( 3200 words)
The Surprising Superiority of Modern Monetary Theory
If we ran the experiment of Earth a million times, the same major problems we face today would happen every single time because they’re driven by individuals pursuing their own self-interest without any attempt to balance it with society as a whole because any attempt at doing so creates a vulnerability to be outcompeted by those with a singular focus on their own benefit. Essentially, our cultural problems are amplified by the very foundations of capitalism and the incentives it creates.
It does not matter how many people recognize and adapt to this truth, if some of the major participants are still playing to a philosophy of kill or be killed, extracting every penny they can from others with little to no regard to the consequences, they could dominate the majority and nothing would change. It’s not enough to enact laws to incentivize a more holistic approach because laws can always revert back in the future. It’s only technology and the structure it creates that can manifest a balance unable to be overrun by the selfish desires of humans. In algos, we trust.
People who don’t want to believe the problem is human selfishness at the heart of capitalism prefer to blame “crony capitalism” or “regulatory capture” etc., but there isn’t one without the other. Crony capitalism IS capitalism. Others like to blame the crux of our problems on a lack of sound money, and if only we could bring back the gold standard, or implement a Bitcoin standard, all will be fixed, but the monetary system isn’t the problem. You have to dig deeper and look at the incentives. The fatal flaw of a free market (indirect) democracy is elected politicians make the laws, so it forces them to constantly appease the voters, and therefore incentivizes policies like the creation of a central bank, fractional reserve lending, and globalization in the name of free trade as a win-win for all, etc… There is no monetary solution that can overcome this (that currently exists). And a dictatorship that isn’t beholden to the voter would be worse. The only thing worse than Capitalism is all the other choices. The essence of the problem is humans, and despite what many idealists want to believe, the government chooses our money, so even the perfect monetary system will inevitably be corrupted to benefit the people in power, unless… (let’s return to this in The Unit Of Account Problem next week).
Imagine a group of young politicians came to power and adopted a Bitcoin standard, which harkens back to the innocent days when gold restrained politicians 100 years ago. How long do you think it would take for these idealist young politicians to create a derivative layer on top of Bitcoin to adopt as money instead so they could return to manipulating the money supply to increase their chances of staying in power? The betting line would be an hour and I would take the under. Do you see the problem? We don’t need a monetary solution. We need a political one that solves human nature, and there isn’t one that wouldn’t devolve into the Slowflation devaluation and perpetual can kicking we have now because that’s what benefits everyone in power the most. The realization of this truth has staggering implications.
Gold would have the same result. There is no solution politicians can’t overcome with a derivative layer (like fiat currencies) that allows them to create money without limits. If gold worked to restrain the money supply we would still be on the gold standard. If Libertarianism was a viable system we would still operate with those principles. Ultimately, Libertarianism lacks sufficient regulations, which causes people to get hurt and lawyers to get involved until the people literally demand to be regulated. Self-custody sounds great until you get hacked and lose your life savings with no recourse. Have you met humans? I met humans. Thumbs down. I’m an intelligent person, but I can’t keep track of my car keys, so I do not want the responsibility of staying on the cutting edge of wallet security and the latest tricks hackers use to steal not just a credit card, but my entire life savings, and 90% of the population would fare worse. Self-custody works great in cold storage to protect your assets from a bank bail-in, but it’s dead on arrival for everyday transactions when your wallet is continually exposed to buy products and services if there’s no way for a higher authority to prevent fraud or reverse transactions.
Our interventionist foreign policy creates an ever growing and unsustainable military budget to proactively tamp down the spread of dictatorships and communism so they don’t threaten our way of life. Imagine an alternative history where the US stayed neutral like Switzerland and communism spread across the rest of the world as China/Russia/Iran grew as powerful as the US and had military bases in Canada and Mexico. How would we feel about the presence of another set of values pointing a nuke at us?
Since we can’t know a counterfactual, we can’t know such a threat would arise in our absence overseas, but if a war was truly necessary to defend our way of life, do we not trust the populace to fund the budget with war bonds, so we can restrain politicians and their war machine when their spending is not truly in our self-interest? Trump might be a blow-hard clown-boy man-child but he’s correct that an international military effort should be funded equally by the international countries it benefits. Otherwise, we’re vulnerable to the military industrial complex Eisenhower warned about 60 years ago calling the shots to capitalize on the profits it would generate, which is the epitome of Capitalism run amok by humans with no restraint, and results in the endless (proxy) wars we live with today.
This is all a preamble for why Modern Monetary Theory is a superior system to the one we have for one fundamental reason: it would very ironically create a check and balance on government spending we don’t currently have (I intended to caveat that with “I don’t think we should do it,” but I’m starting to wonder).
People throw around the term MMT when they describe deficit spending, but that’s not accurate. MMT is the complete elimination of the treasury market. The government would not need to borrow money from anyone. On the surface this sounds insane. If the unaccountability of our political spending is one of the main sources of our monetary problems, how would eliminating the last vestige of restraint in the form of spiking interest rates (aka the bond vigilantes) be superior?
The reason is because the inflationary mechanism of our system is not understood by the general public, so it appears to them like the nominal wage price spiral of Slowflation fueled by an ever increasing money supply is the normal evolution of a growing economy. What was the minimum wage when you were a teenager and what is it now? That’s not from a growing, evolving economy, it’s from the debasement of the dollar. Since the Fed (and therefore the banking system) is able to create unlimited amounts of money, we will never have a sovereign debt crisis. What we will have is a currency crisis because the Fed can buy the entire bond market, so it’s a plunging currency that ultimately restrains the Fed, but the currency is a relative measure against the equally warped European Union and other sovereign nations, and it competes with the disinflationary effects of our productivity for its overall inflationary effect, so the actual value of the currency doesn't reflect the continual loss of its purchasing power. Since the populace doesn’t feel the consequences of our current policies in real-time, there’s no check and balance on politicians, so the people don’t realize why they’re perpetually stressed, and frustrated, and can never get ahead. Collectively, we shake our fist at whoever’s in office and then vote in the other team for their turn at yet another failed attempt at fixing our problems.
In contrast, MMT has no central bank monetary policy because it allows politicians to spend at will until inflation forces them to raise taxes to withdraw liquidity. Ironically, this total lack of restraint creates an actual restraint because the populace will feel the effects in real-time and will only tolerate inflation for so long until they literally demand the politicians raise someone else’s taxes to combat it, which surprisingly creates a very transparent self-correcting system of continuously allowing small brush fires to keep the forest safe. Of course, if you think our country is divisive now, wait until there’s real-time consequences for our spending and a fight over whose taxes will pay for it. In other words, the total failure of MMT-like policies and their inflationary effects from the Covid stimulus programs illuminates how effective it would be as a self-correcting restraint on politicians. (I’m pretty sure that‘s not how the MMT crowd is trying to sell their idea.)
In our current system, the people in power mask the effects of currency dilution with a Fed and Treasury “put” that prevents periodic deflationary collapses and therefore allows the brush to accumulate until it one day ends in a grand wildfire currency destruction because there is no check on the process along the way. You might (correctly) point out that if the politicians could spend without the restraint of issuing interest bearing debt to investors, why wouldn’t they print endless amounts of money and buy overseas assets? And they could, but even this would be restrained by the Forex market repricing the dollar lower, which could cause commodity prices to rise and lead to higher consumer prices. If consumers didn’t receive an offsetting raise because it’s not a true monetary expansion onshore since the printed money was circulating overseas instead it would have the typical supply side inflationary impact of causing a recession to stop it. Markets are self-correcting mechanisms. The madness of MMT eliminates the ability of politicians to override market forces with their deficit spending and restores a self-correction mechanism to the inflationary consequences of their spending.
The system we have with a central bank capable of printing endless amounts of money to indirectly finance the Treasury (and one day outright monetize it) would have occurred in 100% of Earth simulations because it’s driven by humans pursuing their own self-interest above that of the whole. Once you realize this, the unfortunate conclusion is we have no check and balance on the inevitable slow destruction of the currency, and there is no monetary system that can’t be manipulated by politicians unless it created real-time consequences that forced the populace to elect politicians who promise to reduce inflation by restraining their spending.
Instead of trying to revert backwards to a system of tighter, sounder money with austerity and fiscal discipline that has no chance of happening, and no chance of being maintained throughout time, and will inevitably result in manipulation that masks the currency dilution of inflation, why isn’t the surprising superiority of MMT a better system than what we have due to its transparency and real-time effects? The money supply would live at the max amount relative to the productivity.
My original criticism of MMT was focused on the misaligned incentives and lack of accountability if we allowed politicians to spend at will, as well as the interference of free market price discovery, but once you realize there is no monetary system politicians can’t break (that currently exists), maybe the better trade-off is a check on government spending via the real-time inflation it would cause and the vulnerability politicians have to get elected, rather than a system that can be manipulated beyond public awareness that enslaves the lower half of earners who don’t own enough assets to offset it.
Before we fire up the printing presses and make it rain hundos on America, let’s pump the brakes and see if there’s a better solution in The Unit Of Account Problem next week. There has to be a way to solve this problem without risking hyperinflation and civil war.
The Subsidized Deglobalization Illusion
Globalization is irreversible because the incentive of seeking the lowest cost labor and least regulations to maximize profits for shareholders is the foundation of the economy. People who think deglobalization is even possible, let alone happening, are curve fitting a narrative to fit their inflationary or investment bias. All you have to do is watch Apple and Nike. There’s no two companies on the planet who would benefit more from “deglobalization,” so if the process was organically driven by self-fueling incentives, why isn’t there a bidding war for Iowa farmland to construct all the new manufacturing facilities? The reason is because the thought of moving back here only occurs to them in nightmares. The US would be the last place on Earth any sensible business person would look to relocate manufacturing because we are a hostile place to do business.
Other people calling for deglobalization are just not being precise with their terminology. If by deglobalization you mean an exodus out of China, then call it deChinafication, or Reglobalization. Some see the uptick in US manufacturing caused by government subsidies and falsely believe it’s deglobalization, or a reshoring renaissance, but if subsidies were an economically viable strategy, why don’t we offer all our global companies the same deal?
Here’s the offer: if you would like to relocate out of China, but find the economics of the move discouraging, simply put together a proposal of the expense differentials between relocating to Vietnam, Africa, India, Mexico, and the US, and we will subsidize the difference. We’ll need to see the cost to construct the facility, and the increases in utilities, labor, insurance, regulatory, and shipping costs - both for the materials and final products, etc.. Then the US taxpayer will subsidize the difference between the lowest cost location on Earth and moving back here. Bingo Bango Bongo, world solved. Easy peasy. What do we solve next? Human flight?
Before I start gluing feathers to my arms, let’s follow the money to see if a parade is in order. The subsidies would come from increases the taxes on the profits of our domestically constrained businesses so we can give money to our reshoring global companies (and also increasing their taxes) to reduce the prices of their final goods so they compete with products produced at the lowest cost locations in the world. For this to work, the companies moving back here would need to generate the amount of the subsidies in new taxes from their additional profits so the whole thing pays for itself in a virtuous circle, otherwise, it’s a net loss and a permanent bill (as it currently is); therefore, the expansion of their market share would have to occur outside the US or it’s just taking money from Peter the taxpayer to pay Paul the manufacturer to save Peter a lesser amount in product prices than we took from him in taxes. “We were promised a perpetual motion machine, but all we got was a fat kid in Baltimore generating power on a bicycle who gets tired and takes a nap.” This is not a self-sustaining viable business model.
Here’s the ultimate Litmus test for an idea like this: if a little works, why not more? Why not increase the subsidies even more so the products these “reshoring” companies produce are the least expensive in the whole world by a long shot? Certainly our companies would grow their global market share and be able to pay back the subsidies with profits from a massive trade surplus, so it’s a win-win for our taxpayers, the companies, the newly employed workers, and a boom for our local economies. In fact, this could generate so much revenue, the additional taxes it would generate could start paying down the national debt. If all our global companies moved back onshore we could control the standards of the products, the conditions for employees, etc., and now that we embraced MMT why not save the taxpayer money and fund it with our new monetary spigot?
If the market share for these companies truly grew globally, and they generated the substantial subsidy it would require in additional taxes, it would work - if we lived in a vacuum. The problem is the rest of the world wouldn’t sit idly by and watch us take over their lives. Global trade laws are designed to prevent this from happening. Such a policy would be a race to the bottom as countries competed to subsidize the cheapest products to gain the largest market share, which would result in a trade war, a kinetic war, or both. If subsidized “deglobalization” is as fraudulent as a perpetual motion machine, why are we doing it at all? Because we want to control certain vital sectors for geopolitical reasons. It’s not a self-fueling reshoring renaissance - it’s a net economic loss for a strategic geopolitical gain.
Globalization is irreversible because it violates the law of incentives. Our US global companies currently in China don’t want to lose access to the billion customers they have, so it’s not an easy decision to even Reglobalize somewhere else. And what a logistical nightmare. China doesn’t want them to leave either, so the barriers to deglobalization are enormous because it’s not in the best interest of the companies, or China, or the consumer, but the more China acts like a clown boy Tootsie Roll maker, the more our manufacturing base will Reglobalize somewhere else.
The fact is globalization will deepen as companies are forced to continue seeking the lowest expenses possible, which will keep putting downward pressure on prices because as they relocate to other countries they will build new manufacturing facilities with the latest automation, so their prices will go down as more of the process is automated. Manufacturing will relocate back to the US when automation makes it cheaper than the lowest cost location in the world, but even that would depend on many factors. An A.I. program could be developed for a company like Apple to upload all its sales data, raw materials locations, shipping costs, etc., then the A.I. could analyze every possible location in the world to determine the most efficient one based on long-term trends in customer acquisition cross-referenced with geopolitical, regulatory, and tax burdens, among other complex factors. The future of our global supply chains will be organized by artificial intelligence.
Globalization is irreversible, and the chasm in the American middle class bifurcating upward or downward will continue to worsen until technology flattens everything as we approach the end of Capitalism (more on this in two weeks). Globalization creates a nonviable economic condition where monetary and fiscal authorities must continually debase the currency with fire hoses of liquidity to prevent collapse by perpetuating Slowflation to neutralize the burden of debt. Meanwhile, non sovereign technology continues spreading across cultural borders, constructing a network that integrates developing world citizens who have limited access to credit with sources of funding, but since there’s foreign currency risk in transacting across borders, what the world needs is a global currency capable of penetrating organically into everyday commerce as developed and developing worlds integrate through technology and the world becomes a giant interconnected, self-organizing, self-fueling, smart system computer.
In The Unit of Account Problem next week, we’ll explore why it won’t be Bitcoin.
