“Spend All You Want, We’ll Print More!” & Other MMT Fallacies

Posted on September 16, 2021

By Paul Vanguard, for BullionMax.com Per Bylund tackles a concept few would claim to really understand: Modern Monetary Theory, or MMT. A close reading of MMT founder Warren Mosler's white paper on the subject (I dare you – reading this is like swimming through lukewarm oatmeal) isn't particularly helpful. There are, however, two takeaways: 1. Modern money does not derive its value from its status as a commodity (in other words, there's no intrinsic value). 2. Nations can arbitrarily declare anything money, simply by requiring that citizens pay taxes using the nation's chosen unit of measure. (Which reminds me on a headline from The Onion's Our Dumb Century book, circa 1913: U.S. Bureau of Revenue No Longer Accepting Chickens, but that's another story.) Because the government creates money, so the theory goes,governments can never run out of money. They can never go broke because they can just make more! By this theory (which, granted, does offer a certain amount of comfort when the U.S. is facing $28 trillion in debt), there's absolutely no need for fiscal discipline. The government doesn't have a bank account with a finite balance. There's no constraint on government spending at all, ever. Okay, we're not economists here at BullionMax. We're just simple folks. We can't stand toe-to-toe with tenured academics and argue nuts and bolts with them (mostly nuts). Even if we wanted to, we wouldn't be able to contradict one key point. It's true that the government can print as much money as they want. That's inarguable. That is a fact. So, what exactly prevents governments from printing $42,000,000,000,000,000,000,000,000,000,000 and passing it around to everyone? Mosler's paper doesn't offer an obvious answer. So I turned to a TED talk by Dr. Stephanie Kelton , a professor at Stony Brook University (who was the senior economic advisor to Bernie Sanders) to answer this question. And answer it she did! Guess who's supposed to police the money supply? Can you guess? Congress. In a TED Talk, Dr. Kelton explained that Congress is responsible for maintaining market order and preventing complete upheaval. Not the how, not the strategies or the tactics, just that it will. You know, somehow. Keep in mind that Congress is the very same body that keeps giving itself "debt ceilings" and then removing them when they inconveniently constrain government spending. Saying Congress is responsible for fiscal discipline is like giving a drunk a case of whisky and the keys to your car. Per Bylund really nails it, though. First, he quotes Dr. Kelton's video:

The federal government can never run out of money.

Then Bylund eviscerates it:

This is obviously true, but only because Kelton (and MMT) does not distinguish between money in the real sense (the valued medium of exchange, i.e., purchasing power) and the currency issued by government and banks (the dollars or pounds, whether physical or digital).

Do you follow? Governments can print all the dollars (or euros, or yen or whatever) they want. That does not create purchasing power . In fact, it does the opposite by adding directly to the supply of money without also contributing goods or services to the economy. Want an example? Bylund has one:

The government of Venezuela was not running out of bolívars, but from this it did not follow that the currency would retain its purchasing power (as, obviously, it didn’t) or even retain its status as money (which it also didn’t).

So, again, it's totally true that a government can create all the currency it wants. A government cannot create actual purchasing power, actual economic value. All they can do is take it away. Interestingly, there are a few words about hyperinflation in Mosler's original paper outlining MMT:

The State does not force anyone to exchange goods and services for its currency. The exchange is with willing sellers who desire the currency. Deficit spending occurs only if the private sector is desirous of accumulating units of the currency in order to net save. Hyperinflation is the condition in which the private sector no longer desires the currency unit (as reflected in the price level).

Two points: first, the idea that the government can only give their currency to people who want it? That's facile nonsense. Second, hyperinflation happens when nobody wants "the currency unit" (the dollar) any longer. That's true-ish... Usually, hyperinflation happens after the government has already made so much of "the currency unit" that it's become worthless as a store of value and as a medium of exchange. Hyperinflation doesn't start when shopkeepers start posting "No Dollars" signs. Hyperinflation starts when governments make too much money. There are a bunch of other insights in Per Bylund's article , and I strongly recommend a read. It's worth it. In essence, though, MMT is utter nonsense. In essence, it posits an incredibly simplified worldview. It confuses a couple of key concepts, like "currency" and "money." The biggest problem with MMT, though, is its promise of a consequences-free future in exchange for unlimited government spending today. That's a siren song that's going to very, very difficult for even the most disciplined people to resist.   Paul Vanguard is a lifelong precious metals enthusiast and a proud member of the BullionMax team.