Saule Omarova and MMT Central Banking

Modern Monetary Theory is the latest fashion in economics. What started out as loose talk at the University of Missouri, Kansas City about making government the employer of last resort morphed into a full-scale campaign for unlimited monetization of budget deficits without the concerns for inflation. Without ever explaining how, proponents of Modern Monetary Theory decouple inflation from the supply of money and, more importantly, from government deficits funded by that same money supply. They casually ignore adverse empirical evidence, a.k.a., Weimar Germany in the 1920s, Latin America in the 1970s and 1980s, Zimbabwe in the 1990s and Venezuela in the 2000s.

The unwillingness of MMT economists to put their theory in view of just the Venezuelan disaster is a red flag in itself. At the height of their hyperinflation experience, the Venezuelan people had to put up with 300,000 percent inflation.

Per month.

The path from applying MMT to such extreme rates of price increases is unimaginable to practically every American, apparently MMT proponents included. That, however, does not absolve its proponents from their responsibility to actually explain how unhinged amounts of monetary expansion in the United States would not cause destructive levels of inflation.

It is easy to dismiss MMT proponents based solely on the grounds that they do not care about inflation. However, as mentioned, history has shown again and again that politicians are more than willing to use central banks to implement ideological agendas. The common denominator of strato- or hyper-inflation cases is that government wants to spend money on entitlement programs of various kinds (with Weimar Germany being the exception as the money there went to war reparations under the Treaty of Versailles). The exact configuration of the entitlement program varies, but the purpose is always the same: provide cash and in-kind benefits to a select group of entitled citizens.

As I explained in my piece on MMT for the Cayman Financial Review (2018, #53, pp. 68-69), the link from government as a universal job-guarantee provider to unlimited monetary expansion is alive and well, only now at a global scale. The United Nations has included MMT in its project on global sustainable development.

American politicians would use MMT for the very same purpose. It is already happening on a small scale, with the deficit monetization that started as “Quantitative Easing” under Federal Reserve Chairman Ben Bernanke. When the central bank buys government securities on an ongoing basis, it provides cash to the sovereign-debt market that goes into the Treasury and thus finances current government spending. This funding is either direct, with the central bank buying Treasury securities as they are issued, or indirect in the form of central-bank purchases on the secondary market; regardless of how the central bank participates regularly on the sovereign-debt market, its purchases do constitute deficit monetization.

A full-scale implementation of MMT would cause a larger expansion of Federal Reserve Treasury purchases than we have seen so far. The central bank would make an open-ended commitment to putting money into entitlement programs. However, this is not the only channel through which Modern Monetary Theory makes its way into the pockets of businesses and families in America. There is also a direct central-bank method, one has been brought to daylight by President Biden’s nomination of Saule Omarova for Comptroller of the Currency at the U.S. Treasury.

Omarova is the architect of a radical reform that would literally socialize the entire banking system in America. Reports the Epoch Times (Nov. 10-18, pp. A6-A7):

Every American would have a bank account set up at the Fed and authorities would be free to inflate the currency by issuing interest on the deposits or even crediting the accounts directly. To counter inflation, the Fed could also slash the interest rates or even, if all else fails, take away people’s money as needed

This is the same mechanics that MMT proponents want to see used by the U.S. Treasury, only there it would run through existing and new entitlement programs under the federal government. In this case, Congress would authorize the Treasury to spend more on entitlements that hand out cash or in-kind services and pay for that spending with newly minted cash from the Federal Reserve. To counter inflation, Congress would raise taxes to pull money back in again from the economy.

In its practice, MMT is nothing more, nothing less prosaic than a polished form of central economic planning. Conventional wisdom suggests that central planning must include the socialization of private property, including the government seizure of businesses. However, as I explain in Democracy or Socialism: The Fateful Question for America in 2024, there are two pathways to government control over the economy. Confiscation of property is only the special case we often refer to as communism; the general case is economic redistribution by means of a welfare state.

Barry Goldwater aimed for the same argument in his Conscience of A Conservative in 1960, where he explained why a communist revolution became a decreasingly attractive option for socialists in the Western world – or “collectivists”, as he called them (pp. 55-56):

The collectivists have found, both in this country and in other industrialized nations of the West, that free enterprise has removed the economic and social conditions that might have made a class struggle possible. Mammoth productivity, wide distribution of wealth, high standards of living, the trade union movement – these and other factors have eliminated whatever incentive there might have been for the “proletariat” to rise up, peaceably or otherwise, and assume direct ownership of productive property. … The currently favored instrument of collectivization is the Welfare State. The collectivists have not abandoned their ultimate goal – to subordinate the individual to the State – but their strategy has changed.

Goldwater does not refer to the welfare state as explicitly socialist – he calls it “welfarism” – but his conclusion is the same as mine: the socialization of needs is a workable alternative to the socialization of property in terms of placing government in control of the economy. What is missing in Goldwater’s analysis, namely the ideological end goal behind the welfare state, is provided in my book The welfare state rests on the same Marxist foundation as does the communist state, with the goal to eliminate economic differences between individuals.

Proponents of MMT give away the same ideological preference, in part in their desire to make government an employer of last resort. Saule Omarova does the same, explaining as she does how the Federal Reserve, by socializing banking in America, can become an effective central planner of the economy. As such it necessarily becomes a force for implementing a specific ideology. The Epoch Times article quotes Alex Pollock, senior fellow with the Mises Institute. explaining how Omarova’s vision of the Fed as a central planner would govern practically all decisions on the supply of credit – lending, for short:

“If you have all of the deposits in the government bank, then all of the loans, or at least a very high percentage of the loans, are going to be there as well,” said Alex Pollock, former head of the Federal Home Loan Bank of Chicago and financial research executive at the Treasury who is currently a senior fellow at the classical liberal Mises Institute. Controlling credit means the Fed – and de facto the federal government – would have a say in most of the major individual economic decisions, such as what factor or office tower gets built, who gets to build or buy a home, and even who gets to go to college or buy a car.

Such decisions, of course, will be motivated by ideological preferences, something the paper reports Omarova being in favor of:

Omarova seemed to affirm the influence of political priorities. the Fed would be “explicitly preferencing certain categories of assets” such as “loans to small and medium-size non-financial enterprises and minority-owned businesses, student loans, credit supporting development in underserved communities” and others, she wrote.

We are already seeing clear elements of such explicit ideological influences, the paper explains, in the federal government’s interference with the financial industry:

While [Omarova’s] focus is mainly on suppressing what she sees as maladies of the financial market, the Biden administration has made clear it wants financial regulators to target a much broader set of priorities, including steering capital toward companies it sees as furthering the climate-change agenda and away from those that don’t.

However, Omarova wants to ramp up MMT-based central planning even further:

In Omarova’s proposal, the Fed wouldn’t have to bother financing political priorities through private parties. It would create a National Investment Authority (NIA) to funnel money from the Fed into “publicly beneficial infrastructure projects.”

This NIA would effectively socialize the supply of business credit throughout the economy. Only private entities in good standing with the Federal Reserve would be allowed a share of the money the NIA would be doling out.

It goes without saying that such a level of central planning would practically render useless the very private ownership of businesses. With the socialization of all private bank accounts – including individual ones – and with the government’s ability to give or take balances on those accounts at its own discretion, there is no longer any room for private economic decisions, or even individual freedom itself. Everything an individual decides to do, or not do, is related to how the actions and decisions will affect the individual’s status vs. government. If you don’t appreciate the ideology by which the country is being governed, you are at grave risk of having your personal finances gutted by the very government you just criticized.

If you don’t take a certain vaccine, government might punish you buy garnishing your bank account.

On top of the severe consequences for individual freedom, there is also the de facto implosion of the economy itself. Countries that use central economic planning always get stuck in a state of stagnation. Once there, they slowly sink into gradually expanding poverty. Product shortages become permanent, and expand over time until they are universal. As people start competing for increasingly scarce resources, corruption and crime replace private enterprise as people’s means of providing for themselves and their families. Law and order breaks gradually down, society is fragmented, and it is only a matter of time before anarchy erupts.

This process is sped up by hyperinflation. Central planning exacerbates the consequences of hyperinflation. Political arrogance fuses the two into a force capable of competing with wars in terms of economic and social destruction.

Let us pray to God America never goes down that path. We are already on its doorstep. May the Lord lead us away from it. If America plunges into the dungeon of full-fledged socialism, that’s it. There is nowhere else to go on this planet. We account for more than one quarter of the world’s economy: if we destroy our prosperity, we will pull the rest of the planet with us.

If we destroy American liberty, there will be no other beacon holding its light. Anywhere.