Modern Monetary Practice: The Alluring Tree In The Garden

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• Is debt “for the common good” even more noble?
• The new morality – equal pay with no work
• Cryptocurrencies react to regulatory vulnerabilities

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Modern Monetary Practice: The Alluring Tree In The Garden
April 20, 2021

“Our tree is an infinite provider. The fruit will always be in reach. All our protectors have to do is harvest and eat and share with us if we’re good and not evil by the new definitions. Never again will politicians be limited by resources. Any number of promises can be made and all promises will be kept because we have access to the infinite. This is the theory of the infinite money tree.”
— David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. 

Well, gosh, I can’t believe we’ve already gotten through quarter one, Dave, but one of the nice things about a quarter ending is those who want to hear Doug Noland and you talk about what’s going on in the markets, they can tune into the Tactical Short call because you do that each quarter.

David: Well, and of course, Doug writes the Credit Bubble Bulletin every weekend, and that is a treasure trove for those who are interested in not only the credit markets, but the financial markets in general, getting you very much granular detail on what has happened in the preceding week.

Kevin: And that’s free to tune in on mwealthm.com. So if you just go to mwealthm.com, you can tune in. And actually, Doug is somebody that you and I, Dave, have read for decades before he came on staff.

David: Yeah. So join us for the Thursday Tactical Short quarterly call, contemplating an inflection point. It’s 2:00 PM Mountain Standard Time this Thursday. And as Kevin mentioned, you can register for that at mwealthm.com and submit your questions there as well.

Kevin: One of the things you’ve brought out over the last few years, Dave, is this incredible technology of blockchain, which of course is in the form of Bitcoin, Ethereum, those other currencies. Ken Rogoff, yeah, he said what was obvious. And that is, it’s not the kind of thing that will ensure independence for long. It’s almost like it’s been tested in the free market now. The governments, who see the monopoly of their own money creation being threatened, now we’re starting to see it take over. It’s intriguing to see Bitcoin come under pressure this week. And there’s a number of reasons that were given if you read Bloomberg.

David: Yeah, certainly rumors of the Treasury Department pursuing financial institutions for money laundering using cryptocurrencies. We had Bitcoin down 15% over the weekend, not an incidental or small amount, but you also had reports suggesting that it was instead an electricity blackout in Xinjiang, a region in China, and that the Bitcoin miners in that space were hit. So cryptocurrency markets then followed suit. 

What is not conjecture is the USM position of sanctions on Russia, including Russian-linked Bitcoin addresses, which we read about at nasdaq.com. We could skip right past that, but I’m still trying to fathom US-targeted sanctions on something that’s supposed to be anonymous. Do you see what I’m getting at?

Kevin: Yeah. And it just shows me the vulnerabilities right now of cryptocurrency. I mean, you mentioned money laundering as being one of the possibilities, the crackdown on that. You mentioned electricity blackouts. You mentioned sanctions on Russia. And then of course regulation. That’s something that you’ve brought up in the past as well. Regulation in the various countries is coming.

David: Yeah. Certainly, when you see legislation coming down the pike, there has to be some sort of a boogeyman. What exactly are you addressing? What is the threat? What is the problem? What are we trying to keep the people safe from? And that explanation is sort of the justification of why things need to change. Now we know that most boogeymen don’t actually exist, but it doesn’t mean that there aren’t rules coming. And finally we have the Indian government moving forwards with regulation of cryptocurrency ownership and trading. A Reuters article suggested that even a ban was imminent. And I don’t think it’s going that far, but I think we would guess that there’s both control and compliance and monitoring which the Indian government will find sufficient.

Kevin: Is it any wonder that people are trying to find other areas for their cash to go into? Because they’re just drunk right now with too much cash. But loan activity with the banks is going down. I mean, why would you loan money when the money’s free?

David: Yeah. This consistent theme between what we see from the JP Morgan earnings report and a few other banks, and also what we hear from friends in the banking business, loan growth is flat to down. Deposits are moving higher very quickly. And I guess that comes as no surprise. You’ve got stimulus checks certainly playing a role. Of course, for us locally, that means reaching a deposit threshold where no more money will be coming in the door. Banks don’t want it. Just think about that. Just if you go to another part of the economy, and thinking about money in general, I wonder if velocity picks up when you have excess capital that banks can’t or simply refuse to absorb.

Kevin: That’s what I wonder. Where does it go? Even before this COVID, all the $1,400 checks and all the money that’s been coming just for free from the government. You’ve been concerned really since, oh, I don’t know, 2011, 2012, of all this liquidity that was created through quantitative easing and bond buying and other manipulations or just little dances that the Fed would do. This money was being held back. And I love the analogy that you gave. It’s like being held back behind Hoover Dam. As long as that dam can keep that money behind it, then we’re fine. But what happens when velocity picks up and that dam either breaks or water flows over the top?

David: And this is a really unique period of time because you’ve got the federal government, who is pushing money into the system, and typically you would see it hit the banks, and before it gets spent, sort of sit there as a repository, something that is going to be spent. The top 25 banks saw loan balances actually drop by 8% in aggregate in the first quarter. A couple of different measures on that, between eight and 10% in the first quarter. And this is the lowest loan-to-deposit ratio in the 36 years that the data has been collected.

Kevin: It’s almost like a reverse It’s a Wonderful Life. Remember in the movie It’s a Wonderful Life, everyone’s coming to get their deposits out? In this case, you’ve got a line of people to put their deposits in.

David: That’s right. It’s the opposite. People want to put money in. Deposits have been on the rise on average across all of your major banks, up 15% for JP Morgan, the big winner. In the first quarter, deposits rose 24%, up 6% quarter-over-quarter, 24% year-over-year. They had loans declined by 4% and loans declined more broadly, eight to 10% across the entire industry. So last week had the big banks reporting Q1 earnings, and we also had the announcement of JP Morgan issuing $13 billion in bonds. Demand flowing to the underwriters was absolutely insane. 13 billion in bonds on offer, 26 billion in bids. That is 26 billion in demands for those bonds. But kind of a popular offering.

Kevin: Could that be the new form of banking? I mean, could it be that bonds are replacing loans?

David: That was Thursday. Friday, Bank of America offered $15 billion in bonds.

Kevin: Wow.

David: Yeah. I mean, who knows what that suggests in terms of the C-suite and the conversations they’re having in a boardroom somewhere? Are they preparing for a shift to higher rates? I mean, whatever the thinking, the bond market is gobbling up debt in whether it’s exchange-traded funds that have got bonds in them or what have you, investment-grade debt, the appetite for it’s just been unbelievable. 

And as you suggest, it may be that the bond market has largely replaced the commercial bank in our generation and has changed the flow of central bank stimulus. In a different era, monetary policy would have flowed through to the public more directly. Main Street would have seen it. Not anymore. Loan growth, you’ve got that shrinking, ironically in an age of infinite money. And banks, this is even stranger still. Banks with more money than they know what to do with, literally deposits coming out their ears and being close to saying, “No more, please.” And yet, what are they doing at the same time? They’re issuing billions of dollars in future debt obligations. Isn’t that curious?

Kevin: Well, what’s also curious— and you and I both get calls often where people say, “Are they manipulating this market or are they manipulating that market?” The answer to that question is always yes, you can always manipulate in the short-run if you’ve got enough money, especially if it’s free. And look at the stock market this last week. Was there manipulation in the stock market at that time?

David: Self-interest is a predictable thing. And sometimes all you have to do is look at the numbers. You get expiration of options last week, $540 billion worth of options. And of course, the new SEC chief, Gensler, we’d love to see him do some sleuthing, and that would be an appropriate place to start, with over a half a trillion dollars in options moving towards expiration. It’s no surprise to see some shenanigans played within the equities markets coming into options expiration. So there’s at least a couple of places, a couple of numbers to start on.

Kevin: One of the excuses for all this stimulus that’s been flowing to the hands of the people has been because of employment problems. The idea is, well, COVID still exists. There’s probably people who don’t have jobs. But I think, again, let’s just reverse that. If you’re a business owner right now, you can’t fill a job.

David: Well, and that’s one of those aberrant but perhaps predictable behaviors. If you’ve got 42% of businesses that can’t fill job openings, could that be because it’s more lucrative to collect benefits than it is to show up for work? I mean, it’s strange when you have benefits coming in that far exceed what you would be making if you were full-time employed. So it’s no surprise also that we’ve got the not-in-the-labor-force numbers, well over $90 million at last glance. And my concern is that for government checks to look less attractive, wages are going to have to rise. And granted, that’s great for workers, but it’s not so great for one of the key dimensions of inflation. Wage pressures are coming.

Kevin: Dave, one of our favorite restaurants here in Durango, I remember talking to the managers and a couple of the servers. And during the period of time where the stimulus checks were coming and the unemployment was coming, they actually could have made more by not being there. It literally was loyalty to their job that was getting them to actually go work. So when a government feels like they can print as much money— I mean, are we right now, federal spending— Let me just ask you, are we making up federal spending right now with the tax revenues that are coming in?

David: We like to think about things in very basic terms. The way we manage a household would be one example. If you make $1, you can spend $1, and maybe there’s times when you might have to spend $1.10 just because there’s a surprise element in your expenses for that month and you make up for it the next month. So surpluses and deficits, you try to balance out over time. And in the case of the US government, it’s quite different. Jim Bianco points out that only during World War II, during the Great Depression, during World War I, the Civil War, and the War of 1812 did taxes cover less than 50% of federal spending. Oh yeah, and also right now. So we’re bringing in $1 in terms of tax revenue and we’re spending $2, or actually a little bit more than that. And so this is the second-highest deficit-spending— level that we’ve seen of deficit spending. The only other highest point was World War II. That was the only other higher point. So last March, 2020, our budget shortfall just for the month was $119 billion. This year, the March federal deficit came in at $660 billion. Larger than—

Kevin: So, five times. Five times.

David: That’s right. And that’s larger than what we’d usually have in an entire year. So for the month of March, Washington borrowed $0.70 for every $1 spent. So again, we talk about the marginal differences in how we would manage a household and what ultimately is sustainable, what you can imagine as sustainable. And there’s a different kind of imagination being used at the level of federal government.

Kevin: But the way that you can catch a government spending too much is by watching the interest rates that they have to pay. We’ve talked about artificial rates being held down low, and that manipulation can occur, but that doesn’t happen in a lot of the countries that don’t have reserve currencies. I’m mean, the United States as a reserve currency, we do have that exorbitant privilege where we can do an awful lot of stuff that doesn’t show what the market’s doing. But you look at the Greeks, you look at the Portuguese, their rates are rising.

David: But Kevin, this is a really important issue because you have the central banks, both the ECB and the Federal Reserve, expanding their balance sheet to record levels. And they are buying debt hand over fist to keep rates at an extraordinarily low level. And in spite of all their buying, we are seeing a shift in interest rates. Just watching the debt markets over the last 60 to 120 days, the drama has centered in sovereign paper. And of course our rates have come off extraordinarily low levels. Likewise, the European rates. 

So, I mean, looking at year-to-date figures, Greek yields are up 28 basis points. They’re still below 1%. Portuguese rates are up 37 basis points to a total of 40 basis points. I mean, so they basically come off of zero. So again, Portuguese that was hugging the zero line. Spain, too, is up 35 basis points to a total of 39. And again, just basically at zero is where we were beginning of the year. And when you think of Spain at 39 basis points, well, that’s because clearly there’s no risk. There’s no risk over a 10-year-period in Spain. That’s what the market concludes with that kind of pricing. Germany is still negative, 23 basis points. And that’s after rates have been rising about 34 basis points since the beginning of the year. French yields, another example of just amazing fiscal and political stability through time, they have stayed negative. They’re still negative minus one basis point. And that’s off the lows of say negative 34 basis points at the beginning of the year.

Kevin: Yeah. So just to refresh, the governments that are able to keep their rates low, it’s because they’re printing money and buying their own debt. And what you’re saying is they’re not even keeping up with that. Well, if a person sees through that, I mean, I don’t know how you don’t look at gold at this point, again, especially after the double bounce that we had just this last month.

David: Yeah, for sure. The dialogue around 1680, a double bottom, a technical confirmation on the upside. That’s all important. And we covered that a number of weeks ago in our dialogue. Gold imports by India surged in March. So according to Bloomberg, these were the highest monthly totals in two years. It increased sevenfold from last year’s numbers. So March 2020 was 13 tons in total. March 2021, 98.6 tons. And here’s an important reality in the gold market. Franco-Nevada founder Pierre Lassonde has often pointed this out, that jewelry demand sets the floor in the gold price while investor demand sets the ceiling. So judging by March’s Indian buying, you could say that the floor is in.

Kevin: Because that’s jewelry buying for the most part. Correct?

David: Absolutely. So, seeing things differently, we know of curated news feeds and algorithm-anticipated personal truth. This is some of what we were talking about with our friend Justin McBrayer when we talked about fake news. But what does it really look like to see things from a different vantage point? This might be an exercise in empathy. It might be an exercise in insanity. I’ll let you be the judge.

Kevin: I can’t help but think back, Dave, some of the morality changes that we’ve seen over the last several hundred years. We’ve talked about revolutions. The difference between the American Revolution and the French Revolution is profound. But then of course, then we had the Victorian Age in England and we actually saw the abolition of slavery during that period of time. And then of course the wave comes back and goes the other direction, and we have the immoralists, the Bloomsbury Group. And so I just wonder now that we live in a day and age where you can actually have manufactured for you and fed to you exactly the kind of news and philosophy that you’ve shown the artificial intelligence on the internet that you prefer, can you imagine what this next morality shift will be? Will it be the philosopher? Will it be the scientist?

David: Well, I think what we’re seeing is a toying with words and meanings and definitions. And so what was bad at one point is now good. In the age of new morality, we set aside the constraints of the past. We reconsider the present. This is sort of in a fresh and uninhibited light, and now we’re free. And in our day and age, we are free because we have the infinite money tree. So it was not Gladstone and Wilberforce that freed the Victorian world of the old mores. In fact, they were the ones referencing an even older morality. It was Strachey and the Bloomsbury Group setting aside the out-of-date conventions, trading up, if you will, looking for something new and progressive, the unconstrained. Every generation has its avant-garde. And sometimes they show up on the cultural scene as artists, other times as moralists, as you’ve mentioned, perhaps immoralists. And this time it’s actually as economists.

Kevin: Modern monetary theory economists. Because I can’t help but think back to Genesis 3, that the garden, when it’s like, “Yeah, you can eat from this tree and you will not die.”

David: Today’s version of the new morality is in the debt markets. The bad debt of the past was associated with greed. And that’s what we think of today. We will henceforth refer to it as greed debt.

Kevin: So re-label.

David: Yeah. So, for decades, it’s benefited Wall Street, friends of Wall Street, banks, corporations in pursuit of privatized gains. And the Wall Street era of greed-is-good was fueled by what we now will classify as bad debt. Central banks pushed this kind of bad debt into every nook and cranny. (Some think that they’re still doing that. Of course, they are.) We don’t need to lose sleep over bad debt because the solution on offer for “bad debt” is it will be neutralized through taxes.

Kevin: So Dave, of course, you’re being tongue-in-cheek, but we’re talking about the relabeling of debt, calling it something different so that we can justify it. So in a way, the greed is good era— Gordon Gecko comes to mind. I remember the movie Wall Street. And yeah, greed is good. They put that picture in the mind of a person who thinks, “Well, what’s the difference between that now and creating debt with Modern Monetary Theory?” But actually, Modern Monetary Theory is really just— It’s Santa Claus, benevolent Santa Claus with a gigantic checkbook.

David: Yeah. So please keep that in mind. This is not exactly my belief, but it was once believed that mythologies of earlier and clearly less-developed cultures would create something to serve them. And in the end, they would end up serving it. You had Aladdin’s lamp, you had social media, you had greed debt. All of them offered something enticing but delivered in the end a form of slavery. That’s not the case with debt for the common good. So again, this is the new debt, the good debt. We pay as we go. We print as we need to because we can. This time is different. Debt serves us. We’ll never serve it. As we harness the transformational power of tomorrow for every need that we have today. Tomorrow has its own generative power, creative energy. All you do is press a button, print more checks, and someday we won’t even have to wait for the US Postal Service to delay our gratification. Can you imagine, Kevin, having a direct digital link to Uncle Joe and the infinite money tree?

Kevin: Well, I wouldn’t mind the infinite money tree because it also, I think, comes with universal income, but I can’t help but think in a way they’re saying, “We’re going to do this for the children.

David: That’s right.

Kevin: How many horrid things have occurred all through history because we’re going to do it for the children?

David: In the age of the new morality, we see debt in a new light. That’s what we have to come to terms with. Consider this the next great awakening. Debt for the common good is good. It’s good for everyone when governments spend for the common good. Any debt that accrues for the benefit of the collective must be seen through that lens. 

Now, I mean, there are qualitative differences. Consider the new approach to infrastructure. It’s not limited by roads and bridges as we might previously have understood those concepts. But instead, we’ve dedicated ourselves to new human infrastructure. This is the conversation. This is what we hear, right? Investing in social equality entails building inroads to social justice, bridges of love to promote unity. I think that’s kind of how they’re casting the reparations conversation. But let’s not forget childcare. Let’s not forget elder care. I think we should even be more imaginative. I’ve been imagining for some time a government-funded doggy daycare to make sure that families with pets are on an equal footing with families with kids.

Kevin: Well, why not?

David: And I’m even wondering why four-legged family members aren’t in public school for their unique developmental needs. This is the age of modern monetary practice, not theory. So we should be bold.

Kevin: Not only modern monetary practice, but since it is for social justice and these wonderful things like doggy daycare, I like your idea. That’s a form of paying it forward, isn’t it? Instead of taking— We’ve talked about debt, actually just spending tomorrow’s money. But are we not turning it around and paying it forward?

David: That’s right. It’s kind of a paying it forward. We can pay for all the change we ever wanted and the cost is fanciful. That’s what we learn about MMP. Not T, MMP, modern monetary practice. In retrospect, we should not have lingered so long as dependents on monetary policy. The meager trillions that central banks produce for us, those resources, it’s amazing that we’ve stayed slaves, if you will, with strings attached to interest and principal repayment. Those are the narrow channels of liquidity which only flow towards hedge funds and pension funds and trust funds. And so today the benefit is we get to thank our lucky stars there’s new liquidity, and it’s not the monetary flows. It’s the fiscal flows. The fiscal flows from the politically enlightened. They are flooding the land like so much egalitarian light, rays of light reaching every burdened soul, every burdened soul that needs a little extra—1,400 bucks, in fact, from Uncle Joe. It’s amazing. Someday, I think it will be more universal, more basic, and more of a predictable income.

Kevin: It’s amazing. Again, I can’t help but look back at Genesis 3 because you had a tree that we were told not to eat from because it would just kill us. That sounds to me a little bit like this unlimited tree. But the other thing, too, is man was told that he would have to work by the sweat of his brow. UBI says you don’t.

David: I think you misunderstand something, Kevin. In the history of money and credit, there have been doubters, those that lack the faith and eschew new morality of the infinite money tree. And those doubters are rooted, like so many Aristotelians, in ontology, in ontological categories, constantly asking questions about substance and quantity and quality and relationships. What is something? How big is something? In this case, 600— what did I say earlier? $660 billion in debt one month. Well, does it have distinguishing features? Does it relate to other things of substance?

Kevin: Yeah. But you’re so old-fashioned, Dave. Why in the world would you want a real thing?

David: That’s what I’m saying. The problem with these old-school categories is that it trains your thinking towards real things, actual bridges and roads, and that’s tragically shortsighted. The power of our new creations includes debt for the common good. It’s that we are now unshackled by the mundane. We are free to invest our imaginations in all the possibilities and prospects we desire.

Kevin: Well, and we have added this new element for quite a while. The central bankers were saying, “Okay, well, we’re going to print all this money, but one of these days, the government’s going to have to come in and start spending it.” Okay. Fiscal. Remember fiscal response. It sounds to me like the politicians now are just laughing at the central bankers because why would they even need them?

David: That’s right. Governments have regained the lead role, now have control of their limitless futures and ours too. And they’ve put the central banks’ narrow and frankly less popular “interests” in a proper and proportional support function. So yes, if we need central bank money printing, we can always go back to that. But we have something that we can create infinitely ourselves. And that is credit. That is debt. The commanding heights of the global economy have returned. They are once again in the hands of the protectors. What are we talking about? Of course, our democratically elected leaders, who, miracle of miracles, can even raise the dead on occasion. We’ve seen that recently. But from that point forward, we’ll care for our every need from cradle to grave.

Kevin: Well, and you had talked before about how, right now, businesses are having a hard time finding people to work for them. Yet people are still getting stimulus checks. So why go get a job? And frankly, for those who have young kids, why teach your kids to save? I mean, saving is a form of austerity, isn’t it? And that’s a dirty word these days.

David: Oh, austerity’s always been a form of human cruelty. We recognize that now in the MMP world, modern monetary practice. Global governments can achieve so much more these days without the arbitrary limitations set on resources. We know this now. Austerity has always been a form of human cruelty. It’s as if we’ve endured a poverty mindset, like existing in a forest full of fruit trees. And yet with all this produce hanging about around us, we leave it on the tree to rot.

Kevin: I listen to you, Dave, and I hate to say it, but I can hear just the S sound of the serpent just saying, “Take from the tree and eat. Surely there is no cost.”

David: There is no cost. Our tree is an infinite provider. The fruit will always be in reach. All our protectors have to do is harvest and eat—and share with us if we’re good and not evil by the new definitions. Never again will politicians be limited by resources. This is a key transition, Kevin. I mean, I say in jest, but this really is a key transition, the move from monetary policy stimulus to fiscal stimulus, because any number of promises can be made, and all promises will be kept because we have access to the infinite. This is the theory of the infinite money tree.

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. Make sure you tune in on Thursday, the 22nd, at 2:00 Mountain Time for the Tactical Short call with Doug Noland and David McAlvany. Go to mwealthm.com to register. And you can call us here at ICA at (800) 525-9556, or find us on the internet at mcalvany.com, M-C-A-L-V-A-N-Y dot com.

This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.