Consider the following.
‘The medium exchange, for the whole history of human commercial relationships, is defined and valued based on the scarcity of the item exchanged and the ensuing negotiation on trading ownership for some other item of scarcity. We are living in a bubble, where our commercial relationships are defined by a medium of exchange that is detached from a store of value. In our times, a tenuous attachment to value is made, when we collectively insist that the medium of exchange has value despite the jeopardy present in an exchange that has both artificial scarcity and artificial proliferation.’
This is not intended to suggest that our station is unique. Indeed, economic experiments of this sort have occurred several times throughout history, and not just in the theories of central planners or pragmatic politicians. It is like any science that Economics attempts to explain the world of commerce with theories upon theories. Admittedly, the greatest shortcoming of the school is an inability to test the theories in a vacuum. Much like the struggle political theorists face.
The ‘bubble’ I refer to above is the notion that our economic activity is completely separated from the definitive medium of exchange humans have relied on for much of their history, gold.
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense… that gold and economic freedom are inseparable.
– Alan Greenspan
Yes gold. I call this a notion because economic activity is still not separated from the “barbarous relic”. Central banks still trade these holdings among themselves and countries still aggressively buy it as a hedge against the era of fiat. Arguments suggesting that there is no tie between hard money and soft money are generally sophistry. My favorite exchange in this debate is brought to you by former FED chair Ben Bernanke:
Nevertheless, theorists gon’ theorize.
Despite the painfully obvious connections between global finance, central bank reserves, and the historical axiom – gold being used as the medium of exchange -, theorists have taken fiat to an astounding level with the introduction of ‘Modern Monetary Theory’ (MMT). This is not so much an introduction as it is the ‘every so often’ visitation by a prodigal uncle that no one really likes to talk about or see.
In the case of the confusing message that MMT seeks to manage for itself, this author finds some agreement in protesting along household names in economics. Lawrence Summers covers a variety of subjects impacting deficits in Who’s Afraid of Budget Deficits, and while he affirms that deficits indeed matter he ultimately concludes that, “The economics of deficits have changed.”. I agree with this notion in the short-term, but insist as I have above that the road we are on is only temporary.
Like Koo and many other modern economists, Summers points to the Japanese experiment for proof of this change within the elasticity of their debt.
Some commentators worry that rising deficits don’t just slowly eat away at economic growth, as the textbooks warn; they could lead to a fiscal crisis in which the United States loses access to credit markets, sparking an economic meltdown. There is precious little economic theory or historical evidence to justify this fear. Few, if any, fiscal crises have taken place in countries that borrow in their own currencies and print their own money. In Japan, for example, the national debt has exceeded 100 percent of GDP for almost two decades. But interest rates on long-term government debt remain near zero, and real interest rates are well below zero.
Who’s Afraid of Budget Deficits; L. Summers
This insight explores the novel success of an economy that runs (well) despite monetary excess. However, with a debt to GDP at 253%, it is important to explore some of the features distinguishing Japan from their counterparts in the global marketplace. Unlike the U.S., Japan’s debt is majority held by domestic hands (90%), which leaves little room for pressure applied by global credit markets. The US sports less than 60% of domestic ownership. Additionally, unlike the U.S., Japan has shown a consistent ability to produce a trade surplus despite their national deficit – pressure from creditors is unusual when the debtor is profitable. Even though pressure from creditors might be remote, any event that suddenly raises rates would have a devastating impact on economies laboring in a deficit, Larry admits this fact despite advising on the paucity of fiscal crisis resulting from monetizing debt.
I agree with Summers in the short-term that aggressively reducing a deficit results in the moral and financial disruption a country’s day to day, which is liable to injure for the long-term, the economic health of the nation. Possibly (Likely) causing or prolonging the thing (recession) that the acts sought to cure. Richard Koo elucidates this trap at length in his three books on the subject of Balance Sheet Recessions. Koo’s influence on discussions regarding MMT is certainly felt as the adherents seek to refine their message for wider consumption. His focus on debt excess as immaterial in pursuit of producing the needed monetary effect is understandably cited with the MMT premise.
The exigency that MMT is generally invoked with feels good and right. We need free college, universal healthcare, universal basic income. These are the political platitudes that highlight issues we are all aware of one way or another, but for which are never accompanied by a feasible or responsible solution. Even when microcosms of these concepts are attempted and failed, the influence or want for them does not diminish. The concepts, taken individually and from a fiscally conservative standpoint are easy to argue, but if deficits are not so important is it something worth trying for the betterment of humanity?
Consider this: We have a situation in the U.S. where many people have achieved degrees that subsequently do not net them adequate pay or even a position in the field they studied, and yet many of these same people endeavoring to make education available to everyone for free, when it is shown to produce no economic value. Is this a moral principle, or is it buyers remorse?
If national tax dollars will be used to pay for the education of others, should the nation determine what degrees a person is at liberty to get? I imagine if this was the case it would immediately cool demand for the college experience.
I state the above because many observers, Summers and Ray Dalio included, have deferred on stating exactly how fiscal policy should be directed in the recessionary future that analysts forecast. Where would the debt accelerating funds work best for the economy? Provided the concepts above and their serious deficiencies when considered critically, I agree with the deferment. However, with deficits and economies being as elastic as they are, we do have room to make some moves, so let’s try and make the right moves. Making pressured emotional decisions is not good fiscal policy, no matter how acerbic the invective attached.
As for the evolving discussion on MMT, the idea that a national unit of exchange would also not be a vehicle for investment, as Warren Mosler stated in a debate several years ago, does not make for a negotiable that would retain value for purchases in a global marketplace. Being that the MMT message is still being refined I concede it’s a bit unfair to focus on positions stated over a year ago. Even without considering tax and interest rate implications for this type of fiscal policy, I have to agree again with Summers:
Although the U.S. government will remain solvent for the foreseeable future, it would be imprudent to allow the debt-to-GDP ratio to rise forever in an uncertain world. Trying to make this situation sustainable without adjusting fiscal policy or raising interest rates, as recommended by some advocates of modern monetary theory, is a recipe for hyperinflation.
Despite our comfort with living in a fiat world, its associated assurances and conspicuously short memory. It’s important to pause and reflect on the last several thousand years and remember that only for several decades has the fiat world existed, that our age has not been the first to attempt the ephemeral experiment, and that there are many studies of societies that have failed to succeed into our age on purely fiat alone. The standard that succeeds is never counterfeit. Whether it’s gossip, money, character, faith, or fashion, each demands its own standard to establish value (eventually).