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posted: January 31, 2021
tl;dr: An attempt to glean the investment advice within Stephanie Kelton’s MMT book The Deficit Myth...
Disclaimer:
The information contained in this post is not intended as, and shall not be understood or construed as, financial advice. I am not a financial advisor, accountant, or attorney, nor am I holding myself out to be. The information I present is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation, which is different from my own. You should seek the advice of a financial professional who is capable of understanding your own personal situation, your goals and aspirations, and making recommendations suited to you.
I think it’s fair to say that Professor Stephanie Kelton’s The Deficit Myth, a layperson’s guide to Modern Monetary Theory (MMT), is the most impactful economics book published in 2020 in the United States. There’s a strong argument to be made that the U.S.’s response to the Covid-19 pandemic has been MMT-based, with trillions of dollars created out of thin air by the Federal Reserve and spent into the economy by the U.S. government. Prof. Kelton, however, would argue that we still have much further to go to achieve her ideal economy.
Prof. Kelton’s book has its flaws, as I mentioned in my review of it. One of them is that it does not provide explicit advice for investors: people with money to save for use in the future, such as for retirement. Investors are not the target audience of the book, and MMT itself is more appealing to people without any money to invest. Yet it is not too hard to distill words of wisdom for investors from Prof. Kelton. In this post I describe what I believe to be Prof. Kelton’s advice for investors. Warning: this post is not my own advice to investors, nor am I at all a professional investment advisor.
Don’t hold dollars
Prof. Kelton spends a considerable portion of her book explaining what money is and how it comes into existence, for a currency issuer like the U.S. government. According to Prof. Kelton, money “doesn’t exist in some scarce physical form - like gold - that the government needs to ‘find’ in order to spend. It is conjured into existence from a computer keyboard each time the Federal Reserve carries out an authorized payment on behalf of the Treasury”. That special money-creating computer keyboard is located “at the New York Federal Reserve Bank”. Prof. Kelton also draws an analogy to the dollars in the board game Monopoly, and how the issuer of the Monopoly dollars (the “Bank”) can never go broke, as the Banker can create more Monopoly dollars whenever needed. She also explains how MMT embraces “an extensive body of scholarship known as chartalism”, which states that money fundamentally acquires its value from the government, which demands it from citizens as payment for taxes. Otherwise, a dollar bill would just be a piece of paper.
This raises the question: should investors hold U.S. dollars? Well, would you put any significant portion of your wealth into Monopoly dollars, or any other asset that the government can just decide to make by the trillions with a few keystrokes at any point in time? Dollars are the polar opposite of a scarce asset. Prof. Kelton’s advice for investors appears to be to have enough dollars on hand to pay your taxes, and spend your remaining dollars on something else. Dollars are for spending, not saving.
U.S. Treasuries are for losers
Prof. Kelton draws an easy-to-understand picture of the difference between traditional dollar bills (which she terms “green dollars”) and government bonds (“yellow dollars”), which in her view are effectively green dollars that pay some interest. “What we call government borrowing is nothing more than Uncle Sam allowing people to transform green dollars into interest-bearing yellow dollars.” She makes bonds sound like a benefit program for rich people. So are bonds a good investment, according to MMT?
On the one hand, Prof. Kelton seems to encourage people to trade in their green dollars for yellow dollar government bonds: “Those dollars are being saved in the form of US Treasuries. If you’re lucky enough to own some, congratulations! They’re part of your wealth.”
On the other hand, there’s the important matter of what the interest rate should be. Prof. Kelton emphasizes: “this is important - the government can always strip markets of any influence over the interest rate on government bonds”. In fact, that is exactly what the Federal Reserve is doing right now, by holding short term interest rates at zero. She also describes in her book how the U.S. after World War II, and the Bank of Japan today, “has been engaged in a policy known as yield curve control” to pin “rates on ten-year government bonds...near zero”. The U.S. could easily do the same, according to Prof. Kelton. Zero percent interest is, in fact, the MMT ideal.
So in an MMT world, even long term bonds pay no interest. The green dollars and yellow dollars are even more similar. The problem with this is inflation. Prof. Kelton claims to be aware of the dangers of inflation, yet being weak on recognizing and dealing with inflation is MMT’s greatest flaw. I don’t think consumers will welcome a tax hike to remove money from the economy when consumer prices are rising due to inflation, which is what MMT advises. Even if inflation remains low, it is not zero, so Prof. Kelton’s bonds are guaranteed to lose money in real terms. Get out of bonds, Prof. Kelton is telling us.
Lever up
Pinning short term and long term interest rates at the MMT ideal of zero percent is lousy for savers and great for borrowers. The interest rate on government bonds has a strong effect on the interest rates of corporate bonds, and mortgage interest rates, and other interest rates throughout the economy. Low interest rates are beneficial for all types of borrowers. Furthermore, in cases where borrowers get in over their heads and are unable to pay back their loans, for example student loan debtors, Prof. Kelton and other MMTers are proponents of loan forgiveness. With low interest rates plus the possibility of not having to pay back the loan, it’s great to be a borrower in an MMT world.
So borrow. Increase leverage by borrowing at low interest rates, and use that money to invest elsewhere to achieve greater returns. That’s the MMT way.
Invest in what the U.S. government wants to buy
Now that you’ve gotten out of dollars and bonds, and levered up, where do you put your money to work? Prof. Kelton doesn’t make specific recommendations, but it doesn’t take much reading between the lines to figure out what to do. In fact, the advice is right in the book’s subtitle: “the Birth of the People’s Economy”.
Prof. Kelton believes that the people, through their elected representatives in Congress and the Presidency, should direct the federal government to spend a much greater amount of money than in years past: not a little bit more, but trillions and trillions of dollars more every year. A good portion of Prof. Kelton’s book is devoted to specific spending recommendations in areas such as green energy, healthcare, childcare, education, infrastructure, housing, and others. These are where the investment opportunities lie. Invest in companies that make what the government will be buying, or incenting people to buy, in increasingly greater amounts.
Elon Musk figured this out years ago, and rode this strategy to become the richest person in the world. He realized, early on, that the government wanted to entice consumers to buy electric vehicles, and would come up with several ways to funnel money to the companies building those vehicles. He founded the perfect company for receiving this money: Tesla, which is “Made in U.S.A.”, in high-cost California. Tesla created some great cars, out-executed the competition, and became profitable, thanks in part to that government money. According to a recent CNBC article, Tesla is now worth more than Volkswagen, Toyota, Nissan, Hyundai, GM, Ford, Honda, Fiat Chrysler, and Peugeot...combined. Elon was early, but there are still many more fortunes to be made in an MMT world. Figure out what the government is going to subsidize, and what companies are going to receive those subsidies (either directly or indirectly), and invest in them.
That’s my take on the investment advice embedded within Stephanie Kelton’s The Deficit Myth. I highly recommend her book, and that you glean your own insights from it.