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.

https://youtu.be/1PzQz3_boAM?si=kvI_eEP0HkKXG9du

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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