MMT and Fiat-Based Governments
There are a lot of misconceptions about fiat and Modern Monetary Theory (MMT) circulating within the public narrative that are important to address. Though MMT certainly has its shortcomings and the resurgence of sound money through fixed exchange rates, whether via a gold standard or bitcoin standard, will likely prove more beneficial overall, it’s still important to outline the strengths of having a more elastic money supply so we can better understand why fiat or fractional reserve banking were used in the first place and how a truly sound currency compares. The truth is a fait-based government, having no actual financial constraints, can do a lot of good. Just imagine how luxurious your life could be if you could print your way to prosperity.
That said, the dangers of a centralized body with virtually unchallenged money printing capabilities cannot be overstated. But it’s still important to note the concerns around large-scale economic calamity due to a public default or a private sector meltdown are very real when governments are bound to an honest balance sheet through fixed exchange rates. In the absence of fiat and the consequential inability to print your way out of tough times, a fixed exchange rate means you have to run your government well or else. At the federal level, that ‘or else’ is extremely dangerous so putting that into context when considering MMT is important.
Now, while private sector defaults are not nearly as dangerous or far reaching as a default of the public sector (assuming there isn’t a high degree of contagion like with Lehman), the financial crisis of 2008 proved it’s enough of a possibility to remain cautious. Too big to fail in the private sector is a phrase that seems to run counter to the capitalist ethos, and rightfully so, as it often encourages excessive leverage due to their belief the risks are low when the government will come to the rescue if/when things go south. But this practice ends up creating a vicious feedback loop with poorly managed companies never learning their lesson. So simply having the means to print and save the private sector creates very dangerous incentives and practices. However, ensuring the public sector doesn’t fail is a safety net worth considering and arguably one of the greatest strengths to MMT. When the public sector implodes, everything seems to implode and the contagion is likely to buckle the whole economy. One can certainly see how having the ability to print yourself and the economy out of a hole has its advantages in such a dire situation. Yet it’s not without consequences.
A fiat system built around money printing quickly becomes a nation addicted to credit. If there is an expectation of inflation for a government’s currency because of spending continuously outpacing revenue, borrowing, in essence, becomes a profitable shorting of that currency. If your loan is denominated in that currency and that currency is losing value faster than the interest for the loan is accrued, you will actually make money by borrowing. This, naturally, creates a huge incentive within the system to borrow and inflate markets, which severely increases the likelihood of bubbles at magnitudes far beyond what a fixed-exchange-rate market would ever tolerate. And as long as governments keep interest rates low, which they are really forced to do because of their debts, shorting the dollar through borrowing will continue to be a winning trade and encourage excessive credit and deficit spending.
Now, in a perfect world, it’s possible MMT could work and the money printer would only be used when fiscal stimulus is absolutely necessary. The covid pandemic is a good example of a scenario where fiat can prove beneficial as it was a completely unforeseen event that, absent of any economic stimulus via money printing, could have easily sparked a depression. So aside from black swan events where the government has to employ quantitative easing, the Fed’s balance sheet would be otherwise, well, balanced. No excessive printing in normal circumstances and doing their best to earn what they spend (imagine that). But expecting governments to act responsibly as if they are on a fixed exchange rate and to only use their money printing powers when necessary to avoid severe recessions or depressions is quixotic at best. I doubt any sane person these days has that kind of faith in politicians.
So MMT may allow governments to kick the can down the road by printing and, as a result, soften the consequences of credit bubbles or delay what would normally be a default, but they are only postponing the inevitable. Severe fiscal and monetary mismanagement will compound over time—leading to insurmountable levels of debt like we see today, which, one day, will either lead to the Fed finally accepting their massive default or force them into a devastating spurt of inflation from printing those debts away. Kicking the can down the road through printing works for a time, but eventually the credit issued has to be paid. Inflation may be a slow burn for most of the ride in a fiat system (though that is no reason to accept it), but it can be dramatically exacerbated when governments find payments of their debts and the interest thereof only possible through printing. Once their debts have them boxed into a corner, there is no easy way out. Though printing can offer a somewhat slower or less abrupt demise, it’s hardly a more desirable alternative to just accepting the default.
If history has taught us anything about stores of value, it’s that easy money doesn’t last and fiat is the easiest money there is. If governments are gifted unquestioned money printing capabilities, they cannot be expected to remain accountable. The shortsighted nature of our politics and government has made delaying problems for the next administration the standard practice. No president wants history to remember them as the one in office when the US finally paid the piper for all its poor fiscal choices—they will print, inflate, and hand off the problem to the next president. And considering the size and significance of the US economy, it seems unlikely any administration will choose anything other than the slow death through inflation as it is the most politically viable when you’re only looking 4-8 years ahead.
So although, in theory, MMT can provide safety nets against serious economic depressions and nominally eliminate defaults, there is no free lunch. Not only does it all but guarantee inflation and the subsequent debasement of the citizenry’s purchasing power over time, but it creates structural incentives to borrow and inflate markets beyond what is economically tenable. Eventually the Fed is forced to intervene—lest the private sector’s over indulgence sends the economy into a tailspin. This, in turn, creates larger and larger debts for the Fed every time, which, eventually, also inflates beyond what is economically tenable. There’s a reason fiat-based governments never last. The British Pound and USD are anomalies on that list in terms of how long they have lasted, but even the outliers are mathematically destined to fail. With the growth of interest on the United States’ debts outpacing the growth of GDP and tax receipts, it’s a matter of when not if. Forcing honesty and responsibility on our government through sound money is the only way to ensure corruption and shortsighted political gain don’t slowly eat away at the economy. If the government can cheat, they will, so it’s time to change the rules back to an honest system where money doesn’t fly out of a printer at will.