Modern Money Ventures: MMT in a Nutshell

I put this together for the purpose of making a power point for my firm, and figured it would be useful to share here:

MMT in a nutshell:

The US government is a currency monopolist

It does not “borrow” money from the private sector
It spends money by crediting private bank accounts with reserves, which are then used to purchase its debt (Treasuries)
It cannot “run out” of its own currency, and therefore doesn’t rely on outside sources to “fund itself”

Because of its currency monopoly, the US government is a price-maker, not a price-taker

Taxes are the government’s primary tool to create demand for its currency

The government has to issue the currency first before it can tax it away
Dollars can be thought of as “get out of jail free” cards: the private sector relies on the government’s currency issuance to meet its tax obligations and stay out of jail

The US government’s fiscal deficits and debt are the non-government sector’s fiscal surplus and assets

They are two sides of the same coin
Government deficits create private wealth, while government surpluses create private sector deficits
The cash in your pocket is your asset, and simultaneously a liability of the US government
When the government “pays down” its debt it is draining the private sector of financial resources; this has historically led to recessions

Banks are agents of the government and create deposits when they make loans

They don’t rely on pre-accumulated deposits to “fund” new loans
In exchange for this privilege, they have to obtain a special charter from Congress and are heavily regulated

The economy is limited by its real resources, not by arbitrary levels of debt and deficits

Inflation results from too many dollars chasing too few real resources
Raising rates is an ineffective tool to combat excessive inflation, because it provides further economic stimulus through the income channel (pushing up aggregate demand) and restricts the productive capacity of the economy by raising the cost of funding (pushing down aggregate supply)

Markets are creatures of the State

They rely on the public sector setting prices, creating property rights, and enforcing contracts
“Natural” market forces and “free trade” are misnomers

Some implications for investors:

Treasuries perform well when credit markets are weak, and poorly when credit markets are strong

Banks don’t rely on pre-accumulated deposits to fund new loans, so their lending activity is a function of the creditworthiness of the opportunities available, NOT the funds that are available (a bank can always create a loan for a creditworthy borrower)
Treasuries serve as an alternative source of income to fund interest paid on deposits when banks can’t find attractive lending opportunities
Non-bank lenders rely on Treasuries as an important source of liquidity and collateral
Treasuries are therefore an attractive cash alternative when credit growth is weak, as they generate positive carry and perform well when credit markets become stressed
None of this has to do with CPI inflation, and shorting Treasuries because of a high CPI print doesn’t make any sense, unless there is anticipation that the Fed will raise rates
Raising rates has proven to be an inflation accelerant rather than an inhibitor, so betting on higher rates because of inflation doesn’t make sense

Public policy drives business and investment results:

Fiscal spending packages dictate economic flows; look for under-resourced sectors with incoming flows to find price appreciation

Tens of billions of equity capital raised in 2021 for electric vehicles, in part thanks to the government’s incentives for purchasing them. Many of these companies are pre-revenue and will need to deploy billions capital to ramp up production, with much of that flowing to the major steel suppliers, an industry which has consolidated considerably to basically an duopoly: Cleveland-Cliffs (CLF) and US Steel (X)
The government provided $25 billion in support of airlines during the COVID crisis but didn't offer similar funds for car rental companies. As a result, there has been significant price volatility in the used car market because distressed operators such as Hertz liquidated their fleets to raise cash, then upon emergence from ch. 11 needed to rebuild

Trade rules and regulations, including antitrust, are critical determinants of private sector resource allocation

Big tech under scrutiny for anticompetitive practices, in direct contrast to Obama admin, which allowed FB to acquire Instagram, and led to massive equity value creation. Contrast this with the regulations placed on big banks, who were in the "dog house" during that period. Shorting the banks and buying Tech for the last decade would have been an absolutely unbelievable trade
Ocean shipping reform act of 2021 could prove a headwind for container shipping companies, right at the same time their earnings peak, could make for an attractive short opportunity

Specific judges may rule one way or another in a bankruptcy scenario which affects creditor recoveries

Modern Money Ventures