The main idea of MMT is that since government creates money there are exactly no limits to how much money government can create. Back when money was backed by gold (say, with one ounce of gold being worth $20) there was a physical limit – by definition you couldn’t have more $20 gold coins than you had ounces of gold. MMT says, “Hey, since Nixon took the world off of the gold standard, we’ve been making up this money stuff anyway. So let’s go all in.” This is not exactly like a drunken 21 year old with Mom and Dad’s credit card in Las Vegas. Not exactly. The credit card has a credit limit.
January 20, 2021
The Post That Gave The World Bikini Economics: Why MMT Is A Bad Idea.
[It would appear that the U.S. is in the process of testing MMT.
We live in interesting times.—Joe]
We’re not quite there yet, but there are elements of it appearing.
There are three big domestic problems, and one international, with MMT that I see.
One, all money is, even gold, is a medium of exchange with a standardized framework of valuation. With certain exceptions it’s not worth anything in and of itself. (Yes gold looks pretty, doesn’t rust and has some industrial uses.) That valuation comes from the bottom up, so Bob and Jim don’t need to trade three eggs for a haircut. Assigning the valuation from the top, as is implicit in MMT, throws out the pricing function of the market. Disconnecting the currency from perceived value is one way we get Weimar Republic, Zimbabwe, etc.
Two, it seems to capture and accommodate only the interactions between corporations and the government (e.g. macro level and up), but not for instance between corps and their employees (e.g. micro level, where people actually live); and those interactions are only modeled to 1st order. Example, if taxes are raised to reign in inflation as per MMT, the corps will either increase prices, or cut payroll (salary cuts or firing people) – a 2nd order reaction, and higher order reactions will follow on the part of the affected people.
Three, if the combination of printing money and taxation are used as throttles and brakes for the economy, it makes it impossible to plan long-term for tax rates, savings needed etc. (That’s nominally true now, but compared to MMT’s expected rates of change, today they’re small and gradual.)
A final problem would be that it removes any check on government spending – or, if you prefer, cooption of the economic output – but that’s been the case for some time now anyway, it would seem.
The international is, this would make a travesty of borrowing and lending between nations, either via direct sales of goods or government debt, because the valuation is completely at the whim of the nation using MMT.
And there’s all the other moral hazards baked into the assumptions of MMT … but as the proponents seem to see those as features not problems, I’ll leave them be for now.
Anyone who advocates for hard standard money, like gold, is delusional. It’s two dimensional thinking to imagine that the money supply doesn’t have to grow with the economy. As the economy grows, and it does every day, the money supply has to grow with it. When anyone makes a product or provides a service, they create value where none existed before. That increases the economy. It’s two dimensional “Fixed pie” thinking that leads idiots to imagine that if only our money was backed by gold, our economic woes would end. The only problem with that is that we have a track record of seeing exactly how screwed up our economy got even under a gold backed monetary system.
There isn’t enough gold, nor any other commodity, to back the money supply.
All money is Fiat money. Even gold. Money is just a medium of exchange. It’s worth what it will buy. Gold has no inherent value any more than paper.
Gold backed money didn’t work in the past so there’s no reason to imagine it will work in the future.
“As the economy grows, and it does every day, the money supply has to grow with it.”
Or would prices naturally adjust accordingly, so as to accurately reflect the easier production of goods?
When I was a kid a loaf of bread was 25 cents. With the reduced per unit production costs due to industrialization, you’d think it might be down to five cents or less by now.
And don’t forget that there’s still plenty of gold in the ground. It’s only a matter of its current value compared to the costs of getting it out of the ground. Therefore as the total value of land and goods increases, so will the gold. So who is falling into the “fixed pie” trap?
And that’s only the trivial part of it. Obliterating all of those arguments is the fact that it’s neither your business nor government’s business to meddle in the affairs of citizens. So butt out, mind your business and let others mind theirs. But that’s too difficult, isn’t it, because so many are so keen on living the lives of pirates. Pirates with title and station? Even gods.
Free people will easily and readily adapt so long as they’re not being messed with, harassed and herded by presumptive, arrogant, and arbitrary outside forces (no matter how brilliant they view themselves to be) , so forcing a centralized monetary system down the throats of citizens can only hurt them in the long run.
And therein lies the point, and the purpose, of monetary policy; to prevent success and stability, and create decline and chaos instead. And it’s working.
Fiat money is so called because it by government command. Gold, though it is specified in the Constitution along with silver as money, was never fiat – it’s use grew by common acceptance for thousands of years.
The reason for specifying gold and silveras the acceptable monies in the Constitution was because of the known problems in the US with paper currency – inflation, counterfeiting and corruption.
Requiring the government to accept only gold, silver or other hard currencies doesn’t mean that we shouldn’t, as citizens, be able to use other media of exchange – there doesn’t have to be only one.
And, it’s not fixed pie thinking, it’s limited government thinking, along with not allowing the government to issue debt under except in case of war.
As for saying that there isn’t enough gold or other hard asset to back the money supply, you’re again wrong. Even making the false assumption that all of the gold above ground is all there is to be had, using it as a medium of exchange only means that gold becomes more valuable, and the price per ounce becomes the price per gram, and at some point it becomes supplanted or included alongside other kinds of money.
The Real Kurt
Sean, you said that the money supply has to grow with the economy.
Nonsense. Read Von Mises to see why.
Actually, the answer is pretty simple. If the economy grows but the money supply doesn’t, the consequence is that prices go down. Which is fine. The fairy tale that dropping prices are bad is so ridiculous it’s bizarre that anyone still tries to tell it. Consider the prices of computers, or electronics, or cars.
Von Mises makes this general: a growing economy (increasing productivity) means that prices will drop gently to match. And that is good.
I had thoughts about this yesterday, as well.
Someone had posted something to the effect of, “A government really finally and avoidably defaults on its debt when its troops no longer accept its currency.”
By law, the US Dollar must be used for all debts, public and private. .mil/.gov people have to be paid in dollars. Taxes have to be paid in dollars. The fact that oil is priced internationally in dollars means it is partially backed in oil production. If you have a business, you have to accept dollars in payment for services.
But I had a thought: you don’t have to price in dollars. You can price in cryptocurrency (backed by mathematical scarcity, if nothing else), or a precious metals composite currency (backed by gold with conversions to other precious metals) or some other thing that has a backing. With an online store or a properly retail payment system, you can price in a backed currency and accept dollars with a 5% conversion surcharge at the moment of payment.
Why was I thinking this? Property taxes. Even though my mortgage is paid off, property taxes are the rent I have to pay to keep my house. Property taxes are based on value assessments, and my bank has a ‘value tracker’ for my house that says that it has gone up 50% in market value over the last five years. If the King County tax assessor picks up on that, I’m pretty well screwed, because my salary certainly isn’t going up like that. What could be driving that?
Stimulus money. It might go to individuals and families and even to businesses in the first pass, but it doesn’t create much permanent economic activity. The actual economy doesn’t grow with government spend because it all had to come from within that same economy. What it does do, however, is get plopped into banks. So while the price of eggs, gas and Legos don’t creep up immediately, all that fiat stimulus winds up in the things that people get credit for: real estate, cars, higher education, health care, stock market. More money in banks, more money supply, fixed supply/demand of credit funded items, ergo, price of those items goes up. Quite a lot of the record stock market prices today is just due to the value of the currency being down.
But not my income. If my salary goes up by that fraudulent consumer price index (that Congress switched to in the 90s to mask about 3-5% extra real inflation), I’m lucky.
Neil Stephenson, who I consider to be a deep-thinking novelist, had in one of his Sci-Fi novels the concept of three kinds of money: fast, medium and slow. Fast money is the currency of day to day life, groceries, personal services, fuel, power, restaurants, pretty much anything with a shelf life or is consumable or doesn’t hold value. Medium money is backed currency, and you use it to buy real estate, large durable goods, refined metal, crude oil (before conversion to perishable gasoline), things that generally holds intrinsic value over time. Slow money he invented as a currency for interstellar transactions limited by the speed of light and travel, and primarily represents the accumulation of supplies and equipment needed to establish a colony on a new planet and the centuries-long process of repaying that investment so you don’t get into a “Moon is a Harsh Mistress” situation. Nothing about slow money is applicable here, but I include it for completeness.
To bring this all back to the issue of defaulting and troops getting pissed because they can’t buy tacos with what they’re paid, I think a way to get some discipline in the US economy is to institute a medium money concept. A backed currency used to manage value items like real estate, but also stocks and loans. There is conversion between fast money (dollars) and medium money all the time, in both directions at a broker’s fee to make a little friction, but there will be something immediately available to compare the volatility of the dollar (fast money) versus value holding assets (medium money). The way you can keep the dollar buying tacos is to get people pissed at the other end when they can’t buy a car, which might be priced in a medium money because that’s how you get a loan but it’s a fast-money item once it is off the dealer’s lot. We’ve seen that politicians and governments cannot control their fiat currencies without there being a day-to-day visibility at the street-level with a currency they cannot fuck with; the incentive structures simply don’t exist without that tension.
At the personal level, the fast/medium money might show up in wages. If the company makes durable goods, they get paid in medium money, so they can pay people in medium money. Similarly, if they’re publicly traded, their stocks are bought in medium money, so they pay people in the same. Your pay structure might be a split between fast and medium money, which would be a bit like today if you’re in a position to get stock awards, or you can set aside some of your salary for an ESPP and thus convert your fast money to medium money at your own elected proportions.
Seems there’s some folks out in the world who need to read and understand a few works for beginners by Rothbard.
Start with “The Mystery of Banking” and “The Case Against the Fed”.
Gold fits all 5 criteria for money, as defined as far back as Aristotle:
– Durable- the medium of exchange must not weather, fall apart, or become unusable. It must be able to stand the test of time.
– Portable- relative to its size, it must be easily moveable and hold a large amount of universal value relative to its size.
– Divisible- should be relatively easy to separate and put back together without ruining its basic characteristics.
– Intrinsically Valuable- should be valuable in of itself, and its value should be totally independent of any other object. Essentially, the item must be rare.
Silver is a lesser fit, as it tends to oxidize, and paper and bits in computers do not fit at all.
The Real Kurt
I’ll take ‘Fungible’ for $500, Alex.
Correct- and I simply missed that in my copy/pasta
The Real Kurt
Absolutely correct Boris. And as we have seen. The gold standard was a nightmare for international trade. It was also a nightmare for anyone that didn’t have it for purchasing power.
And Keynesian economics was a way for Government and corporations to steal people goods and labor. Inflation acts as a tax. As it only benefits the inflator. Or group printing the money, issuing credit. And it can only land on the price of goods.
And deflation is just a short squeeze for goods and labor produced by people.
The fit is like shooting. It’s simple. Just not very easy.
Since inflation is a tax. And as you pointed out, income taxes are just add to the price of products. As most all taxes are paid by consumers.(costed into the product) Income taxes for all should be set and fixed at 10%. And sales taxes at 5%. Minimum wage at 5 dollars. Social security at 1,000 dollars. And all forbidden to be changed.
Banks by law should only be allow to write one dollar of credit for a dollar on deposit as Karl Denninger proscribes in book on this subject.
Congress should be in charge of the money supply with four year budgets. And just print any shortfall.(which they do already.). Or deflate if excessed. (fat chance, but it could happen!)
Government and corporations should be banned from owning any coinage metals as a store of wealth. Only individuals should be allowed to own gold, silver, platinum.
International trade should be a form of cryptocurrency. With every country issued 1 trillion trade units, or TU’s. Tango uniforms.(Pun intended) Also set and fixed as unchangeable. And traded against a countries total money/ credit supply outstanding. In that way a every country is responsible for their own inflation, instead of exporting it as we have done to the world.
To me, that would smooth out the cycles that economies always go through in their natural course. Take away much of the parasite classes power. And give working people a way of storing wealth, hedging against inflation/deflation, and helping secure their own retirement.
And as an added kick in the nuts. All printed money is only good inside a countries borders. And all stock/commodity trades are for a minimum 9 months!
The purpose of government intervention in the economy is to create chaos and failure, while empowering the few at the “top” (or at the “bottom”, depending on one’s opinion of them). And of course it’s working, and it will continue to work.
And as in ancient times, which are current times again; all roads lead to Rome.
I guarantee that a LOT of the people pushing MMT theories and ignoring the effects of printing money at will have LOTS of their assets in instruments and locations that keep those assets sheltered from the fallout of their insane experimentation….and that’s the ones who BELIEVE in MMT. A lot of the people pushing it are doing so for the EXPRESS PURPOSE of destroying the dollar knowing that the destruction of the dollar will result in the destruction of the USA. And these people have been working to destroy the USA for DECADES.
Yup. MMT is a European invention, in fact — French if I remember right. Lots of communists in France…