In this month’s digest, we are going to link Modern Monetary Theory (MMT), zero and negative interest rate policy, and cryptocurrencies. To implement true state-owned money, the government needs all three pieces to come together. We will explain how all of this works.
MMT is nothing really new, which is something even most MMT proponents admit. Let’s get that out of the way first. This is not something the monetary alchemists just discovered which will be seen as the silver bullet to solve all of our economic problems. Look at this chart from Bloomberg which illustrates the roots of this theory, though the chart makes some paradoxical connections along the way.
This map attempts to link together Adam Smith, Karl Marx, John Maynard Keynes, Federal reserve economists, and modern MMT advocates. This is a gross misunderstanding of the different viewpoints on economics. But, MMT proponents need you to believe that their modern fiat alchemy somehow draws its roots from the metallic money and free market classical economists. Nothing could be further from the truth.
MMT is based off of the state theory of money, and has roots in chartalism first proposed by Georg Friedrich Knapp. Knapp published his economic views in the State Theory of Money in 1905. Further, the idea that government deficits don’t matter was originally posited by Polich economist Michal Kaleki. You will notice how MMT has roots since before the central bank era began in the US. We will indeed make the case that MMT was the ultimate end of the Federal Reserve system in the US when it was originally fashioned by its architects.
MMT is, in a nutshell, the socialist economist’s wet dream. It seeks to destroy the classical economic concepts of scarcity and private savings, and replace them with aggregate supply/demand and government deficit spending. And this is where MMT gets really dangerous. To implement the system, the government needs to eliminate private savings and the private investment that results from savings. And further, it needs to destroy personal property rights along the way.
MMT advocates only believe in macroeconomics. They do not care about microeconomic factors and how they impact daily economic transactions. Roughly translated, it means they disdain the individual and their property rights. To an Modern Monetary Theorist, the individual is an inefficiency within the system that needs to be planned for and phased out.
MMT economists (hence MMT’ers) only want to talk about aggregate supply and demand factors, and many have no understanding of how the economy works at a granular level. They don’t care as long as the state controls all money, debt, and the regulations that govern their use. We are going to use a simplified economic equation, posed by the Mises Institute, to illustrate what MMT actually believes is true.
We will use G − T = S − I , where G is GDP or gross national income, T is taxes, S is savings, and I is investment. This roughly equates to government budget deficit = net private saving.
It should first be noted that private saving is not created through real private investment here, but simply represents a number on a spreadsheet equal to how much more money the government spent than it had at the time. To consider this private investment in the traditional sense means it would have had to come from the private sector, or individuals, instead of the government itself which is a public creation.
MMT’ers believe that the government can regulate inflation and the money supply through taxation. They could raise taxes to recapture cash from the system and prevent instances of high inflation or destructive hyperinflation. Of course, the tax level is directly related to the government deficit in this model. So, where the government may overspend to meet its objectives, it can simply raise taxes to recapture any excesses resulting from its initial malinvestment. Who needs to worry about malinvestment and bad public economic policy when one can simply sop up the messes through new tax policy?
Private savings comes from industry, thrift, and technological advancement. If a person discovers a way to harvest corn using machines instead of by hand, then they have created a market efficiency. The result in savings from costs will have the effect of both lowering prices and creating more profit for the producer. This net profit, often referred to as net income, can be used for further research and development activities, aka private investment. The government was not needed in this model to generate increases in both private savings and subsequent private investment.
The theory that private saving must come from public budget deficits is absolutely absurd on its face, but is also absolutely necessary for MMT theory to work. Socialist economists only care about aggregates and how those can be manipulated for state means, and ignores the entire process for which efficiency improvements lead to lower costs, higher savings, and higher investments into improving the economy. MMT is therefore intellectually lazy and dishonest in its representations about how private entrepreneurship positively effects the economy.
History tells us that when governments issue too much debt, particularly when debt is 90% of annual GDP, that the economy starts to slow down. If deficits continue, then the debt bubble ultimately bursts and economic depression ensues. To pay for the bonds and prevent a total collapse, government will often raise taxes and print more money. Both of those methods have the effect of destroying private wealth and savings. Taxes confiscate wealth directly, and monetary inflation raises the cost of all goods which erodes the value of savings.
The ultimate result of MMT policy would be the destruction of private wealth and property, along with elimination of prices and money. The government would control the definitions of ownership and value; e.g., this is true to Marx’s economic view of public ownership. And this is why including free market economists such as Adam Smith and the Austrians into MMT theory, as the above Bloomberg graphic illustrates, is completely dishonest.
Nations that have tried these macroeconomic policies in the past suffered from squandering of capital, malinvestment, and high inflation. A current example is Argentina, which is suffering from an ongoing bout with currency hyperinflation despite over $50 billion in IMF emergency loans last year.
MMT’ers believe that the true interest rate is zero. This way, they can eliminate the practice of issuing state bonds and simply print as much money as they need for their policies. They view the bond market and its interest rate function as an anachronism. This is largely why we see over $15 trillion in negative interest rate bonds across the world. The central bankers are trying to take interest rates to the zero bound, and are effectively charging bond savers to implement their new policy. Of course the bonds will eventually default anyway, and along with the default will go trillions of dollars of individual savings.
In our May 2019 Digest – Cryptocurrency, Gold, and Cash: The Battle For Monetary Freedom, we discussed the IMF’s view that for zero or negative interest rate policy to work, cash need be eliminated. We will expound on how that view is an extension of MMT macroeconomic theory. Remember above how MMT’ers want to eliminate both prices and money.
When cash exists, really low interest rates lose effectiveness in combating recessions because people will simply hold their savings outside the banking system. When interest rates fall below zero, cash flows from the banks to private coffers. After all, who wants to pay the bank for the privilege of loaning them their hard-earned money on speculative investments in bubble markets like real estate and the stock market? To force adoption of negative interest rates and the confiscation of savings, cash must be eliminated from the system.
When the central banks finally get interest rates to the zero bound or below, the economy will be in a full deflationary spiral. The central banks and their fiat currencies will be blamed, along with the governments and their irresponsible fiscal policies. It is likely that major economists will then call for a public debt jubilee, meaning state bonds will be marked down to a much lower number and paid off with increasingly worthless currency. This will have the effect of destroying what is left of both the bond and currency markets, and usher in the era of electronic money which is needed for MMT policies to work. The state needs to control monetary flow, eliminate bonds, and have the ability to directly inject cash into the system whenever it pleases, while taxing to take excesses back out without allowing for private individuals and businesses to save it.
This is really simple. Cryptocurrencies are simply the form of electronic money that will be used once cash is eliminated. The private sector is busy creating all new manner of cryptocurrencies with a myriad of different features and efficiency improvements. When these currencies are ready to assume the role of money, which they are not at this moment, the government will issue a monopoly on them by fiat legislative declaration. With the stroke of a pen, private cryptocurrencies will be banned and banks will only accept government approved electronic money. All competing private cryptocurrencies will move to the black market, and as such, will be heavily discounted in value for the risk of using them and getting caught by the state.
This view may seem dystopian, but it has been written about publicly by the global banking system. Central banks are developing cryptocurrencies per the IMF template we talked about back in May. Once the banks have adopted their cryptocurrency models, then you will see the IMF and BIS call for reducing cash reserve in favor of electronic ones. Your bank deposits will be marked in crypto and not cash, and you will pay for goods electronically as cash will be removed from the system during the next collapse. This process is already underway, and it is quite transparent if one simply looks at the policies already being implemented.
Socialist government bureaucrats like AOC are also hopping aboard the MMT bandwagon, because it is absolutely necessary for implementing the Green New Deal type of socialist program. These programs will form the basis for new government spending that will enable MMT to control monetary policy and to finally eliminate the current central banking model. They would not be possible in today’s bond and interest rate world with the current regulatory regime.
Central banks were not designed to last. They are built upon the theory of ever expanding debt and a currency printed into nothingness over time. Eventually the system, when looked at mathematically, had to destroy itself while taking with it all public confidence in the model. The architects of the system could not have been blind to this knowledge, and had to have know the long term effects of implementing central banking. Governments have never maintained their budgets, blowing them up to pay for social programs and war throughout history. Central banking never had a chance to succeed when viewed in the light of economic history.
In fact, economists have been talking about negative interest rates for over a century. Silvio Gesell was the first to discuss negative interest rates back in the late 1800’s. Economists Irving Fisher and John Maynard Keynes took up Gesell’s work on interest rates. Keynes called Gesell a “strange, unduly neglected prophet”. I believe that the proponents of central banking and centrally managed macroeconomic policy understood that the ultimate end was the elimination of private money and abolition of the public bond debt concept. In that sense, the Bloomberg graphic printed in the introduction for this article has aptly linked the socialist economists work together throughout history.
In other words, all of this was part and parcel of the central banking system implemented in the early 1900s because the economists of the time had already laid out the long term framework of the system designed to move the world from private banking and money to state owned economies and banking. MMT and the destruction of cash as they were known were planned for. What the economists did not know at the time was how to replace both gold and fiat currencies with something the state could control with a button such as the cryptocurrencies. That development took many decades and technological advancement to achieve. And we are now here in that time at the cusp of the elimination of individual savings and liberty. What choices we make will affect how we survive and live in the coming decades.
As always, we recommend our readers take a look at gold and silver. They are the only true independent form of wealth savings and money which can never be destroyed by the Marxists and state controllers. Sure, they can try to heavily regulate them or tax them. But given recent policy changes on gold reserves, and the absolute necessity of silver in the industrial economy, the government is not likely to ever completely remove gold and silver’s role in the private economy. To do so would be to prevent their own economic solvency and technological advancement needed to advance their rule. And as long as the relationship between precious metals and the state power holds true, you will be able to hold your savings in gold and silver safely stored away from government control and banking coffers. But you are running out of time to secure your resource now.