We like to play Monopoly at our house. In the past, we did an experiment and changed the rules, allowing unlimited zero-interest borrowing from the bank.
Confidence is Key
Property prices got crazy, rents inflated, and shortly we had a spreadsheet and calculator to trace all the debits and credits. The suspension of the classic rules was fun until my son, John, no longer wanted to go along with the fiat money scheme, having lost confidence that his brother might have the ability to ever pay him back.
Fiat money only works as long as people have confidence in it.
Good Faith and Credit
History is replete with nations who destroyed the \”good faith and credit\” that belongs to them currency – the 100 trillion Zimbabwe dollar bill framed on my office wall serves as my daily reminder.
With another 2 trillion dollar stimulus going to be added to our national debt , the U.S. is accelerating the risk of destruction of the U.S. dollar. This can be a risk I call a possible gray swan event.
Nassim Nicholas Taleb coined the word 'black swan' in his book, The Black Swan, as an extremely unpredictable event that is beyond what is normally expected of the situation and that has potentially severe consequences. As opposed to that, a gray swan is really a potentially very significant event that is predictable, is considered unlikely to occur, but is still possible.
In the easiest of terms, a gray swan is definitely an obvious danger that we have a tendency to ignore. The coronavirus causing a global pandemic is a prime example.
Modern Monetary Theory
Out of all of the economic gray swans facing our country, the practice of Modern Monetary Theory is of heightened concern for me as an investor and U.S. citizen. Whether you agree to it or not, it is happening, not only in the United States, but also in just about every developed nation that prints its own currency.
MMT operates from the unorthodox economic principle that deficits do not matter if you issue your own currency. It is based upon the idea that nations can print money just as if they are the bank in the Monopoly game. Proponents say that there are little downside consequences for excessive debt if you issue your own currency.
If so when the MMT gray swan comes home to roost,
someone will need to pay for it.
I could not more strongly disagree.
We cannot stop the practice of government overspending and of ever-increasing deficits other than by our votes for elected officials. Even then, both parties have been responsible for reckless spending for many years and are now consciously or unconsciously embracing the idea that we can provide enough liquidity to help keep the whole world afloat.
Someone Will Have to Pay For It
Senator Rand Paul agrees with me. He condemned the latest COVID bill as a living example of the Left's en vogue Modern Monetary Theory. Also, he scolded conservatives who mock belief in what Paul calls 'quackery,' but then he watched as \”our Republican representatives voted for this in practice.\” See his speech here.
If so when the MMT gray swan comes home to roost, someone will need to pay for it. We can expect much higher taxes, or even the government will attempt to inflate their way to avoid it of it and punish those of us who practice prudence by saving. They may even attempt to print 100 trillion dollar bills similar to the Zimbabwean fiasco.
It will be painful to admit that this theory has been tried before and was found lacking; yet, we watched it happen in plain sight.
Regardless, be watchful. Be prepared. Be prudent. This gray swan is troubling and dangerous. It ought to concern us all.