I’ve been reading up on Modern Monetary Theory lately. Honestly, I’d previously heard the term in the news and had a vague understanding it favored easier central bank policy in the U.S. and elsewhere, but I didn’t understand it any deeper than that until now.
The more learn, the more I find MMT pretty scary, to be frank. And, crucial for purposes of this blog, it strikes me that any widespread adoption of MMT by governments will likely speed the process of cryptocurrency replacing fiat money in the global economy. More on that later.
For now, let’s start with a working definition of what MMT is, excerpted from an excellent long-form explainer that Bloomberg published back in March:
MMT proposes that a country with its own currency, such as the U.S., doesn’t have to worry about accumulating too much debt because it can always print more money to pay interest. So the only constraint on spending is inflation, which can break out if the public and private sectors spend too much at the same time. As long as there are enough workers and equipment to meet growing demand without igniting inflation, the government can spend what it needs to maintain employment and achieve goals such as halting climate change.
A little further on, we arrive at the real rub. Additional emphasis mine:
MMT rejects the modern consensus that economies should be steered primarily by the raising and lowering of interest rates. MMTers believe that the natural rate of interest in a world of fiat money is zero and that pegging it higher is a giveaway to the investor class. They say tweaking interest rates is ineffectual because businesses make investment decisions based on prospects for growth, not the cost of money.
Ah, low interest rates. The perpetual top wishlist item of everyone in the government — and I do mean absolutely everyone — who makes fiscal policy. That’s the part of economic policy that involves revenue generation and spending on programs. In other words, the explicitly political part most people are familiar with.
In the ’90s, Clinton political advisor James Carville famously bellyached about the power of interest rates. Donald Trump openly pines for lower rates now on the rare occasion he’s not ducking questions about sketchy phone calls with foreign leaders. Alexandria Ocasio-Cortez, an MMT fan, argues for lower rates too, with the New York Times editorial board acting as an echo chamber behind her. And Trump’s senior economic adviser, Larry Kudlow, praised them all effusively for it this summer. On Fox News.
Seriously. Here’s the video link. Take a look. It’s the business news equivalent of seeing a leprechaun riding a unicorn that can talk.
As a long-ago cub reporter at the Washington Post and, later, the Wall Street Journal, one thing I learned is that when everyone agrees on something in D.C., pay close attention. It’s either a legit common-sense necessity (invading Afghanistan after 9/11) or complete folly (invading Iraq after 9/11), and rarely anything between. I don’t know why, but that’s just how things tend to work in Washington.
Notably in this case, some real economic heavyweights who don’t currently hold any office have been arguing that MMT belongs squarely in the “folly” category. That includes Nobel-winning economist Paul Krugman, who wrote a two-part critique of MMT for the New York Times here and here, and former treasury secretary and Harvard president Larry Summers, whose skeptical take for the Washington Post is available here.
The TL;DR version is that, over time, excessively “easy money” can lead to market bubbles or, in a truly worst-case scenario, hyperinflation along the lines of the crisis that devastated Venezuela in 2016 or the one before that in Zimbabwe or the one that hit Germany in the years between the two World Wars.
Yet the temptation to devalue a country’s currency is always present, because politicians love free money for their favorite pet projects. Periodically, some politician thus becomes convinced he or she has landed upon some clever new way to finally make devaluation work.
In the end, it never does.
MMT strikes me as just one more entry in the looooooong line of such attempts. That said, there is one historically unique thing to it: Its timing happens to coincide with the rise of the crypto industry, including hundreds of entrepreneurs and developers making new currencies of their own, each with its own unique governance structure.
In other words, these folks are also wrestling with monetary policy right now, albeit in a different way, project by project. They’re getting their hands dirty actually implementing their ideas in real-world experiments, not theorizing like MMTers about what someone else (central banks) ought to do.
And the really, really funny thing I notice is that none of the largest, most well-known crypto projects is implementing anything that resembles MMT. For example:
- The number of bitcoin tokens that will ever be issued is fixed at 21 million coins, not open-ended. This is perhaps the main reason why bitcoin is sometimes called “digital gold” — a comparison to another asset that has a very real limit on its supply.
- Ethereum has no such hard cap on new tokens but does use fees to effectively conduct “minimum issuance to secure the network” and no more. As anyone who uses ethereum will attest, these fees can be pretty considerable, depending on network traffic.
- In the stablecoin space, which is perhaps the closest crypto parallel to traditional central banking, coin issuance is strictly limited by actual collateral on hand. Different projects achieve this in different ways, but no one just shirks it.
In the Facebook-led Libra project, for example, a consortium of companies is supposed to manage issuance using a trust that holds actual securities to back each Libra token. The MakerDAO project, which manages the DAI stablecoin, allows anyone to participate in printing new coins, but you have to put up 150 percent (!) collateral for each DAI that you create.
In addition, any DAI you print have to be paid back, including an annual “stability fee” set by the MakerDAO community — a rough approximation of interest rates in traditional central banking.
As of this writing, that stability fee is set at 10.5 percent, not zero.
In my experience, crypto startups can often do astonishing things technically. They also tend to be dismissive of the real-world decisions that government institutions and Wall Street have made in the past. But, consciously or not, they’re also often surprisingly reverent of old-school economic principles. Most of them start from the perspective of trying not to make easy money but rather strong money, with a supply that’s limited in some way or other, because strong money is generally what’s missing from the world we live in.
If central banks want to keep up, it would seem MMT should not be the way forward for them in the years ahead.