Scott Bessent: ‘Modern Monetary Theory Is Neither Modern, Nor Monetary, Nor Theory’

Originally published on RealClearPolitics:

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Key Square Group CEO Scott Bessent speaks with “War Room” host Steve Bannon about the ballooning deficit-to-GDP rate and the “sophistry” of Modern Monetary Theory.

“The rubber has now met the road on the spending. We are stretching the debt and deficits, the savings glut in the world is going away. The Global South, the Chinese, and the Russians don’t want our debt anymore. And you know, we would have to put in some proper spending,” he said. “So lo and behold, there’s a new theory called Modern Monetary Theory. It is neither modern nor monetary nor theory.”

“This has been around forever. As you mentioned, the French thought it up and you know, it’s probably the reason they had to sell us Louisiana. It’s not monetary, it is fiscal because it is all contingent on government spending that is financed by the central bank. And like I said, it is not a theory because it has been practiced.”

“On the supply side, the idea is that you grow your way out of it and you have a private solution, not government spending. The government spending, what we’re seeing now, if the Chips Act is so great and Intel is getting all these subsidies, why is the stock at a new low? That’s all you need to know.”

“They’ve run out of road with fiat currency,” he said. “We had Bretton Woods and we went off the gold standard and that kept us going for about 50 years. Now, we’re at the end of the road and we got to create this new bit of sophistry called Modern Monetary Theory. And you know, the core of Modern Monetary Theory is when inflation gets high, Congress will stop spending. Can you imagine the politics of stop spending? You know, why, why do we even have a central bank?”

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SCOTT BESSENT: As a financial analyst, and later on I’ll express some political opinions, this is worse than I imagined. We’re halfway through the year, the debt-to-GDP or deficit-to-GDP is going to be $2 trillion. I’m sure that number will be revised up later in the year. A big amount of this is related to the illegal student loan forgiveness.

Politically, Joe Biden is like Imelda Marcos throwing dollar bills out of a bus window. He’s not very popular, so it’s clear that he’s spending a lot. This is worse than I could ever imagine.

I’ve come out from behind my desk and am taking a more public role because I believe that 2024-25 is the last opportunity for a supply-side solution or for us to grow our way out of this. But with numbers like this, Joe Biden has created a steroid economy that looks great on the outside but is killing your internal organs. These guys are about to put us on a ventilator. Their prescription for 2025 to get the deficits down is high taxation and more regulation. We’re going to go from the steroid economy to the ventilator economy because the steroids have killed your capacity.

The most worrying thing here is just the debt service, the interest bill for the United States of America will be $1.1 trillion this year. To put that in perspective, the defense budget is about $850 to $900 billion. We are spending more on interest than we are on defense. If there are no interest rate cuts this year, the interest bill will automatically go up to $1.5 trillion for 2025.

We have never seen this when we are not at war or not in a recession. We are at a 6.87% deficit-to-GDP with full employment and Joe Biden telling you how great the economy is. This is an unsustainable path. Right now, what we’re seeing is a spending problem; the revenue side is fine. Revenue starts to falter, and we’ll have a real problem.

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STEVE BANNON: You’re a mathematics guy. What worries me most about this is that this is not a true picture. The institutions around the federal government, like the Federal Reserve and Treasury, are trying to work together to juice the economy, and BLS is giving us false numbers. This is not the true horrible picture, is it?

SCOTT BESSENT: No, these numbers are not meant to be accurate; they’re meant to be just a snapshot in time of the data that’s available. What is alarming is the trend, and this deficit is just not going down. It’s all spending. As I said earlier, it is a spending problem, not a revenue problem. The real issue will arise when we get a revenue problem because we’re not going to see a spending decrease. The Biden administration put out their 10-year budget, and they say they’re going to get the deficit under control, which is like Hannibal Lecter saying he’s going to be a vegan. They want to keep spending but now want to tax, tax, tax. It’s just a deeply cynical thing to have done.

This is a financial problem, but it has now become a national defense issue. Cicero said, “The sinews of war are infinite money.” The US Treasury flexed up three times in the history of this country: Salmon Chase financed the Civil War for the Union, the Treasury and our ability to borrow saved the American people during the Depression, and it saved the world during World War II. Now, we’re at the point where we are borrowed out during a boom.

The folks at the CBO are good, well-meaning technocrats, but the protocols they use are not accurate. I have an issue with some of the sequencing they’ve done. The recent work on immigration, I thought, was off base because they showed the benefits of economic growth through new arrivals without the cost. I told them it was not great sequencing and they should have included the cost.

More importantly, the costs borne by the federal government are obfuscated because they end up at the state and local levels. Look at what’s happening to the budgets of New York City, Denver, Los Angeles. Eventually, the federal government will have to step in. The budget cuts for those cities are borne by the most vulnerable people. Low-income people are getting it both ways: their wages are being suppressed by immigration and government services are being cut. Veterans’ centers in Boston are being relocated to migrant shelters. This isn’t an accurate number. After November 5th, we will get a much bigger number.

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The best way for viewers to think about this is if you were financing your household. You could have gotten a 4% mortgage in 2021 and had household debt with a long-term 30-year mortgage at 4%, or you could take out credit card debt every day. Janet Yellen is paying down the mortgage and using the credit card to do it because she wants to keep long-term interest rates down. She’s suppressing long-term interest rates to keep the stock market up and the bond market from blowing out. Then she’s using the national credit card at the very short end to pay the highest rate available. We’ll see what she does after November 5th.

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STEVE BANNON: The test of whether somebody really knows something is to take a very complicated issue and break it down very simply. Your last 60 seconds in that break was the smartest explanation of the three-card Monte that this regime is running with Janet Yellen, who I think has now proven herself to be actually dumber and more radical than she was coming out of college when I think she was a Maoist.

Because this is the way the Chinese Communist Party would finance something to hide it from the people, just go back to it. So you have, you’re adding a trillion dollars every 100 days, you got $35 trillion. I hate the way they say public debt versus all debt. But you’ve got this, the gross interest, not the net, the gross interest already over a trillion. You’ve made the case and, and, and people know that you’re, you’re very close to the president talking about financial matters that this is now, you believe, and you’re, I would call a hawk like you come from South Carolina. So you’re like us in Virginia and South Carolina, you’re a hawk. You say that you believe this may be the most important national security issue facing the American people, but explain why it’s even worse than, than, than we can imagine because of the way they’re financing the problem that they created, sir.

SCOTT BESSENT: Right. And Steve, I’m gonna correct you. You know, you said this, this is a Maoist Chinese style. You know, this is a Peronist, Argentine, Chavez style of Venezuelan is, you know, I think I’m starting to look like it, but I’ve been doing this for 30 or 40 years now and every emerging market that I’ve ever seen get into trouble does what Janet Yellen is now doing. You go into an election cycle, the incumbent is behind, they start, they engineer a boom in house prices and stock prices. And so you engineer an asset boom, you finance the asset boom with borrowing and then as you get closer to the election, you switch the borrowing to short-term borrowing like that, that you know, this is not the stuff the United States of America should do. This is, you know, Argentina, Turkey, Venezuela style. And you know, as I said before, what she has done is she is paying down will cost mortgage debt, but you know, she’s also increasing new debt and she’s worried that the market will not give her any more mortgage debt. So she’s now, you know, on her spending law of having to finance it with short-term 90-day debt, which is the most unstable and you know, this is gonna be a mess is we, we have, they are probably a debt ceiling coming up in 2025 in January and you know, this isn’t like the, the way the US finances are run during peacetime or not in a recession.

STEVE BANNON: Scott, one last thing just real quickly for nomenclature because people now think that the audience loves this. I wanted to just give you, there are two kind of opposite ends. You have been warning and President Trump remember, the golden year of 2019, 2018, 2019 where we had, you know, low inflation, low interest rates, blue-collar salaries higher growing faster than white-collar, non-college graduates salaries growing higher than college graduates. Kind of the perfect, you know, MAGA economics. You have warned that because of the Biden regime’s economics — the fiscal plan, but also the radical monetary, the way they finance this, just the economics and the finance — that we are towards the end of really what started with President Reagan, really a supply-side solution.

Can you compare and contrast modern monetary theory which has infected this town, the political class, but particularly coming from the lords of easy money on Wall Street versus what a supply side is and why you fear that we may be if, if first of all, if President Trump is not elected, you’ll never see again. But even with President Trump being elected, it’s gonna be a herculean task to get a supply-side solution for this.

SCOTT BESSENT: I’m not an economist, I’m an economic historian. And you know what I have observed is the rubber has now met the road on the spending. We are stretching the debt and deficits, the savings glut in the world is going away. The Global South, the Chinese, and the Russians don’t want our debt anymore. And you know, we would have to put in some proper spending.

So lo and behold, there’s a new theory called Modern Monetary Theory. It is neither modern nor monetary nor theory. This has been around forever. As you mentioned that the French thought it up and you know, it’s probably the reason they had to sell us Louisiana. It’s not monetary, it is fiscal because it is all contingent on government spending that is financed by the central bank. And like I said, it is not a theory because it has been practiced. And you know, on the supply side, the idea is that you grow your way out of it and you have a private solution, not government spending.The government spending, what we’re seeing now, if the Chips Act is so great and Intel is getting all these subsidies, why is the stock at a new low? That’s all you need to know.

They’ve run out of road with fiat currency. We had Bretton Woods and we went off the gold standard and that kept us going for about 50 years. Now, we’re at the end of the road and we got to create this new bit of sophistry called Modern Monetary Theory. And you know, the core of Modern Monetary Theory is when inflation gets high, Congress will stop spending. Can you imagine the politics of stop spending? You know, why, why do we even have a central bank?

But it all goes back to, you know, in, in my mind, the failure, the recent failure of central banking since the great financial crisis, we have let these people become the central planners that, you know, highly educated vision of the anointed style central planners and the central planning comes from setting the price of money, not from, you know, like some gigantic Soviet-style plan. It’s we are planning around here’s the price of money, we’re gonna buy bonds and then we’re gonna hand it to the government.

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The key to supply side is high after-tax returns on investment. That’s why it is dependent on the private sector. What we are seeing right now is the Green New Deal and government spending — whether it’s to the bloated states or forgiving student loan debt, that is crowding out both households who want to make productive or spending decisions. But most of all, it’s crowding out business.

The success of the Trump tax cuts was from business investment. It gave people the confidence. I will finish with whenever I talk to industrialists, they will tell me the tax cuts were important and you know, like everybody likes making money and having high after-tax returns. They said the other thing about the Trump administration very different from the Obama administration was regulatory certainty. You had to know if you’re gonna build a pipeline, if you’re gonna build a chemical plant, if you’re gonna build a real estate development, you have to know that you have, you know that the rules are the rules and that some executive order will not change them.

I’ve coined a new phrase in monetary policy. They talk about forward guidance on interest rates. What will be different under a Trump administration is a Trump administration will give forward guidance on competence and competence.