MMT Failing Miserably in Brazil

The "we owe it to ourselves" MMT nonsense failed in Japan and Venezuela. Brazil is an excellent case to watch.

Modern Monetary Theory (MMT) proposes that government spending and deficits do not matter because the government can always print more money.

Anyone who has studied or lived through hyperinflation knows the theory is ridiculous at best, yet it prevails. Venezuela is in hyperinflation right now, but the MMTers reject that as corruption.

Japan remains mired in slow growth after wasting trillions of dollars, but at least Japan has not wrecked its currency, yet.

Brazil may be a better test case, because its government has done just what many of the MMTers want, pass out free money with no tax revenues to pay for it.

Pensions take 43% of Brazilian government revenues and MMTers tend to believe in absurd constructs like living wages.

Dire Consequences

I side with a Wall Street Journal report that states Dire Consequences in Brazil.

Mariuza da Conceição Aparecida taught math and science at public schools for 27 years, enough to retire on a full pension in her late 50s.

Last year, more than two decades later, the 80-year-old was forced to wait in line at food banks. Swelling retirement obligations have nearly bankrupted the Rio de Janeiro state government, leaving Ms. Aparecida without her pension checks for as long as four months at a time.

Nationally, more than half of sewage goes untreated. The average adult has just eight years of formal schooling. Retirement outlays already eat up 43% of Brazil’s national budget, and health care about 7%, while two expenditures that are critical to economic development—education and infrastructure—claim only about 3% each.

The social security system’s revenue shortfall widens each year as the worker-to-pensioner ratio shrinks. The United Nations projects that by 2050, the number of potential workers per retiree in upper-middle-income developing countries such as Brazil will tumble from the 2015 figure of seven to just 2.5.

Only Japan has ever faced a shift of this scale in a similarly short period, and it now has one of the world’s most indebted governments.

Credit-rating firms are getting anxious. Standard & Poors estimates that unless there are major changes to publicly funded pension and health-care systems, population aging will help drive net government debt in the biggest emerging economies to extraordinary levels—307% of gross domestic product in Brazil, 274% in China, 262% in Russia and 341% in Saudi Arabia by 2050.

Their sovereign bonds would be rated junk in that scenario, said an S&P analyst, Marko Mrsnik.

Authorities wrestle with a gut-wrenching decision: whether or not to cover aging citizens who didn’t contribute enough to social security.

Such benefits were financially fanciful in that era of raging inflation, but they were increasingly granted under the leftist Workers’ Party government that took over in 2003. Fueled by a commodity boom, it granted pensions to millions of peasants and informal workers who hadn’t paid in. It also nearly doubled the minimum monthly wage, which the constitution set as the floor for retirement checks.

The upshot: Rural workers paid about $3 billion in social-security taxes for the 12 months through September 2017, while rural retirees drew about $36 billion in benefits.

Schools and universities periodically close. Public hospitals are perpetually short on supplies. At one point late last year, scarce funds to maintain police patrol cars kept half of them off the streets.

Investment spending by the state government has ground to a halt. That has left dozens of public works incomplete and decaying in the tropical climate, including sewage-treatment plants, roads and a cleanup of foul-smelling lagoons around Olympic facilities. An unfinished maternity hospital in the poor suburb of São Gonçalo is occupied by squatters.

​In the MMT world, government deficits and free money do not matter.

And with all those people struggling in Brazil, MMT theory suggests that government should give away more money.

MMT is absurd.

Mike "Mish" Shedlock

Comments (36)
No. 1-36
Bam_Man
Bam_Man

And they will give away more "money". Until it is no longer "money".

AWC
AWC

But they do have options under the magic of MMT. They can always run faster and faster to stay in the same place.

Grumblenose
Grumblenose

"Their sovereign bonds would be rated junk in that scenario, said an S&P analyst". Brazil's sovereign debt is already rated junk by S&P, Brazil and Russia are already rated junk by Moody's.

tedr01
tedr01

Who invented MMT anyway?? Sounds like Keynesian crap.

Hooligan
Hooligan

If deficits don't matter, neither does debt. If there is no intention of paying back debt, then deficits (and debt) are a measure of the scale of theft from future tax payers and welfare beneficiaries. This is why libtard demoNrat socialist - enabled by QE - is a failed dogma. A country that steals from itself and others via the issuance of debt, to cover deficits, is abhorrent and unsustaianle. The debt that it issues is "odious debt", issued by poliicians that lie, cheat and steal in order to perpetuate their trough feeding. DEFICITS (FEDICITS?) DO MATTER!!!

Webej
Webej

This is not a fair portrayal of MMT. MMT does hold that you can spend any amount of money and it will not matter, nor that deficits and free money do not matter. There is also no link between the Basic Income or Living Wage concepts and MMT. MMT is in the first place a description of the actual mechanics of government spending/taxation. The characterization here is cartoonesque and not germane.

Irondoor
Irondoor

If there is an unlimited and relatively cost-free ability to create money by national reserve banks, why collect taxes? From time-to-time repudiate the debt and start over again. Look at the number of countries that have gone "bankrupt' in the past and are always able to borrow at some rate. Of course this is absurd, but so is the current course the world is pursuing. Nobody cares because nobody is responsible when the bill comes due.

Bahian
Bahian

Mish: You should know that the principal contributor to the retirement deficits is public employees (your pet peeve) especially upper level ones from the executive, judiciary, legislative and military branches. The beneficiaries of these spectacular retirements (that go well into six digits in monthly payments) are called Maharajahs. I saw a stat years ago that every public 'service' retiree creates a deficit 50 times that of private sector retirees. Some 20 years i was on the beach chatting with a man who worked at the Banco do Brasil. He said he knew a judge who received 42,000 Reals a month in retirement benefits. That was about $36,000 US in 1998 or the equivalent of 300 monthly minimum wages/or 10 per day. Multiply this judge by thousands of other similarly pampered retirees and you get an idea of the problem. Worse, many may never have even worked to get the retirement but were phantom employees on public payrolls due to corruption/nepotism. Other public retirees accumulate multiple retirement payments from different jobs, simultaneously magically working in different localities and states. Attempts to end these abuses or put a cap on the payments are met with cries of "Direitos Adqueridos" meaning previously vested rights. Lula when he entered the presidency made noise about introducing such a cap/teto and back down when the military/judiciary started an outcry. He had no desire to end up a martyr a la

Bahian
Bahian

Allende and inherited a serious economic crisis largely due to the prospect of his election so probably was wise in not pushing the retirement limit proposal

JonSellers
JonSellers

Agreed. Nor is any of this a portrayal of MMT. If it were, Brazil would be using deficit spending on education and infrastructure as well as retirement income. Japan is probably a good example. Unfortunately, Mish couldn't find any sad stories of hungry old people or poor infrastructure issues. When you find yourself having to make stuff up to portray something that is in opposition to your personal values, maybe it's time to to review those values.

WhirledPeas
WhirledPeas

Peter Schiff had it right when he said that, unlike math and physical science, we have to keep learning economic rules over and over and over again.

WhirledPeas
WhirledPeas

"It's deja vu all over again." Yogi Berra

Bam_Man
Bam_Man

MMT, the "Magic Money Tree".

Bam_Man
Bam_Man

Lucky for us that our economic geniuses discovered it just in the nick of time.

Bam_Man
Bam_Man

LOL...

RedQueenRace
RedQueenRace

Post fragment removal.

Tony_CA
Tony_CA

Federal deficients do not matter provided you can issue your own currency. Japan & the US have repeatedly proven this. What is happening in Venezuela is a political problem which has been brought about by the US pushing for regime change. We have essentially cut them off from the Swift dollar based financial system. MMT has no relevance it Venezuela.

Bahian
Bahian

"Deficient" minds believe such tripe after 12 or 16 years of leftist indoctrination. Federal DEFICITS do matter especially when they are being funded partly from abroad. It undermines the dollar, pushes inflation, will eat more of the budget as interest rates rise and also increases the trade deficit. Why? If the deficit was eliminated then taxes would have to be increased or spending cut, either way means less money available for consumers to buy imports. Venezuela's problems are the result of US policies? More tripe to justify the ideological rape of the nation with the largest proven oil deposits. Only marxists-commies like yourself can turn such a natural resource blessed country into a basket case. And not just oil but mineral and agricultural wealth like the cattle rich LLanos. Now they can't feed themselves. Worse then the country Chavez/Maduro emulated, Cuba. Even Paul Krugman is worried about the deficits at least now that his hero Obama left office after doubling the Federal devt in 8 years from 10 to 20 trillion.

abend237-04
abend237-04

Japan was actually doing OK and muddling through their slow-growth-with-an-aging-population problem...until Krugman arrived. His answer, as always, was to trash the Yen and set Japan on the same living standards grind-down as Brazil and Venezuela. Insanity, indeed.

Ted_Smoothie
Ted_Smoothie

Respectfully, I have to say that I don"t think Peter Schiff has been right in 10 years. He nailed the subprime crisis in the 2007 timeframe, but hasn't really had a great call since. Don't get me wrong, I used to be a big disciple, but his mantra of runaway inflation, crashing dollar and gold to the moon have not materialized. And to Mish, MMT is clear that hyperinflation is not possible if and only if your debt is denominated in your own currency.

RedQueenRace
RedQueenRace

And MMT's description is wrong.

Their argument that the government created the money first falls flat when one realizes that the US initially issued paper backed by gold. Later the gold backing was removed. The gold that kicked things off most certainly did not come from government.

The argument that the (US) government spends money into circulation is wrong. They tax, then spend. They restrict themselves from spending the Treasury Account into a deficit, which is what would happen if it worked the way MMT says it does. That has not happened, ever. It could function as MMT describes, but it is not how it currently operates.

As the system currently operates, taxes and bond sales TEMPORARILY reduce banking reserves, and, to a lesser extent, money supply. But it is temporary as government turns around and spends the money right back.

Contrary to what MMT says, this removal of reserves and money is not part of monetary operations. Instead, it forces the Fed to engage in monetary operations as they often increase repos around periods such as tax times to avoid spikes in the Fed Funds Rate. That should not be an issue now with the gargantuan level of excess reserves that still remain courtesy of QE. But it was prior to QE.

MMTers also have a the wrong idea of what "savings" is as they think money is savings and that government spending adds to private sector savings. It is not and does not. Economically, savings is unconsumed production. Money is worthless without production and it loses value when issued in excessive amounts against production. By MMT logic there is tons of "savings" in Venezuela. Now ask what it will buy.

RedQueenRace
RedQueenRace

Left out the quote to which I responded, which was "MMT is in the first place a description of the actual mechanics of government spending/taxation."

SMF
SMF

It all matters when your interest payments balloon to take up your entire budget. Who will reach that point first?

RedQueenRace
RedQueenRace

"MMT is clear that hyperinflation is not possible if and only if your debt is denominated in your own currency."

So, will they argue that is why Continentals and Lincoln greenbacks became worthless?

MissionAccomplished
MissionAccomplished

Double the dose of Social Justice and call me in the morning - if there is one.

Ambrose_Bierce
Ambrose_Bierce

So scratch Brazil off the list of let's get out of America destinations. So what's happening in Argentina?

Carl_R
Carl_R

I would phrase it differently. Debt does not become a problem until you can no longer borrow money in your own currency. So long as your debt is in your own currency, you can simply print more money and pay it, if you like, and hyperinflation is impossible. Once your debt is denominated in another currency, that no longer is true, and printing money leads to hyperinflation. Deficits are an entirely different matter, and always matter. The reason is that, if the deficit is structural, such as due to entitlements, it can not easily be eliminated, and even if the government prints money to pay off the debt, the debt will simply re-appear due to ongoing deficits.
Most US debt is denominated in USD, but not all. Some is now in the form of TIPS, inflation adjusted bonds which are denominated not in current USD, but in a prior USD.

El Capitano
El Capitano

I always have to laugh at all these attempts by those trying to appear intelligent by defining new acronyms and jargon or by going into pedantic explanatory detail about something that needs to be kept simple because it is simple. The US has been running a debt Ponzi ever since the federal reserve was created. Each time the Ponzi looked ready to collapse, the US came in with more confidence building promises to keep the Ponzi plate spinning. But no Ponzi ever ran forever an no, it won't be different just because of "American Exceptionalism" to quote the con man Obama.

Stuki
Stuki

MMT’s insight that governments with unconstrained license to print fiat can’t go bankrupt, isn’t wrong in the technical sense. It’s just irrelevant. Simply because money is ultimately irrelevant to economics.

Money is, fundamentally, just a shorthand coordination mechanism for barter transactions. Not something of value in and of itself. Instead of personally searching out exactly who wants how many eggs and who happens to have exactly the goods he himself wants in exchange for said number of eggs, which quickly becomes practically uncomputable, a chicken farmer can accept, then spend money. Relying on the indirection of money to simplify the coordination function between what he needs., and what he must provide in return for it. But neither the money he accepts, nor what kind of moneys he accepts, has any bearing on economic value nor output in and off themselves.

Printing money, as in putting Washington’s head on paper pieces or adding zeros to some balance number on a computer, doesn’t create one lick of economic value nor output. All it does, is mess with the above resource coordination. Redistributing who does what for whom. Hijacking the barter coordination provided by sound money, where each bartering participant must put something of economic value into the pot to be able to take some out; in favor of allowing those with fiat printing privilege to freely outbid anyone for, hence command, whatever economic resources are available, without having to, themselves, providing anything at all in return.

So yes, a sovereign doesn’t have to go bankrupt. But by printing money, all he does is lay claim to an ever-greater share of an economy’s productive capacity. In return for nothing. In the process, diverting resources from productive uses, to pointless government aggrandizing and sustaining ones. Until there no longer are any resources left for production of anything. Such that all the money in the world, still can’t buy a loaf of bread. Which is the inevitable end point of all fiat systems. Past, current and future. The sovereign can nominally pay down any possible debt, hence avoid technical bankruptcy, by simply circling the earth with zeros added to his currency notes. Which is about as relevant as any non-sovereign being able to do the same, by paying in monopoly money.

The key insight is simply that money is genuinely irrelevant. It has no intrinsic value, nor does it produce any value. The only things that matter economically, are real productive resources, and how they are utilized. The rest is just about how those resources are employed, and how that employment is coordinated.

Whether a sovereign steals resources by taxing or by printing, doesn’t matter one lick. The only, as in really the only, way the two differ, is wrt who gets robbed, and who gets handed the loot. If you could design a taxing scheme who transferred resources to and from actors in exactly the same proportion as printing does, the two mechanisms would be literally equivalent from an economic POV.

The only reason the printing way is preferred by most governments, is that it allows a thing veneer of obfuscation over the fact that the theft function provided by printing, is from the many who have little, to the few who have more. Which makes it easier for the government to pretend that they are needed to “protect” the poor from the “rich.” Rather than, as is always and everywhere without a single exception ever their real purpose, to rob the poor and peripheral, for the benefit of the rich and connected.

Pater_Tenebrarum
Pater_Tenebrarum

It is an invention by German monetary crank Georg Friedrich Knapp, who wrote "Die Staatstheorie des Geldes" or "The State Theory of Money" - which used to be known as Chartalism. The first important central bank that followed Knapp's theory was the German Reichsbank under Rudolf von Havenstein in the post-WW1 era until 1923, when the paper mark finally gave up the ghost and ceased to be a viable medium of exchange.

Pater_Tenebrarum
Pater_Tenebrarum
Stuki
Stuki said: MMT’s insight that governments with unconstrained license to print fiat can’t go bankrupt, isn’t wrong in the technical sense. It’s just irrelevant. Simply because money is ultimately irrelevant to economics. Money is, fundamentally, just a shorthand coordination mechanism for barter transactions. Not something of value in and of itself. Instead of personally searching out exactly who wants how many eggs and who happens to have exactly the goods he himself wants in exchange for said number of eggs, which quickly becomes practically uncomputable, a chicken farmer can accept, then spend money. Relying on the indirection of money to simplify the coordination function between what he needs., and what he must provide in return for it. But neither the money he accepts, nor what kind of moneys he accepts, has any bearing on economic value nor output in and off themselves. Printing money, as in putting Washington’s head on paper pieces or adding zeros to some balance number on a computer, doesn’t create one lick of economic value nor output. All it does, is mess with the above resource coordination. Redistributing who does what for whom. Hijacking the barter coordination provided by sound money, where each bartering participant must put something of economic value into the pot to be able to take some out; in favor of allowing those with fiat printing privilege to freely outbid anyone for, hence command, whatever economic resources are available, without having to, themselves, providing anything at all in return. So yes, a sovereign doesn’t have to go bankrupt. But by printing money, all he does is lay claim to an ever-greater share of an economy’s productive capacity. In return for nothing. In the process, diverting resources from productive uses, to pointless government aggrandizing and sustaining ones. Until there no longer are any resources left for production of anything. Such that all the money in the world, still can’t buy a loaf of bread. Which is the inevitable end point of all fiat systems. Past, current and future. The sovereign can nominally pay down any possible debt, hence avoid technical bankruptcy, by simply circling the earth with zeros added to his currency notes. Which is about as relevant as any non-sovereign being able to do the same, by paying in monopoly money. The key insight is simply that money is genuinely irrelevant. It has no intrinsic value, nor does it produce any value. The only things that matter economically, are real productive resources, and how they are utilized. The rest is just about how those resources are employed, and how that employment is coordinated. Whether a sovereign steals resources by taxing or by printing, doesn’t matter one lick. The only, as in really the only, way the two differ, is wrt who gets robbed, and who gets handed the loot. If you could design a taxing scheme who transferred resources to and from actors in exactly the same proportion as printing does, the two mechanisms would be literally equivalent from an economic POV. The only reason the printing way is preferred by most governments, is that it allows a thing veneer of obfuscation over the fact that the theft function provided by printing, is from the many who have little, to the few who have more. Which makes it easier for the government to pretend that they are needed to “protect” the poor from the “rich.” Rather than, as is always and everywhere without a single exception ever their real purpose, to rob the poor and peripheral, for the benefit of the rich and connected.

Hi Stuki, I completely agree, except I would probably not say that money "doesn't matter", since its power to disrupt economic calculation and coordination obviously does matter. I would also point out, there is in fact a slight difference in the way in which money printing and deficit spending disrupt the capital structure, but it is essentially technical. In the former case, the dis-coordination is inter-temporal in nature (i.e., there is an imbalance in the allocation of resources across time, as usually too many resources are allocated to the higher stages), while it is intra-temporal in the case of government spending. The end result in both cases is the emergence of a production structure that is not in harmony with actual consumer preferences, so in that sense I guess it does not really make a difference. In any case, you make very important points: money printing cannot create an iota of real capital; in fact, its net effects will lead to capital consumption rather than capital accumulation - and all production is ultimately funded by real goods, not "money", which is merely a medium of exchange. One must also be careful though not to get carried away too much with the notion of the underlying barter economy. Money prices are ultimately ontologically bound up with real goods, as a modern rational economy with an extensive division of labor would not be possible without monetary calculation.

oldngrumpy
oldngrumpy

Most discussion here centers around the evils of debt, not spending. If the debt is a problem then why not eliminate the debt? It is the result of an outdated gold standard restriction of Congress that was intended to defend a now non-existent gold reserve by drawing down reserves to cover any spending that would increase the money supply in excess of the gold reserve. It was never a source of revenue for a government that issues its own currency and needs no revenue. By simply dropping the value of the gold reserve from the formula used to determine deficit that definition changed to include all currency left in the private sector after taxes. Is $21 Trillion too much currency to leave in circulation? One would think the economy would be in much better shape and private sector bank debt much lower if that were the case.

oldngrumpy
oldngrumpy