It is MMT? Not Yet

Increasingly aggressive fiscal and monetary measures are being applied on a weekly basis. For this I am extremely grateful as these actions allow the US to continue as a "going concern" and stop the domino effect of unemployment from morphing into a domino effect of bankruptcies.

All recessions are simply a contraction of consumer demand and are normally induced by the Fed's tightening. But this time the Fed was already in a loosening phase and has accelerated that support. The recession-fighting actions of the U.S. Treasury and the Federal Reserve have been seen by many as inflationary. But I think that's wrong - assuming that radically different structures are not employed.

Typically the U.S. Treasury functions as the "fiscal" piece of the U.S. Government (USG) by issuing debt and collecting taxes. When the USG spends more than it earns, this deficit is funded by issuing USG bonds. On the other end of the USG, in its own non-constitutionally based room is the Federal Reserve. This central bank functions as the "monetary"  piece of the USG by issuing the only legit money (look at the top of your currency "Federal Reserve Note") to control interest rates and, thus, the growth rate of the economy.

These two functions - fiscal and monetary - have been kept as separate in the USG as church and state in the US society. The financial crisis of 2008-9 brought coordination between fiscal and monetary functions and so profitably concluded its operations that it was able to quickly set up a beautiful coordination to respond to COVID-19's economic impact.

The scale of the operations at $50 billion per day in the US alone with comparable scale operations in Japan and Europe lead observers to predict inflation. Further, those who have advocated Modern Monetary Theory (MMT) have declared its arrival.  MMT is the proposition that we don't need to have any social ails with a paper money economy because we can simply "helicopter" or print more money.

Without getting too technical, the important distinction between the current USG processes and the radical money printing mechanisms of Modern Monetary Theory (MMT) is that all of our processes are currently structured by instruments created between a legit borrower and lender. The monetary mechanisms are merely providing liquidity and value stability for instruments that were created on a reasonably sound basis pre-COVID.  MMT, on the other hand, advocates a simple handout of money where needed. This is very different and gets to the important issues constraining current actions.

For example, the Fed is willing to consider "fallen angels" - instruments that were investment grade (thus reasonably sound pre-COVID) but no longer so. Instruments that were made on a less than investment grade basis or speculative basis do not qualify. Such actions would move us more closely to the world of MMT.

Of course, another related but different issue is moral hazard. Given the large scale of these actions, individuals will be able to game these actions to receive benefits where none should be given. This concern for moral hazard has been affecting the legitimate receipt of fund for organizations as varied as large restaurant chains to private universities.

For all of the above, I don't see these actions as inflationary, while MMT would clearly be. The challenge in our economy is to grow productivity adequately in such a way as to create new investment grade instruments. Without these, the brutal machinery of capitalism is more likely to continue to drive a deflationary outcome despite the record levels of debt creation.