- The U.S. stock market’s sustained bull run is largely driven by the “watering” of the dollar, rather than America’s inherent “hard power.”
- The modern monetary system has gradually become an important theoretical cornerstone for many economies worldwide since the 2008 financial crisis, emphasizing the subjective initiative of large governments in intervening in markets and utilizing government fiscal deficits as a primary tool to achieve full employment while stabilizing inflation.
- The term “large government” is most commonly associated with Keynesianism, which highlights the government’s role in “smoothing peaks and troughs” during economic cycles – for example, suppressing overheating and stimulating contraction. It places great emphasis on the multiplier effect of government spending, i.e., how much an increase in monetary stimulus can amplify consumer multipliers; a 1-unit increase in government expenditure stimulates an equivalent increase in corporate and individual income, leading to business expansion and job creation, and ultimately mitigating economic downturns. Furthermore, it adopts a relatively conservative approach to fiscal deficit limits and sustainability. The multiplier effect will drive market recovery, thereby increasing government revenue, especially during periods of overheating, where government debt potential and interest rate levels can be accumulated as stimulus funds for the next cycle.
- The modern monetary system is more like an extreme extension of Keynesianism, but with differences; its biggest characteristic is the limitation on government debt, which means the central bank should not have independent autonomy, primarily focused on inflation and full employment. With limited resources and productivity, inflation refers to the government continuously increasing purchasing power through unlimited fiscal deficits as technological progress improves production efficiency, until it reaches the ideal level of full employment and production bottlenecks; continuing to increase monetary supply will lead to inflation, at which point it chooses to set a limit on fiscal deficits, as long as there are idle production resources, increased debt will not trigger inflation.
After the Financial Crisis
Of course, reality is not an ideal world, and execution in each stage involves human participation. Keynesianism is also selectively applied, leading to more economic stimulus during downturns and less overheating suppression. Economic imbalances generate achievements, while overheating also does, making it extremely difficult to suppress them. The numerous economic problems brought about, even a new financial crisis, are not inferior to the economic shocks caused by traditional overcapacity. The 2008 global financial crisis was actually a market self-reinforcement resulting from extreme Keynesianism, leading to the proliferation of speculative structural financial investment products such as real estate and financial investment products derived from real estate as their underlying assets. Even before the crisis erupted, there was a lack of risk awareness at academic, political, and market levels, treating debt-fueled prosperity as achievements, and more people benefited from it, such as the enormous financial system: losses are yours, dividends are ours, it’s bankruptcy – we made a fortune, money cannot be spat out. Ultimately, this led to massive investment by participants, bearing the profits of previous stages.
At this time, the shadow of the modern monetary system entered the financial crisis, characterized by rapid monetization of fiscal deficits and central banks’ unlimited quantitative easing, as well as so-called emergency central bank lending policies. As the final lender, the central bank supplied bullets endlessly, allowing governments to continue borrowing debt. The central bank coordinated with fiscal policy, supporting government fiscal deficit spending through methods such as purchasing bonds, ensuring consistency of policy objectives. This is also why the boundaries between modern monetary and fiscal policies are becoming increasingly blurred – the base money injection relies heavily on the central bank’s direct participation in bond purchases, with one hand printing money and the other buying bonds.
The Eurozone and the United States exhibited similar trends. In 2008, the EU government debt was approximately €6.7 trillion, and the government leverage ratio was around 66%, slightly above the generally recognized warning line of 60%. By 2014 – the five years of saving the market – the debt scale reached €9.5 trillion, and the leverage rose to 93%. The United States was even more exaggerated: in 2008, US government debt was approximately 18 trillion by 2014, and recently again raising the government debt ceiling. Of course, each farce is staged with a government shutdown, but it will always break through the government debt limit. Currently exceeding 26 trillion growth in 2008, considering GDP growth factors, the government leverage has grown from 60% to over 120%. The Federal Reserve, as the final lender, played an important role in multiple rescue operations and is one of the main purchasers of government debt.
Flaws and Limitations of the Modern Monetary System
This government-led stimulus scheme, though not a planned economy, faces consistent problems. How can you guarantee the market’s omniscience and all participants’ selfless dedication at every stage? Let’s take a simple example: if a government department increases its budget for a particular direction by 1 million, is it going to go to the mayor’s nephew or a more cost-effective market auction? Of course, in reality, interests will form in increasingly complex ways, leading to the result that even though the government has expanded debt and spending, it flows completely out of control. The recent American establishment of a Government Accountability Office is an extension of this type of problem. These issues manifest differently across varying corrupt economies; we’re focusing on discussing the more prevalent problems.
1. Inflation Issues
With the development of the modern information network, governments have a much greater grasp on market information than in the past, but this is not omniscience; markets inherently contain variables and are always subject to change based on expectations, leading to nested loops (or “Russian dolls”). I anticipate your predictions. Taking actual performance as an example, while between 2008 and 2020, the practice of Modern Monetary Theory (MMT) performed well, achieving short-term economic recovery and inflation stabilization – even the Eurozone experienced phase-wise deflation, and U.S. inflation remained roughly within the expected 1-3% range, leading people to believe in extreme tools like Keynesianism again.
However, if we look back, it was primarily due to continued high growth in manufacturing in developing countries after 2008, such as our country gradually securing its position as a global production base and Southeast Asian and Indian economies following suit, all maintaining relatively high industrial value added, which offset the biggest limitation of MMT – resource supply constraints. Even under de-industrialization and excessive financialization in Europe and America, they simultaneously experienced increased government debt and monetary supply surges, while maintaining relatively stable inflation.
However, after 2020, with the use of larger-scale stimulus policies, both the Eurozone and the United States saw more significant inflation, peaking at around 10% – even today, despite rising interest rates for nearly three years, the U.S. labor market continues to exhibit abnormal overheating, and financial markets experience divergence from economic growth supported by monetary support, with inflation running towards 3% as the base effect disappears. This overheating performance during rate hikes is closely related to fiscal deficits. Raising interest rates is a contractionary monetary policy, while fiscal policy remains expansionary, compounded by the ultra-massive money injection in 2020, which has made U.S. inflation remarkably persistent. The biggest limitation of MMT is high inflation.
2. Government Debt Issues
In principle, governments can indefinitely finance debt repayment through borrowing, but this is only possible if the central bank becomes a complete puppet, meaning full alignment of monetary and fiscal policy – a key element of modern monetary systems known as policy coherence. The Federal Reserve has no intention of granting the government completely unfettered authority, especially considering the accumulated government debt balance over many years, particularly interest expenses, which are increasingly becoming a significant burden on finances.
Fiscal Year 2023: In fiscal year 2023, the United States generated $4.439 trillion in revenue. The proportion of interest payments on its debt to this revenue was approximately 15%. In 2024, this high-interest environment continued, according to data released by the U.S. Treasury Department.
Fiscal Year 2024: The U.S. federal government’s budget deficit reached 882 billion – approximately 18% of U.S. revenue. This even exceeded Social Security expenditures.
This highlights the sustainability issues within fiscal policy. If persistently maintained at low interest rates and low inflation, high levels of debt (such as in Japan) could theoretically lead to a slow, incremental increase under a quasi-modern monetary system. According to the 72 rule, if interest costs are sufficiently low, debt repayment can double over 72 years – assuming inflation breaks this delicate balance, the accumulation of interest payments on debt will lead to runaway debt levels, with principal becoming a secondary factor. If the central bank subsequently diverges from the government’s objectives, these issues will become even more acute. Furthermore, Donald Trump’s political agenda starkly contrasted with the current Federal Reserve’s hawkish stance, contributing significantly to tensions between the U.S. government and the Fed during his term. The primary focus of observers is whether the current chairman can successfully complete his term.
3. Financial Bubbles and Monetary Credit Issues
Ideally, government-expanded spending enters the household and corporate sectors, leading everyone to expand their spending, thereby boosting the increase in effective demand. However, given that people are all experienced from numerous financial bubbles since 2000, it’s clear that investment and consumption choices will exhibit a strong tendency towards large investment appreciation, especially when one or more products with extremely high expected appreciation appear, people will flock to the financial market seeking higher appreciation, even willing to compress living standards and leverage up. This is similar to what happened in Japan, the United States, and China during periods of high real estate growth. Combined with policy stimulus and the pursuit of maximum self-interest by practitioners, issues such as subprime loans are rampant. Many so-called bailout policies are actually encouraging borrowing.
Therefore, historical performance shows an astonishing consistency: when monetary and fiscal policies are deployed on a large scale, it often leads to asset bubbles and wealth redistribution frenzies. The asset bubble comes first, followed by wealth redistribution. This results in another problem – the extreme Keynesianism or Modern Monetary Theory (MMT) frequently encountered – leading to economic Ponzi schemes (Minsky Moment). As long as there is hot money, asset prices continue to rise; as long as they keep rising, latercomers will flock to hold cash; while the CPI measuring changes in basic living expenses doesn’t change significantly, money circulates within specific areas, and latercomers have no way out. After the frenzy comes the collapse, which is the judgment of the Minsky Moment – repeatedly proven effective.
Furthermore, currency itself has a supply and demand relationship. When market supply exceeds demand, traditional investment products cannot accommodate it, or when it harvests too much capital that cannot attract investment, such as repeated real estate bubbles (Japanese people haven’t dared to touch real estate investments for decades), tax policies like increasing property holding taxes to reduce speculative demand will increase the cost of financial speculation. In a situation of excessive monetary supply, the market urgently needs investment-and-tax-exempt investment products, and various virtual investment products emerge accordingly, even including the US President and First Lady joining in. One saying is to dig into the dollar, but it’s actually the inevitable result of global currency issuance and financial circulation under the damage of fiat currency credit. MMT relies most on countries with monopoly rights over credit money, which are also challenged. What kind of soil breeds what kind of financial game?
In summary, Modern Monetary Theory (MMT) and Keynesianism are more like a progression and replacement relationship, emphasizing greater government intervention in the market and adopting a more aggressive attitude towards fiscal deficits and central bank independence. Excessive use of Keynesianism leads to stagflation and financial crises; MMT quietly took over after 2008 to clear out this artificially overheated economy. Under global economic globalization, productivity continues to improve, it quickly restored growth in the short term while maintaining inflation levels in the country using it, but also accumulated large government debt and asset bubbles. When inflation rebounded, with inconsistent goals between the central bank and the government, high interest rates and high leverage coexist, further exacerbating the fiscal burden brought about by government bond issuance. Fiscal sustainability is significantly weakened. Furthermore, excessive government participation has led to monetary base expansion, creating asset bubbles, while unlimited printing of money weakens the creditworthiness of the currency itself. It may appear that the dollar is strong, but it’s just a reflection of others. The massive investment demand creates fertile ground for various new types of financial investment and speculative tools, even escaping tax restrictions on traditional financial investment products – this is a microcosm of the global economy. MMT may not be the future, but it’s more like the past used after 2008, superimposed on the decline of economic globalization, the larger the financial bubble blown by governments, the higher the accumulated government debt, and the more frantic the financial speculative tools, the higher the efficiency of distorting wealth allocation. The greater the risk of a hard landing – including economic and social risks. Whether it’s Keynesianism or MMT, no matter how much monetary supply is provided, it cannot truly solve the problem of wealth structure; instead, it exacerbates risks in asset bubbles and Ponzi schemes. People are repeatedly falling into the same pit in different postures, but never learn anything from it.