Will MMT Trigger the Collapse of “Money”?
Will MMT Trigger the Collapse of “Money”? BY CHARLES HUGH SMITH for Daily Reckoning
If the supply of money in an economy is $1 billion, each unit of currency buys X (the purchasing power of each unit of currency).
If the money supply is doubled without any expansion in the consumers’ pool of goods and services, the purchasing power of each unit of currency falls in half. This reduction in the purchasing power of each unit of currency is called inflation.
Governments facing soaring demands and limited tax revenues are naturally tempted to meet these demands with “free” new currency, since the political and financial pain caused by skyrocketing taxes leads to governments being tossed from power.
This temptation explains the regular occurrence of hyperinflation and debt default, as the temptation to over-borrow and pile up interest payments leads to governments defaulting on their debt. In both cases — hyperinflation and debt default — there’s a currency/ governance/ financial crisis that upends the status quo.
This is one common objection to MMT: the freedom to issue new currency is difficult to limit, as there will always be more demands for government spending. Without some “governor” to limit the issuance of new currency to align with the expansion of goods and services, then governments tend to issue new currency far in excess of what the real economy is creating.
This generates inflation, which impoverishes everyone using the currency.
MMT advocates claim that since MMT generates goods and services, it won’t generate inflation. But rebuilding a bridge doesn’t actually create any new goods and services, or increase productivity: it generates wages and consumes materials and energy.
Since it doesn’t generate more consumable goods and services, the expansion of wages and demand for materials will drive prices higher.
The core difficulty here is that the democratic political process is intrinsically skewed to short-term, politically expedient dynamics: politicians focus by necessity on winning re-election, and they will naturally approve new issuance of currency and new spending to placate the demands of constituents, lobbyists and campaign donors.
I honestly don’t see any intrinsic limit on political expediency. Politicians need to be forced to say, “I know your need is legitimate, but the money’s simply not there.”
Without some real-world limit on the issuance of new money, money will be issued in surplus because the issuance isn’t an economic process, it’s a political process.
This is a fatal flaw in MMT. Relying on politicians to impose limits on their own desire to win re-election is to deny human nature.
A second concern is the entire notion of “slack” in the economy — untapped capacity.
Have you noticed the “help wanted” signs in every Home Depot and many other retail outlets and restaurants? We read about millions of people who aren’t working, but if they wanted to work, or had to work, why are there so many unfilled positions?
The answers are complex: the wage being offered isn’t sufficient incentive, the unemployed don’t have the requisite skills, etc.
In other words, in some important ways, the economy appears to be very close to full capacity. New programs such as The New Green Deal will basically be poaching experienced workers from existing projects, driving up wages (good for workers) which can generate a wage-price spiral (bad for everyone who can’t demand higher incomes).
My third concern: as someone with 45 years of construction experience, I am keenly aware that the vast majority of the infrastructure and New Green Deal spending many people see as socially beneficial requires skilled labor.
Rebuilding bridges, electrical grids, etc. all require highly specialized labor. Installing solar arrays also requires trained workers with physical stamina.
The process of training a large new workforce is time-consuming and expensive, and doesn’t necessarily generate new goods and services.
In other words, it’s inherently inflationary as it puts new money into the economy but doesn’t increase the goods and services — at least until the newly trained workforce starts generating goods and services.