to look totally insane to history if we end up losing democracy bc [sic] a couple of people wanted to protect the filibuster.”[6]
That said, even if Democrats were to proceed along this path over the coming weeks and months, we are likely to remain a long way from a truly MMT-enabled US economy. While the principles of MMT have been warmly embraced by left factions of the Democratic party, there are plenty of more moderate Democratic Senators (as well as a Democratic President) who remain sceptical of the idea that government debts are irrelevant in the face of contained inflation.
MMT is an idea that probably remains a long way off from widespread adoption. But it is far from impossible. Some Democrats believe there at cosmic forces at play that are laying the foundations to expand voting rights in America. If so, these same cosmic forces are paving the way towards an MMT-enabled US economy. We will know more by the end of this month.
[1] Note: Limited budgetary changes to law can be made under a process called Reconciliation, which requires only 51 votes. It was under this Reconciliation process that Biden’s US$2 trillion covid-stimulus was passed.
[2] (Congress.gov) H.R.1 – For the People Act of 2021
[3] (Washington Post) How GOP-backed voting measures could create hurdles for tens of millions of voters, March 2021
[4] (Skullduggery) For the People, with Rep. John Sarbanes, March 2021
[5] (NYT) Senate Republicans Filibuster Jan. 6 Inquiry Bill, Blocking an Investigation, May 2021
[6] (Twitter) Ben Rhodes, former Deputy National Security Adviser to President Obama, May 2021
Andrew Macken is the Chief Investment Officer at Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.
