How High Can Gold Rise Under MMT Conditions?

In recent discussions surrounding economic theory and fiscal policy, the spotlight shines on Modern Monetary Theory (MMT) and its implications for nations, particularly the United States. While certain assets have seen minor price increases, the unease remains palpable among analysts and investors alike. The prevailing sentiment is one of cautious observation, awaiting concrete developments before making significant financial moves. MMT, heavily derived from Keynesian economics, presents a dilemma that could steer the course of the U.S. economy. As it stands, the decline of MMT could prompt a return to more prudent monetary principles, potentially impacting the prices of gold and silver positively. Within the U.S. government, Keynesian proponents like Paul Krugman advocate for increased money supply as a remedy for economic woes. This persistent reliance on expansionary fiscal measures raises concerns over inflation, eroding global confidence in the U.S. dollar.

The parallels between MMT and Keynesian economics are evident, yet MMT introduces a precarious notion: government spending—distinguished from the influence of the Federal Reserve's interest rate cuts—should not be constrained by rising debt levels. Proponents of MMT argue that government deficits and debt are inconsequential, suggesting that the underlying issue lies far removed from the debt figures themselves. It’s essential to acknowledge that economics, unlike many hard sciences, does not yield neatly packaged problems; hence, the emergence of varying economic schools of thought. Currently, Keynesian economics reigns supreme, a theory established by British economist John Maynard Keynes, emphasizing government expenditure as a driver of economic demand, especially highlighted during the Great Depression. The reapplication of Keynesian principles during the 2007-08 financial crisis and the 2020 pandemic further solidifies its position.

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Keynesianism promotes intervention via government spending during economic downturns, implementing measures such as direct payments to the public coupled with interest rate cuts by central banks to stimulate the economy. Some alarming concerns stem from the Keynesian belief that deficits and debts do not merit significant concern, given that the government can issue currency. Over the years, many Keynesian economists, including the notable Paul Krugman, have propagated this theory. Krugman emphasizes the multiplier effect of government spending, believing it can produce economic growth surpassing the amount initially expended. Yet, in practice, this logic falters—government spending often proves inefficient, with funds failing to generate the anticipated economic activity. Moreover, Krugman has posited that the debt dilemma is more a political issue than an economic one.

While there’s an element of truth in this regard, the real issue is that economists like Krugman provide counsel to the White House and Congress without adequately weighing the implications of increasing deficits and debts. A degree of accountability is placed on the American populace, as citizens should ideally reject candidates who fail to address issues of debt and deficit reduction. Keynesians have convinced many that as long as economic growth outpaces debt growth, the situation remains manageable. However, in recent years, despite some indicators suggesting strong economic growth, the U.S. debt-to-GDP ratio has climbed to over 120%, a red flag for many financial analysts.

In a recent discussion aired by NPR in January 2024 with Stony Brook University professor Stephanie Kelton, a leading voice for MMT, the conversation focused on the national debt. Kelton argued that national debt should not be likened to familial debt, as the government, being the issuer of currency, can never “go bankrupt.” This assertion raises eyebrows, given that the relentless printing of money can lead to currency devaluation and severe inflation. Keynesian advocates may counter this inflation through taxation; however, taxes can stifle productivity, disproportionately impacting small businesses and entrepreneurs, who are instrumental in driving economic growth and increasing tax revenues.

Inflation has evolved into a critical concern for not just myself, but many observers and economists. The prominence of MMT advocates in mainstream media, academia, and government during a period of increasing national debt highlights a troubling trend towards apathy regarding deficits, resulting in escalating annual deficits that jeopardize future generations. As is often noted, economics largely hinges on theoretical frameworks, and while we cannot predict future developments with certainty, the unbridled spending by the government appears reckless. Turning briefly to quantitative easing (QE), this approach involves extending the Federal Reserve’s balance sheet, which has vastly inflated since 2020, reaching a staggering peak of $8 trillion. Initiated during the 2007-08 financial crisis, QE involves the Fed purchasing government bonds and mortgage-backed securities to stabilize the economy, and this trend intensified after the pandemic hit in 2020. As new projects emerge, the overall economic climate faces threats from irresponsible spending practices. This situation begs the question: how long can the Federal Reserve’s balance sheet sustain this level of expansion? How high can asset prices truly go?