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)
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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?

No. 26-36
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.