Z on MMT

The Zman took on Modern Monetary Theory, a subject this blog investigated some time ago with a series of thought exercises as to how it all works. Economic analyses from the right are typically gloomy and partially realistic at best. Z did not break the mold.

Modern Monetary Theory is the economic argument that government spending is only constrained by inflation, as long as the government has control of the money supply.

That's his opinion on what MMT is, because he heard of MMT, scanned some literature until he found something he didn't like, and then did a write-up about it. It's not that he's necessarily wrong, it's that he's picking through to find the yucky cherries, and ignoring the rest. Except he is wrong, because his description makes no sense. Government spending is only constrained by inflation? It seems that government spending is limited by whatever the increasingly low-IQ congresspersons can get away with, and inflation can be a natural response. Ah, but that's one reason we have an independent central bank, an entity Z ignores entirely.

The core economic argument of MMT is that currency is a political product and is given value by government enforcement of legal contracts. That is a clean break from commodity-based currencies, like the gold-back dollar of yore. While Z equates the concept with inflation, he fails to notice that commodity-backed currencies are inherently deflationary, since economic growth tends to outpace increases in the gold supply. Perhaps that's okay if inflation is bad and deflation is good, but the case needs to be made.

The basic argument of the MMT people is that as long as there are resources not being utilized by the private sector, the state has a duty to step in and put those resources to use through government spending. That’s a moral argument, not an economic argument or a factual observation. The economic argument is that spending and debt is meaningless, as long as the state is not crowding out the private sector and the spending is not driving up retail inflation. Otherwise, the government can spend as much as necessary.

That may well be something that many MMT enthusiasts say, but it is hardly the "basic argument of the MMT people." No, it's the thing that Z dislikes the most, so he frames it as the core principle of the thing he decided ahead of time that he doesn't like. "The economic argument is that ... debt is meaningless." No, the economic argument is that debt offsets currency, and is hardly meaningless. MMT does lead some to say things like "deficits don't matter", but that is a faulty conclusion. Debts still constitute a transfer of wealth from borrower to creditor, just like they always have. MMT implies that debts are necessary to maintain a money supply, not that they are inherently good or should not be restrained.

What MMT seeks to do is make the sovereign state, by which is meant the issuer of currency, the commissary of the American economy. By controlling the supply of goods and services, via currency manipulation, spending and debt, the state can keep an increasingly useless population busy. It can always reward activities that enhance control of the system and punish activity that creates disorder. Inevitably, the communications companies, banks and technology firms become the prison guards of the system.

No doubt we are being made into economic prisoners of the system, but that doesn't mean "MMT seeks to do" anything. It's just an economic theory; another way of looking at things. If the communists think it justifies their expansive programs, let them. They'll not be swayed in any case. MMT is a useful analysis tool for us to use. It was MMT that drove me to realize that a country pays for its money supply. The government borrows money - which it pays interest on - and much of that money is in general circulation. Thus, we pay for money. Countries that adopt foreign currencies, like Zimbabwe, are buying their money supply outright, whereas we rent ours. You don't really need MMT to understand that, but it puts things into a perspective where you can make those kinds of inductive insights. Is anyone else talking about how the fiat-issuing nations rent their own money supplies? I've not seen it anywhere but here.

Another revelation is that borrowing does not permanently increase the money supply. If I take out a mortgage, the bank might "create" a hundred thousand dollars into existence. Many people get hung up on this. However, it is offset by debt. The mortgage is a legal contract. When the mortgage is repaid, the currency and debt cancel, and the contract is completed. The only net transfer was from me to the seller (the principal), and from me to the bank (the interest). Its just how we normally understand how a loan works. Under MMT, we can understand why issuing a loan does not permanently expand the money supply. Try to find anyone on the right who talks about economics and isn't adamant that fractional reserve banking dooms us to the coming hyperinflation. There aren't many.

The major contention seems to be that it justifies government spending and taxation. Spending puts currency into circulation, while taxation gives it value. If that's the problem, then what is the better option? It seems to be the way things work. Why did the denarius have value? Because it was shiny? Or maybe because Romans were subjected to torture for tax delinquency. Getting your hands on enough of the coins was practically a matter of life and death. It was sure to have value. Why did the gold-backed dollar have value...because of gold's intrinsic value, or because of its status as the official currency? Others have computed that, if we were still on the gold standard, the price of gold would be over $5000 per ounce today, given the size of our money supply and how much gold is reportedly held in government vaults. It's the same reason that Moldbug argued we can never return the dollar to a gold standard. Whether or not it's a good idea, it's not practical. The sudden valuation shifts would be too dramatic. Ironically, pegging the dollar to gold has a greater effect on the value of gold than the other way around. Whether or not you reject MMT, it remains true just the same.

Z doesn't like that the dollar is a political entity, nor that it is regulated to maximize economic outcomes and stability. What he prefers, then, must be a radical departure from the norm. All currencies are issued by some government. Perhaps he has a better suggestion? Even this blog's Energy-Backed Currency proposed that the central government monopolize the energy sector - and I'm hardly one for government tyranny or socialism. (Perhaps it's worth re-considering the approach to make it decentralized, although I believe I gave that a try once before and failed.) Cryptocurrency, inherently valueless, is not a practical substitute, as it cannot be easily adjusted to the size of the economy. I've not been able to devise a currency that is decentralized, free from government interference, and scales naturally with size of the economy. Perhaps Zman, who dismisses MMT outright, can come up with something better for us.