If US debt is at $22 trillion and interest rates can barely rise above 2.60%, why can't the US have $222 trillion in debt?
That, in a nutshell, is the generic MMT argument, which claims that the US government should dispense with a central bank altogether and resort to helicopter money to reflate the economy, a strategy that is especially popular among socialist politicians as it affords them a carte blanche to spend virtually unlimited funds obtained from the sale of debt.
Of course, this only works until it doesn't - and it usually stops once faith in the reserve currency starts buckling. But while that has yet to happen, as the TBAC pointed out two months ago, it has not prevented a cohort of financial icons and pundits from opining on the intellectual inconsistencies of MMT. And the latest to do so, just hours after we presented the scathing criticism of Convoy Investments' Howard Wang, was none other than Jeff Gundlach, who during his Tuesday webcast "Highway to Hell", slammed MMT as a "crackpot" theory, and slammed the "people who have PhDs in economics" and are "actually buying the complete nonsense of MMT which is used to justify a massive socialist program."
Lashing out at the economists who embrace MMT - who claim that just because the US borrows in its own currency, it can print dollars to cover its obligations, and can’t go broke (just like the Weimar Republic, Venezuela and Zimbabwe) - Gundlach exclaimed that "the problem with that is it’s a completely fallacious argument,” adding that MMT could lead to a "significant boycott" of long-term bonds.
"This argument is ridiculous,” he said. “It sounds good for a first-grader. What happens when the economy turns down?"
As Bloomberg notes, by lashing out at MMT, Gundlach joins an array of financiers and economists including Jerome Powell and Larry Fink who have slammed at the theory that despite being around for over a century (it was known as chartalism around the time it was put to use during the Weimar hyperinflation) got little attention until a band of socialist democrats including Alexandria Ocasio-Cortez were elected.
However, more than just a "crackpot" theory - Gundlach echoed Convoy Investment's fears that that MMT - which is just the political cover for helicopter money - may end up being more than just a theory if the U.S. falls into a recession next year.
"That means anybody other than an incumbent president would win, which kind of means that we’re headed toward this experiment of modern monetary theory," he said, although some have argued that Donald Trump is in fact the most MMT president the US has had yet, considering the massive surge in the US budget deficit observed during a period of economic expansion, and which has led some to ask what will happen to the US deficit when the next recession strikes....