The Breakdown - Why Emerging Markets Are Wary of Modern Monetary Theory

Episode Date: November 8, 2020

Today’s Long Reads Sunday is a reading of Andy Mukherjee’s piece: “Why Emerging Markets Are Wary of a Modern Monetary Fix”. The argument is that while Western governments debate just how far we can take the idea of money printing without paying a dubious price, for emerging-market governments there simply isn’t the same capacity to print their way out of problems.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com and nexo.io and produced and distributed by CoinDest. What's going on, guys? It is Sunday, November 8th, and that means it's time for Long Reads Sunday. And today I'm doing kind of an interesting one. My thesis has been for many, many months now that we are going to hear a lot more about modern monetary theory in the years to come. I've made it clear in many episodes that I think that there is almost a parallelism, a yin and yang that Bitcoin and modern monetary theory have,

in that they're both actual true alternative visions for how an economy should work, even though in many ways the principles of them are diametrically opposed. One of the interesting things about modern monetary theory, however, is that it seems to be a theory that divides the world very cleanly into the countries for which it is true, assuming that you think that it's true for anyone, and the countries for whom it is simply not. It divides the world into monetary halves and have-nots in a very distinct way, and I think that's something that as people take it more seriously, needs to be explored. So with that, I'm excited to read a piece by Andy Mukerjee, it was on Bloomberg opinion, and it's called why emerging markets are

wary of a modern monetary fix. The COVID crisis fashion for freely spending money is piling pressure on governments that perhaps can't handle it. Modern monetary theory is suddenly everywhere. The idea that a government can freely print and spend its own currency shouldn't deny anyone a job is gaining currency in our pandemic ravaged world. Coming amid a sharp increase, in public expenditure, Democratic presidential candidate Joe Biden's $2 trillion clean energy plan shows a disregard for debt and deficits that was unimaginable after the 2008 subprime crisis. The theory that sovereign currency issuers can't go broke is also at work in the UK. In Chancellor of the Exchequer, Rishi Sunak's attempt at keeping the economy ticking,

even if it means paying the private sector not to fire staff. Japan's government, already the most indebted among major nations, is more than doubling its bond issuance to fund COVID-related expenditure. Orthodox scholars still occasionally murmur that all of this will somehow have to be paid for by future generations. But there's nothing like the fear that gripped policymakers around 2010 when economist Carmen Reinhart and Kenneth Rogoff proposed that beyond a public debt to GDP ratio of 90%, long-term growth tends to swoon.

However, this newfound confidence is seen only in relatively affluent society. move over to developing economies, and the conversation is much the same as before. When it comes to paying for a costly lockdown, helping people tied over the loss of livelihoods, or marshaling resources for publicly funded COVID-19 vaccination, the dominant question is, can we afford it? This episode is brought to you by crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins.

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And remember, it's your crypto, your credit, your choice. Get started at nexo.io. Emerging markets have reasons to be wary of MMT. They don't strictly meet its preconditions. While every country does not print illegal tender and collects taxes in its own currency, not all can borrow in them, nor can they allow their exchange rates to float freely, especially if they import vital commodities like food or energy. The degree of economic freedom enjoyed by the governments of the U.S., Japan, or the U.K.,

is simply not available in most places. Yet individuals and businesses everywhere are expecting their governments will stop elevating the, quote, needs of abstract ledger entries over the needs of flesh-and-bud human beings, as Stephanie Kelton writes in her book, The Deficit Myth. For instance, New Delhi is finding it tough to explain. to people why, with India's economy expected to shrink by 10% in real terms this year, it's hesitant to boldly expand the budget deficit. The states are unhappy that the federal government is pushing them to borrow rather than

using its own unlimited power to print money. If MMT catches the fancy of the global working classes, emerging markets won't have a choice. They'll set out to assert whatever little financial freedom they have, ignoring debt and deficits. The question is, will the experiments succeed or sink them in an Argentinian-style quagmire of hyperinflation, sovereign defaults, and erosion of living standards. India, South Africa, Mexico, and Brazil will all be plagued by large overcapacity well until 2023, according to the international monetary funds forecasts. This persistent slack appears to be partly due to a lack of what MMT refers to as, quote, monetary sovereignty. After all, among rich nations, Spain, Italy, and France

will also be operating far below potential as being part of the Eurozone similarly crimps their financial freedom. So how to tackle the spare capacity? MMT scholars and activists like Denison University economist Fidel Caboob, stress a decentralized community-based job creation policy, with funding provided by a central fiscal authority acting in coordination with a central bank. In other words, deficit spending and money printing. It's hard to quarrel with MMT pioneer Warren Mosler's argument that in any society developed or developing, state-funded transitional jobs would be better than long-term unemployment, which destroys skills, connections and attitudes. But some proposals coming out of the MMT tent are audacious. One prescription for India

pegs the first year cost of putting 400 million people to work at 270 billion, or 10% of pre-COVID gross domestic product. For now, the Indian rupee is stable because import demand has cratered more than exports. But trying to spend 10% of GDP in one year on things like renewable energy, rainwater harvesting, and wages could easily switch the currency market's view. The rupee might collapse in anticipation of higher import demand for everything from Chinese solar panels to shirts made in Bangladesh. A sharp one-time increase in government deficit, monetized by the central bank, is easy to sell to markets as a temporary measure to deal with COVID-related supply dislocation and demand funk. Indonesia has shown the way. Running such deficits permanently would

butt heads with investors. For countries that pass the threshold conditions, MMT says the only real constraint on government spending is inflation. If it makes a sudden return, the theory recommends raising taxes and reducing deficit spending. The standard practice of raising interest rate is deemed to be inflationary. If that flies in the face of conventional wisdom, the more adventurous MMT advice of creating slack by putting curbs on polluting industries may work only for a handful of nations. I can't see India or Indonesia shutting down coal-fired plants to fight price escalations. Is modern monetary theory really for emerging markets? For now, they're right to have reservations. But if the shock of the pandemic lingers and left-wing politics turn ascendant, there's no telling where the MMT

juggernaut will stop.