Under Janet Yellen, the U.S. Treasury Will Usher in a New Era of Modern Monetary Theory (MMT)

By John Banks

On Nov. 20 we said the next U.S. Treasury Secretary would be pro-MMT, meaning, they would be a de facto believer in, and wielder of, Modern Monetary Theory.

And so it comes to pass. Janet Yellen, the incoming Biden administration’s pick for U.S. Treasury Secretary, is probably the most technocratically skilled and ideologically suited person on the planet for bringing about a new MMT era.

It is important to remember that Modern Monetary Theory (MMT) is not just a wild, crackpot notion.

In the world of economics — and increasingly the world of politics — a growing number of smart and influential people believe in the practices and conclusions of MMT, even if many prefer not to use the phrase out loud.

The nuts-and-bolts takeaway of MMT is that a government with monetary sovereignty can never go broke or run out of funds, because the funds are self-created. The government borrows in its own currency and can print new currency to pay off its debts.

Technically speaking, the logistical assertions of MMT are correct. When the U.S. Congress wants to, say, spend a trillion dollars, it just decides to spend the money. The U.S. Treasury can then issue government securities (bonds), which buyers then absorb.

But if nobody in the private sector wants to buy the newly issued government bonds, the central bank can just buy them itself, issuing currency to do so. In this sense, money is debt and debt is money. The whole thing is a closed loop, and MMT is correct to point out there is never a need for technical default.

MMT acknowledges that, if you print too much currency relative to how the economy is doing, you wind up with unhealthy inflation.

The inflation idea is central to the MMT premise: According to MMT, the only true barrier to how much a government can spend, or how big government deficits can safely be, is inflation. If you don’t have inflation, you are okay, and excess worries about deficit spending or the national debt are unnecessary.

The real point of MMT, as a school of thought and a way of shaping policy, is to help the labor side of the economy. MMT is not a neutral theory in the sense that it is just a description of how the monetary system works. The goal and focus of MMT, as a rule, is getting the government to do more and spend more, in various creative ways, to help raise wages and increase benefits, or to create wages where none existed before.

In some ways, MMT is a natural successor to Keynesian economic ideas. The core notion, once again, is that the government can do more — and should in fact do more — to help the economy in times of crisis, and particularly to help low-income workers and those who are struggling. 

This helps explain why, in our view, we are entering a kind of “new era” of MMT, which could also be described as neo-Keynesian economics on steroids.

The global pandemic has dramatically accelerated the hope and expectation of ongoing fiscal government help for struggling economies. That is what Keynesian economics, and ultimately what neo-Keynesian economics and MMT, is all about.

Then, too, some of the arguments are fairly compelling.

For example, without some form of sustained intervention between now and full rollout of a vaccine, there are credible estimates that 40% of all bars and restaurants in the United States could permanently close.

There are also numerous arguments that long-term unemployment effects — the cost of millions of Americans evicted and tens of millions of Americans unable to find work — could stretch out for years and leave deep economic scars.

Janet Yellen — the incoming Treasury Secretary nominee, who will almost certainly be confirmed by the Senate — has long specialized in labor economics, with a focus on what happens to middle-class and lower-income workers.

In a speech in 2013, when she was Vice Chair of the Federal Reserve, Yellen said the following:

These are not just statistics to me. We know that long-term unemployment is devastating to workers and their families. Longer spells of unemployment raise the risk of homelessness and have been a factor contributing to the foreclosure crisis. When you’re unemployed for six months or a year, it is hard to qualify for a lease, so even the option of relocating to find a job is often off the table. The toll is simply terrible on the mental and physical health of workers, on their marriages, and on their children.

Seven years later, in 2020 in the midst of a global pandemic, the risks of long-term unemployment are higher than ever. As a specialist in labor economics, a Treasury Secretary Yellen will be sharply focused on that area.

This means freeing up financial resources, and coming up with creative programs run jointly by the Treasury and the Federal Reserve, to move trillions in new spending into the U.S. economy, whether or not the legislative branch is on board.

We know what Yellen wants to do because she said it out loud.

Indeed, her open embrace of pro-labor, pro-MMT type policies — which means unrestrained deficit spending to help middle-class and low-income workers — are likely the main reason she was chosen to be the next Treasury Secretary in the first place.

“There is a glut of savings and a shortage of investment,” Yellen said in a central bank panel discussion on Nov. 16. “We have to have fiscal policy, structural policy other than just relying on central banks to achieve healthy growth,” she added. “At this point, they’re doing about all they can do.”

The other high-powered individual who believes central banks are “doing about all they can do” is Jerome Powell, the current Chairman of the Federal Reserve.

Under Powell, the Federal Reserve has not been shy in calling for more spending.

On Nov. 5, Powell said the initial CARES Act stimulus package was “absolutely essential in supporting the recovery that we’ve seen so far.” He also said that “further support is likely to be needed” and “fiscal policy can do what we can’t.”

In the normally restrained and polite tones of central-bank speak, and against a backdrop where the Fed lecturing Congress is usually frowned upon, Powell’s statements are the central-bank equivalent of shouting from the rooftops.

This means Treasury Secretary Yellen and Federal Reserve Chairman Powell will be on the same page. They both want to pump more funds into the U.S. economy, ideally as quickly as possible, to mitigate the potentially devastating effects of long-term unemployment.

And they will work together in figuring out how to do it, even if Congress is left out of the equation.

As Treasury Secretary, Janet Yellen will be particularly effective here because she is one of the most knowledgeable and connected insiders in all of economic history:

  • Yellen headed the White House Council of Economic Advisers from 1997 to 1999. 
  • She spent six years as President of the San Francisco Federal Reserve, one of the 12 regional Federal Reserve banks.
  • She was the Federal Reserve vice chair (the No. 2 job) from 2010 to 2014 under Federal Reserve Chairman Benjamin S. Bernanke.
  • She was the Chair of the Federal Reserve from 2014 to 2018 (with Powell, as a Federal Reserve governor, under her leadership during that time).

What all of that means is that possibly nobody — not one other person — knows as much about how to “work the system” as Janet Yellen does, in terms of the deep knowledge and experience she has gained at the nexus of politics, policy, and central banking over the past 25 years.

Having run the Federal Reserve for four years, and having served as the No. 2 for years before that — and having headed the CEA before that — Yellen will know the landscape like the back of her hand. She will not only be the first female Fed Chair and first Treasury Secretary, she will be the first person to have ever had the “big three” economic power jobs (CEA Chair, Fed Chair, and Treasury Secretary) all on the same resume.

That means Yellen will know exactly which levers to pull. And because she and Powell have the same mindset, and had already worked together for years, there will be no daylight between the Treasury and the Fed.

Yellen also has experience observing a divided government. Her years spent as vice chairman of the Fed came in the 2010 to 2014 period, when Democrats lost Congress and the Obama administration had to square off with anti-tax-and-spend policies.

All of this comes together against a backdrop where the Federal Reserve has already broken the rules of the Federal Reserve Act — through its unprecedented support for corporate bond markets — and nobody really cared. (Or at least, nobody with political power, anyway.)

Wall Street, meanwhile, is thrilled with the selection of Yellen as Treasury Secretary because, in her time running the Federal Reserve, markets did quite well.

This is a natural consequence of the fact that, when funds are pumped into the U.S. economy to try and help the labor force, Wall Street usually gets the first cut. Quantitative Easing (QE) did a lot more for share buybacks than it did for actual worker wages. If Yellen and Powell figure out how to unleash the fiscal taps in creative ways, a similar thing is likely to happen again.

This partly explains why, in our view, real inflation will be coming back in the next few years. Not the pretend stuff, but actual, full-on, wage-and-policy-driven inflation.

When that inflation wave (which could wash over the entire world) comes into contact with the biggest low-yield sovereign debt mountain in history — which is again global, with something like $18 trillion worth of debt sporting negative yields at last tally — the fireworks will be spectacular.