"Kee" Points with Jim Kee, Ph.D.

  • Multi-Year Trade Negations
  • Modern Monetary Theory

Multi-Year Trade Negotiations

You are probably as glad as I am that the market was closed on Memorial Day, given what Barron’s described as the Dow’s recent “five weeks of futility.” And recent economic data releases (housing, retail sales, industrial production etc.) haven’t been very encouraging. A good question to ask is whether or not there is a case for optimism regarding the ongoing US-China trade conflict. I think there is, and you hear it particularly among economists who are starting to view trade negotiations as a long-term, multi-step and multi-year process. This might involve an agreement this year on tariffs, for example, with subsequent agreements on items like national security or intellectual property down the road. Economist Scott Powell points out that the General Agreement on Tariffs and Trade (GATT), which preceded the World Trade Organization (WTO), took nine rounds and 60 years of on-and-off negotiations to bring international tariff levels down following the Great Depression. That’s an interesting way to look at it, but given the level of global integration today (discussed in prior Kee Points), some reduction in the current high level of uncertainty regarding trade policy is needed, and fast. I would characterize the current environment of global trade restrictions as relatively moderate and threading to ratchet up, which is a growth and market killer. I think a multi-year series of negotiations would only be successful (as measured by global growth and stock market returns) if they were perceived as a ratcheting down (or at least clarification) of current trade tensions. And in my opinion, that requires a tangible agreement on some aspect of trade with China (tariffs, intellectual property, security) in the next few months.

Modern Monetary Theory

“Just wrong” is how Federal Reserve Chair Jerome Powell describes so-called Modern Monetary Theory, or MMT. Since I am hearing this term a lot lately, I am guessing that Kee Points readers are too. The gist of MMT is that a country that issues its own currency, and also borrows in its own currency, can spend more money than it receives in tax revenues without increasing budget deficits by just printing money to pay for the difference. Conventional economists would argue that this would just lead to inflation, or each unit of currency being worth less in terms of the goods and services it can buy. MMT also argues that said government need never default on its debt because it can just print money to pay debt-holders. But conventional economics would argue that lenders, upon seeing this, would not buy new debt (lend money) or roll over existing debt without demanding higher rates. In fact, the University of Chicago polled its panel of experts from top economics programs around the country (Harvard, Stanford, etc.) and found no real supporters of MMT. But then, conventional economists haven’t exactly had a stellar record of anticipating interest rates, inflation, etc., under the current, unconventional monetary policy period! My sense is that anything that promises more spending without raising taxes will always find some political support, but I would be wary of things like MMT that emote more from newsletters than peer-reviewed research. If anything, and like most things monetary, there is probably a case to be made for individuals to be fooled in the short term by some monetary expansion scheme (known as “money illusion”); that is, it might not immediately result in higher inflation and interest rates, but it probably would in the long run.