Yesterday we all woke up to the news that China was planning to cut back on the amount of U.S. bonds it purchased. Another way to say this is that China is considering cutting back on the amount they will lend to us. Reports later in the day suggested this was not the case or that it was just a geopolitical shot across the bow to remind a certain person in the White House that he is still beholden to bankers. Either way, bonds sold off and interest rates moved up a little, a move that looked like a potential pin for many who see the current stock and bond markets as bubbles. Time will tell.
Yesterday I shared with you some of my thoughts on Modern Monetary Theory. In that piece, I promised to provide two perspectives on the economy that I find credible yet very distinct from each other. As I noted to a colleague recently, we could choose 20 of history's most noted economists — past and present of all different economic religions — put them in a room together, and not only would they be unable to form a consensus about what is likely to happen in the near future, they could not even agree on an explanation of what happened in the past and why. What this means to me is that, while I definitely have a point of view I find most credible, the only thing we should be confident about is that everyone is wrong — at least a little.
Put another way: anyone who tells you that economic conditions are clear and that the next course of action is obvious is either a charlatan or is camped on top of Mount Stupid. I've spent time there; the view is quite enchanting. Charles Darwin said, "Ignorance more frequently begets confidence than does knowledge.” You can say that differently: confidence is frequently a sign of ignorance, not knowledge.
Peter Schiff could be described as sympathetic to Austrian economics, but I've found him a very consistent voice for a certain kind of thinking he sometimes stands alone on. Like many conservatives, he finds debt to be a major source of fragility but, unlike a lot of modern conservative thinkers, he prefers deficit reduction to tax breaks and adheres intellectually to the notion that budgets must be balanced and markets work in an equilibrium.
The most notable thing about Schiff, and the reason I'm sharing his 2006 speech from a conference of mortgage bankers, is that he perfectly described the entire housing subprime crisis, and all its aftermath, years before it happened. He predicted it all while others — including the most prominent economists at the time — were saying the exact opposite. He supposedly also predicted the dot-com bubble, although I don't have good quotes from that to rely on, but I find it wholly plausible based on what he is now saying about the current market, particularly bitcoin.
Keep in mind as you watch his talk that he's making these comments two years before the housing crash.
Stephanie Kelton was an economic adviser to the Bernie Sanders 2016 presidential campaign. She is a vocal proponent of Modern Monetary Theory. She served as Chief Economist on the U.S. Senate Budget Committee (minority staff) and is Professor of Economics at the University of Missouri-Kansas City. She was the Founder and Editor-in-Chief of the top-ranked blog, New Economic Perspectives, and a member of the TopWonks network of the nation’s best thinkers.
I've listened to her quite a bit over the past month, but I've not read much of what she's written. I understand that in her book, The State, The Market and The Euro, she predicted the debt crisis in the Eurozone. It has also been written — again, I've not verified this but I accept it — that she also explained in advance that Quantitative Easing (QE) wouldn’t lead to high inflation, that government deficits wouldn’t cause a spike in U.S. interest rates, that the S&P downgrade wouldn’t cause investors to flee Treasuries, and that the U.S. would not experience a European-style debt crisis. These predictions have proven true, although to be fair, many would say, "not yet."
My advice is to listen to both of these talks and, regardless of which one you find most credible, attempt to explain both of them in the most credible terms possible.
I personally find Modern Monetary Theory to be true voodoo economics and I think much of what Kelton says here is nutty, yet in working to understand it — she's clearly very intelligent and the theory is not the byproduct of intellectual laziness — I've found nuggets of truth I would not have otherwise pondered. I'll share those with you in an upcoming column.