May 23, 2022
–In my opinion Modern Monetary Theory is working exactly as advertised. I’ve had several conversations with people complaining about one boneheaded government program or proposal after another; they typically close by saying, “And we’re the ones paying for it!” as if they get a specific tax bill for a specific program. That’s not how it works. Taxation seems to have less and less to do with specific programs or spending. It’s simply redistributive. Constraints on government spending are not related to taxation but on borrowing. When viewed through that lens, it’s all about political choices, as Stephanie Kelton herself articulates. It’s not financial decision-making, it’s political. However, Kelton did identify right up front what the constraint on MMT would be: inflation. That’s how we pay for boneheaded decisions: by everyone paying more for everything. The logical extension, in my opinion, is that the federal government begins to have trouble borrowing. We’re not there. Yet.
–Friday featured initial weakness in stocks that took SPX down to a 20% decline from the high, followed by a ripping rally. While the equity bounce was nice, rate futures still signal a rocky economic road ahead. Near one-year calendars made new lows. EDU2/EDU3 fell 4.5 to 56, down from 86 on May 6. EDZ2/EDZ3 plunged 7 to -7.5; it was +23 on May 6. SFRZ2/SFRZ3 closed at just +0.5. Here’s what the spreads are suggesting: economic brick wall straight ahead.
–There was a little blurb over the weekend that Visa and Mastercard were having outages. https://downdetector.com/status/visa/map/ That’s where the panic sets in.
