Comparative National Emergencies
What Happens if There Is a Recession?
On-Budget Versus Off-Budget Deficits
Forget Turning Japanese, We Are Turning Greek
Where Will the Money Come From?
Boston, New York, Puerto Rico, New York, Maine, and Montana
This week is the fourth in a series of five open letters responding to a series of essays by Ray Dalio, the founder of Bridgewater Associates. His original letters are Why and How Capitalism Needs to Be Reformed, Parts 1 and 2 and It’s Time to Look More Carefully at ‘Monetary Policy 3 (MP3)’ and ‘Modern Monetary Theory (MMT)’. My replies are here, here, and here. Today I continue my response.
I was quite pleasantly surprised to read a very generous and gentlemanly reply from Ray in Forbes last week, in which he clarified some of my understanding of what he wrote. I encourage you to read it after this letter for more context. I’ll continue responding to his original material but first a short piece responding to his letter in Forbes.
I want to thank you for your thoughtful and courteous reply to my first three essays. It was remarkably civil and I learned a great deal. Clearly you and I agree more than we disagree. Many of our differences are an emphasis on a different syllable in a word rather than the word itself. Much like tomato and to-mah-toe. I will continue my series in the spirit in which you replied, noting that my misunderstandings would have been cleared up in a few minutes in a normal conversation rather than a public internet back-and-forth. Part of the times we live in…
I will encourage my readers who are following this discourse to read your response, as there is much to be learned in your explanations of the nuances of MP3 and MMT. I somewhat conflated them in my first few readings of your letter, and your clarification helps immensely. I believe my fifth and hopefully last letter in this series next week will offer an alternative to this path we both agree would be perilous. These paragraphs from your response are at the crux of the matter:
Having studied these dilemmas in the past and thought a lot about the cause/effect relationships that determine how they work, it is my conclusion that central banks will have to turn to what I call Monetary Policy 3 (MP3) in the next downturn. MP3 follows Monetary Policy 1 (which is interest-rate-driven monetary policy), which continues until interest rate cuts can’t be big enough to do the trick. That’s when Monetary Policy 2 (which is central bank printing of money and buying financial assets) happens and continues until that doesn’t work anymore either. MP3 is fiscal and monetary policy working together with fiscal policy producing deficits that are monetized by the central bank. Modern Monetary Theory as it’s described is simply one version of many types of MP3. What I’m saying is that I believe that in the next downturn you will either see some form of MP3 from central banks or you will have terrible economic and social conditions.
To be clear, I’m not saying that such policies don’t have some undesirable consequences, and I don’t think that MMT is the best form of MP3. What I’m saying is that MP3 is the best of the bad alternatives and some form of it will likely happen, so one had better know how it works and how to deal with it. I welcome alternative descriptions of what will happen when both interest rate cuts and QE don’t work to stimulate the economy in the next significant downturn.
I quite agree that unless something is done there will be terrible economic and social conditions. As you say, we will have to choose between bad and perhaps even worse choices, none of which will be easy. The longer we wait, the more difficult and limited the choices will be.
I’m looking forward to hearing what form of MP3 will be best (or least bad). I quite agree that more QE will have its own attendant complications, creating the same problems as last time. The image of Christopher Walken demanding More Cowbell comes to mind. More QE may be far more annoying, if not destructive.
I look forward to continued conversation…