Weekly Market Update by Retirement Lifestyle Advocates

         While the term “Modern Monetary Theory” isn’t tossed about as much presently as it has been in the past, you still hear about it once in a while, typically from free-spending politicians who hope the fringe theory is an economic reality that will allow them to continue to spend recklessly without consequences.

         For readers unfamiliar with  “Modern Monetary Theory’ it is an economic hypothesis that states governments don’t need to budget like households do.  Instead, governments can print all the money that is needed to pay for whatever programs the government wants to implement.

         One of the leading proponents of “Modern Monetary Theory” is Stephanie Kelton.  Ms. Kelton is a professor at Stony Brook University and a former advisor to failed presidential candidate Bernie Sanders, which may give you a glimpse into her economic views.

         Ms. Kelton makes this statement in her book, “The Deficit Myth”; “The idea that taxes pay for what the government spends is pure fantasy. It is the currency issuer – the federal government itself – not the taxpayer, that finances all government expenditures.”

         Interesting statement, isn’t it?

         If it were true, then why collect taxes at all?

         Why not just print all the currency needed?  Why not just print our way to prosperity?

         If the past several years have taught us anything about price inflation, it is that currency creation increases the currency supply and causes consumer prices to increase.

         Kelton acknowledges this relationship between currency creation and consumer price increases, using a kitchen sink analogy to explain how inflation can be controlled under Modern Monetary Theory.

         Kelton says the currency supply is like water flowing from the sink faucet.  If there is too much water (currency), the sink overflows (inflation), but that’s where taxes come in.  The government’s ability to tax is like the drain in the sink.  As long as currency flowing in from the faucet is balanced by currency flowing out through the drain, according to Kelton, there’s no inflation.  The end result is limitless funding with no downside.

         Of course, this very analogy collapses on itself when one realizes that the sink will have to be ever larger to accommodate more spending which results in inflation.

         There is another big problem with this theory.  It transfers the responsibility for the creation of new currency from the central bank to the politicians.  As big a mess as central bankers can make of the economy when in charge of currency creation, it’s nothing compared to the resultant chaos that would ensue when putting the collective group of politicians in charge of currency creation. 

         It would be hyperinflation.

         Unfortunately, despite the fallacy of Modern Monetary Theory as an economic policy,  the current state of US finances dictates that we will continue to see currency creation as a short-term solution to bridge deficits. 

         The math tells us that short of massive spending cuts that would thrust the country into a deflationary depression, the only other option is to continue to spend and makeup shortfalls via currency creation.

         The numbers don’t lie.

         The current official national debt is more than $35 trillion.  At the end of the 2024 fiscal year, which ended September 30, 2024, the gross annual outlay by the federal government for interest payments on the debt was $1.16 trillion.

         Obviously, given the current trajectory of spending, the annual outlay for interest costs will continue to increase.  That means that we are, by default, choosing to use a watered-down version of Modern Monetary Theory as our monetary policy.

         Interest-carrying costs on the debt of the US Government now exceed the outlay for defense spending and Medicare.  Interest costs are approaching the annual outlay for Social Security.

         The reality is we are now borrowing money to pay interest on money that we have previously borrowed, a statistic that had billionaire Ray Dalio observing that we are nearing an ‘inflection point.’

         The all-important question is how this will affect you.

         I have two general suggestions for you.

         One, since currency creation is likely to continue and Modern Monetary Theory becomes the default monetary policy, it will likely be increasingly important to have tangible assets in your portfolio.  The recent nominal price performance of gold makes the point.

         Two, it’s likely that as debt continues to balloon and as interest-carrying costs grow exponentially, the ruling class will become more aggressive with the tax code. 

         Under current law, there are planning strategies that one can utilize to potentially significantly reduce income taxes paid and to insulate existing assets from a future unfavorable change in the estate tax rules.

         Planning now may yield huge dividends later in the form of tax savings and asset protection.

         Just like planning for an approaching storm, you can’t wait until the storm is here and expect to achieve a great outcome.

         As I note in my recently released “Winning Strategies” book (thank you for your support with the book, it achieved Amazon number one best-seller status in two categories), conditions are right for a perfect economic storm to emerge.

         This week’s RLA radio program features an interview that I did with economist and best-selling author Mr. Harry Dent.     

         The radio program is posted and available now by clicking on the "Podcast" tab at the top of this page.

         The weekly Headline Roundup newscast is also posted there.  If you haven’t yet done so, check out the free resources available on the website.

“When a business or individual spends more than it makes, it goes bankrupt.  When government does, it sends you the bill.  And, when the government does it for 40 years, the bill comes in two ways; higher taxes and inflation.  Make no mistake about it, inflation is a tax and not by accident.”

                                                               -Ronald Reagan