[Editor’s note: When I set about writing this, I had something different, albeit tangentially related, in mind. Specifically, I wanted to highlight recent research quantifying the “interest relief” sovereigns enjoyed thanks to central bank largesse since the financial crisis. Ultimately, I decided to save that discussion for a separate article. What follows will be repetitive for some longtime readers, but it’s one of the most provocative lines of argumentation I employ in these pages and thanks to the market’s inflation obsession, it’s more germane now than ever.]
I have serious reservations about the language we use when we talk about public finance.
Regular readers are acutely aware of my position on this most touchy of subjects. As far as I can tell, there are very few people (in the world) who agree wholeheartedly with my thinking, which is best captured in “The Wealth Tax And Our Shared Insanity” (although I’ve penned countless other missives communicating a similar message).
That linked article is a comprehensive reference point. And I’m glad I have it at my disposal. It means the burden is on you (to read it) rather than on me (to recapitulate or to string together ideas from a hodgepodge of less thorough articles).
My paramount concern is that, almost without exception, our conversations assume that economics is at least semi-viable as a field of inquiry, that money is a real thing and that words like “debt” and “deficits” have meaning for advanced, currency-issuing sovereigns like the US, the UK, Canada, Japan and Australia.
MMT dispenses with much of the nonsense when it comes to misconceptions about debt and deficits. I’m always keen to emphasize that everyone owes Stephanie Kelton a debt of gratitude for helping to dispel decades of deficit dogma, much of which is wielded like a cudgel by politicians seeking to justify otherwise indefensible positions when it comes to federal outlays.
Ultimately, though, MMT simply describes how the existing system works. As such, it seems to accept that the system is somehow real and that economics is a worthwhile endeavor. Both of those assumptions are dubious.
By contrast, what I’ve tried to emphasize is that the existing system (and the words we use to describe it) has virtually no basis in objective reality. “Dollars” aren’t real in the same way the tree in your front yard is real. Economics isn’t amenable to the same kind of analysis we use to study the natural world. And “the system,” in all its various manifestations, from bonds to the nation states that issue them, are human constructs that have no meaning outside of the subjective set of myths humanity relies on to cooperate and structure the world.
This is why nobody has a working model of inflation. Inflation is a very simple, observable phenomenon and in many cases, it can be explained by reference to simple dynamics. The apple harvest was subpar leaving fewer apples for an unchanged pool of apple-eaters, so apple prices rose.
But spiraling, economy-wide inflation like that experienced by the shrieking Lego people from the Cleveland Fed’s instructional video series, is only explainable by reference to a loss of confidence in the shared myth that underpins demand for the currency.
I’ll recycle some language from a previous article. Spiraling, across-the-board, inflation can only come about if people lose confidence in each other’s belief in the value of something that had no value in the first place. The value of the currency is derived from the strength of that confidence network. Nothing else. You believe the dollar has value because you know I believe it. And I believe it because I’m confident the next person believes it. And so on.
Additionally, I understand (and you understand) that even if I decide not to believe it, it won’t make any difference. The confidence network is too entrenched. The shared myth is too strong. My (objectively correct) contention that the dollar is just a worthless piece of paper is totally irrelevant.
The same is true for organized religion. Obviously, there is no bearded Zeus figure watching over humanity. The historical Jesus wasn’t his “son,” didn’t walk on water and didn’t perform any other miracles either. None of that is debatable, but the shared myth we call Christianity is sufficiently strong (helped along by humanity’s refusal to accept the reality of death as the permanent cessation of existence and consciousness) that it can withstand irrefutable scientific evidence that Creationism, as described in the Bible anyway, simply isn’t an accurate description of how (and, importantly, when) life developed on the planet we inhabit.
Small wonder then, that objectively worthless pieces of ornate paper manage to retain their appeal in the face of purportedly “reckless” policies which, if they mean anything at all, suggest these already valueless scraps of green parchment are even more worthless than they used to be. If people can simultaneously accept the reality of dinosaurs and the contradictory timeline sketched in the Bible, it’s surely possible for other deeply-entrenched, shared myths to survive in the face of equally irrefutable evidence.
Seen in that context, it’s not at all clear why we should assume that a juxtaposition which finds the supply of money growing faster than some other aggregate (e.g., total economic output), should be the death knell for a powerful shared myth like the US dollar. This is especially true in a world where average citizens across western economies would likely struggle to guesstimate the average annual rate of economic expansion in their own country. They’d have an even harder time telling you how fast the money supply is growing.
This isn’t an argument for unbridled “money printing.” And it’s not a political statement either. Rather, it’s a reminder that virtually nobody is willing to tell the unvarnished truth about federal government finance, inflation and economics in general.
There are myriad reasons you can cite while explaining why nobody wants the Venezuelan bolívar, but the crucial point is that none of those factors would matter if, for whatever reason, everyone suddenly regained faith in the currency. If you’d be inclined to say that’s tautological, my rejoinder would be: “Exactly.”