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Smart Question on MMT From a DKI Reader

Darren writes in with a question about modern monetary theory (MMT). It’s basically the fiat economics we’re accustomed to in the US and Europe. I’m an advocate for hard money and less government interference in the economy. Darren’s question is smart and right on target given all DKI has written recently on the disastrous inflation of our money supply. I’d encourage all of you to check out the few minutes from the clip that Darren highlights where you can hear Warren Mosler disagree with Ed Yardeni. While nothing Mosler says is incorrect, I take Yardeni’s side in response.

Check it out and let me know what you think.

Darren’s question:

Hi Gary and team, I’d love to play devils advocate on the bond vigilante narrative a little bit and share this video.

It is an interview with Warren Mosler, and the specific section that is interesting to bond yields is the question and answer at 1:02:30-1:08:00. Would love to hear your thoughts, you might be interested in the entire thing I did not watch it all.

I am by no means in agreement, just wanted to charge how the MMT crowd views this stuff.

My Response:

Thanks Darren. I appreciate the thoughtful response and just watched the video clip at the recommended time-stamp. I think Mosler is technically correct, but that his idea doesn’t work long-term. Yardeni is saying that a lack of interest in buying long-term Treasuries from the “bond vigilantes” could lead to massive increases in government interest expense. In this case, while vigilante sounds bad (like a villain), it simply means investors want a higher yield to accept the risk of holding debt against a currency being debased by excess issuance. Mosler responds that the Treasury doesn’t have to sell long-term bonds (10/20/30 years), and that they could instead issue 1-3 month bills that will be closely tied to the fed funds rate.

This is technically correct, but runs into two problems. First, in this hypothetical example, the reason long-term rates would be about double the fed funds rate is investors expect higher future interest rates. So, you issue today at a little over 5%, but have to keep refinancing while the bond market is pulling rates higher. Second, the US government is issuing trillions of dollars of debt this year and the only reason it’s not more is because much of the debt previously issued was long-term. When the Treasury issues short-term debt, that doesn’t solve the problem; but rather, means more supply in the auctions over the next few months. Play that out for a couple of years (or even quarters), and that simply means constantly growing supply of debt that needs refinancing.


So, who do you think had the better argument?


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2 thoughts on “Smart Question on MMT From a DKI Reader”

  1. I’m still surprised treasury I (Inflation indexed) bonds are priced pretty low, showing 2-3% inflation expectations. It seems the government can’t inflate their way out of the I bond debt unless they severely understate the inflation rate. I have some in retirement funds, along with Japan & Brazil, and US Stocks. I am in between real estate investments, putting $ in T bills with the four week at about 5.3%. Do you like uranium mining stocks?

    • These are excellent points!

      It’s been a long-held DKI thesis that the government is intentionally understating the inflation rate. This has been going on for decades and is not directed at any one Presidential Administration or Congress. Great point that by understating the inflation rate, they reduce the cost of the iBonds and also reduce the outlays for inflation-indexed entitlement programs.

      The long-term plan has to be to inflate us out of the debt. With off-balance sheet liabilities of approximately $200 trillion, we have no other options. There’s no level of production or taxation that will result in a quarter of a quadrillion dollars to pay the bills.

      Uranium is one of my favorite positions right now. We own $SRUUF. There is more beneficial leverage in the mining companies, but then we have to take the risk that the underground assets are as stated and that management is good and honest. Given the worldwide shortage of uranium production and the needs for nuclear plants under construction, I’m sticking with the pure-play exposure right now.

      Great questions – thanks!


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