Modern Monetary Theory Isn’t Modern. It’s Antiquated

When it comes to economic panaceas, there isn’t much new under the sun. MMT, shorthand for Modern Monetary Theory, is the elixir du jour, but it is actually an old potion with a slick new label.

The New York Times has noted,

[Stephanie Kelton] … is the most familiar public face of Modern Monetary Theory, which posits that if a government controls its own currency and needs money — to make sure its citizens have food and places to live when, say, a global pandemic pushes many out of work — it can just print it, as long as its economy has the ability to churn out the needed goods and services.

There are other definitions of MMT including the following from Investopedia:

The central idea of MMT is that governments with a fiat currency system under their control can and should print (or create with a few keystrokes in today’s digital age) as much money as they need to spend because they cannot go broke or be insolvent unless a political decision to do so is taken.

One major assumption is that the monetary authorities can keep price inflation under control:

Under MMT, the risk of inflation is considered minimal as governments that fully control their fiat currencies are believed to be able to control price levels, provided they can meet consumer demand.

Now, with the annual change in the Consumer Price Index at 40-year highs, this assumption has tripped on a landmine. To the proponents of MMT, however, this is a minor flesh wound. Kelton, for one, is undaunted, even though she’s skeptical of the current monetary remedy:

[F]ar too many people remain convinced that conventional monetary [theory] is the best weapon against inflation. Perhaps we’ll get lucky and inflation will trend steadily down before the proactive efforts to rein it in tip the economy into recession. But, as I’ve written before, I wouldn’t bet on it. I think we need a different approach.

Kelton has a plan, however, which she shared on The Lens:

We… need to make (long-overdue) investments in renewable energy to diversify our energy portfolio—but this time  not  into other forms of fossil fuel—with the ultimate goal of weening ourselves entirely off of carbon-intensive sources of energy for the sake of civilization. Amping up supply in the near term and remaining wedded to oil going forward will only leave us vulnerable to future oil price shocks, not to mention the devastating impacts of climate change. Action on climate is action on inflation.

While in tune with progressive talking points, such thinking is pure fantasy, as Alex Epstein, author of Fossil Future, explains:

By our standards, the world is extremely poor, including energy poor… [T]here are six billion people in the world who by our standards use a totally inadequate amount of energy, less electricity than one of our refrigerators uses. We live in a world that is energy deprived, and then you learn that fossil fuels provide 80 percent of that energy and their use is still growing, particularly in the parts of the world that care most about low-cost reliable energy. It is insane to talk about phasing them out rapidly.

Nothing New Under the Sun

There is one area where we can be quite certain – Modern Monetary Theory is not that modern. It has roots in the Song Dynasty (960-1276), when the government took advantage of the Chinese technological advance in block printing to create “flying money,” or notes representing metallic coin reserves in the government’s treasury. Moving these slips of paper from one province to the other rather than metallic coins was more convenient. All went well until the government recognized the opportunity to print more paper money than was backed by the coins. Thus was born the concept of fractional reserve banking, which is a major factor in most inflations today.

An economy can survive mild inflation, although it always represents some redistribution of wealth through government. The challenge is in knowing when to shut it down before it reaches the calamitous stage, hyperinflation. The Chinese of the Eleventh and Twelfth Centuries were not able to do that, unsuccessfully defending themselves from the numerically and technologically inferior Jurchen and then Mongols as a result of the internal chaos that had been caused by hyperinflation.

The Song dynasty twice turned from a Golden Age to terminal and catastrophic decline. Both periods of decline were announced by hyperinflation, economic decline, and popular unrest and culminated in conquest by numerically weak rivals.

Marco Polo brought the story of the “magic” of paper money back to Europe in the Thirteenth Century, but it wasn’t until the mid Fifteenth Century and the Gutenberg Press that the technology became available there. Apparently Gutenberg did not see the opportunity in printing money, preferring printed books, including bibles.

That lapse opened the door for a charismatic Scot, John Law, to convince the post-Louis XIV regency that it was possible to pay off the previous monarch’s immense indebtedness for wars and luxuries by printing money. Thus Law introduced paper money inflation to Europe. According to Charles Mackay, author of Extraordinary Popular Delusions and the Madness of Crowds, it worked spectacularly initially, but then created a crash of the economy in what has become known as the Mississippi Scheme.

Andrew Dickson White observed in Fiat Money Inflation in France that a mere 69 years later “the French nation found itself in deep financial embarrassment: there was a heavy debt and serious deficit.”

In 1789, the French King, Louis XVI, called the Estates General, an event generally recognized as the beginning of the French Revolution. Forsaking the bitter medicine of wise financial management and sacrifice, the delegates opted instead for paper money with a new argument – “This time is different”:

“Paper money under a despotism is dangerous; it favors corruption; but in a nation constitutionally governed, … that danger no longer exists,” delegates concluded.

As more paper money was pumped into the French economy, prices raced ahead of wages, and the washerwomen of Paris could no longer afford a bar of soap. Looting followed.

The politicians’ response was predictable under the circumstances—coerce merchants with fixed prices. The Reign of Terror was underway.

While best known, Weimar Germany’s hyperinflation is only one of 19 hyperinflationary periods identified by Wikipedia.

Although the value of the dollar in the United States has never reached hyperinflationary levels, it has depreciated by 97 percent as measured by the 1914 dollar, according to one estimate.

The “this time is different” rationalization behind MMT now is that “governments with a fiat currency system under their control can and should print … as much money as they need to spend.” That argument might not otherwise convince the majority of Americans, but is offered with a “sweetener”: stimulus checks to the masses. Little thought is being given to the massive special interest payments that accompany these handouts, nor the inflation created from them.

But even with these changes, how much has fundamentally changed since China’s Song Dynasty? Paper money inflation does not create real wealth, the wealth that represents real goods and services for consumers.

It seems Modern Monetary Theory is nothing more than Ancient Monetary Theory in modern garb.

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