by Chris Powell of the Gold Anti-Trust Action Committee (GATA)
Dear Friend of GATA and Gold:
Modern Monetary Theory, which has been getting much attention lately, is so controversial mainly because it is misunderstood.
It is misunderstood first because it is not a theory at all but a truism.
That is, MMT holds essentially that a government issuing a currency without a fixed link to a commodity like gold or silver is constrained in its currency issuance only by inflation and devaluation.
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This is a very old observation in economics, going back centuries, even to the classical economist Adam Smith, and perhaps first formally acknowledged by the U.S. government with a speech given in 1945 by the president of the Federal Reserve Bank of New York, Beardsley Ruml. The speech was published in 1946:
“The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government. Two changes of the greatest consequence have occurred in the last 25 years which have substantially altered the position of the national state with respect to the financing of its current requirements.
“The first of these changes is the gaining of vast new experience in the management of central banks.
“The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold.
“Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank and whose currency is not convertible into gold or into some other commodity.”
Ruml noted that in a fiat currency system such as the United States had adopted by 1945, government did not need to tax to raise revenue but could create as much money as it wanted and deploy it as it thought best, using taxes instead to give value to its currency and implement social and economic policy.
MMT does not claim that the government should create and deploy infinite money. It claims that money can be created and deployed as much as is necessary to improve general living conditions and eliminate unemployment until the currency begins to lose value.
The second big misunderstanding about MMT is that it is not a mere policy proposal but is actually the policy that has been followed by the U.S. government for decades without the candor of Ruml’s 1945 acknowledgment.
The problem with MMT is that, in its unacknowledged practice, it already has produced what its misunderstanding critics fear it for: the creation and deployment of infinite money and credit by central banks as well as vast inflation.
In accordance with MMT, this creation of infinite money and credit has necessitated central banking’s “financial repression” — its suppression of interest rates and commodity prices through both open and surreptitious intervention in bond and futures markets and the issuance of financial derivatives.
That is, since money creation in the current financial system is restrained only by inflation, this restraint can be removed or lessened with certain price controls, which, to be effective, must be disguised, lest people discern that there are no markets anymore, just interventions.
The British economist Peter Warburton perceived this in his 2001 essay, “The Debasement of World Currency — It Is Inflation, But Not As We Know It”:
Warburton wrote: “What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities, or anything else that might be deemed an indicator of inherent value.
“Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value not only of the U.S. dollar but of all fiat currencies. Equally, they seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets. [EMPHASIS ADDED.]
“Central banks have found the battle on the second front much easier to fight than the first. Last November I estimated the size of the gross stock of global debt instruments at $90 trillion for mid-2000. How much capital would it take to control the combined gold, oil, and commodity markets? Probably no more than $200 billion, using derivatives.
“Moreover, it is not necessary for the central banks to fight the battle themselves, although central bank gold sales and gold leasing have certainly contributed to the cause. Most of the world’s large investment banks have overtraded their capital so flagrantly that if the central banks were to lose the fight on the first front, then the stock of the investment banks would be worthless. Because their fate is intertwined with that of the central banks, investment banks are willing participants in the battle against rising gold, oil, and commodity prices.”
This “financial repression” and commodity price suppression have channeled into financial and real estate assets — the assets of property owners — the vast inflation resulting from the policy of infinite money creation, thereby diverting inflation from assets whose prices are measured by government’s consumer price indexes. Meanwhile those indexes are constantly distorted and falsified to avoid giving alarm.
As a result the ownership class is enriched and the working class impoverished.
Of course this is exactly the opposite of what MMT’s advocates intend.
But while the monetary science conceived by MMT people well might develop a formula for operating a perfect monetary system with full employment and prosperity for all, the monetary system always will confer nearly absolute power on its operators, and as long as the operators are human, such power will always corrupt many of them — even MMT’s advocates themselves.
That’s why market rigging is the inevitable consequence of MMT as it is now practiced and why the world is losing its free and competitive markets to monopoly and oligopoly and becoming less democratic and more totalitarian.
So what is the solution?
Maybe some libertarianism would help: Let governments use whatever they want as money, but let individuals do the same and don’t mess with them. Gold, cryptocurrencies, seashells, oxen, whatever — leave them alone.
Most of all, require government to be completely transparent in whatever it does in the markets. If government wants to rig markets, require that it be done in the open and reported contemporaneously.
After all, the world can hardly know where to go when it isn’t permitted to know where it is.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
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