The legitimacy of MMT (Modern Monetary Theory) to the uninformed observer rests on the Post-Bretton Woods Debt Standard, brought into existence after the Death of Bretton Woods. In fact, the Post-Bretton Woods Debt Standard is made possible due to most currencies being Fiat Currencies. A central government’s Revenues and Expenses are treated as irrelevant under MMT because of this notion that it happens to be the nation’s sole issuer of its currency.
Going back to The Work-Standard (2nd Ed.), I spent multiple entries in the final Section about the significance of the following equation:
State Budget = State Revenue – State Expense
What MMT is trying to imply is this:
State Budget ≠ State Revenue – State Expense
By treating Revenues and Expenses as irrelevant to a State Budget, MMT insists that any central government could also ditch its own Sovereign Debt and all possibilities that it might declare a Sovereign Default because of having Sovereign Debts that it cannot pay back. The Sovereign Debt is instead treated as a representation of the Quantities of Kapital and Schuld, created by a Fractional-Reserve Banking System, and marshalled with the Incentives of Supply and Demand.
Here, the Quantity of Schuld becomes correlated to the Quantity of Kapital in existence. If the Quantity of Kapital is, to use a placeholder currency, 1,000,000 GDM, then the Quantity of Schuld is also 1,000,000 GDM. It can then be written as such:
Quantity of Kapital = Quantity of Schuld
1,000,000 GDM = 1,000,000 GDM
This implies for every 1 GDM that gets added to Quantity of Kapital, the Quantity of Schuld likewise increases. When a central government needs to reduce the Quantity of Kapital in existence, it can just as easily raise its Taxation Rates to siphon Kapital out of circulation. The other monetary policy methods found in Liberal Capitalism, such as raising Interest Rates or the Reserve Requirements of private banks to maintain a higher Quantity of Kapital, are assumed to be still active. But therein lies the problem with MMT: its premises fall apart when faced with the issue of Currency Depreciation vis-à-vis the Inflation Rate.
The concept of Currency Depreciation, like the Inflation Rate, gets sidelined by MMT inasmuch as it is more concerned about promoting higher Expenses and providing Job Guarantees. When MMT advocates for higher Taxation Rates to reduce the Quantity of Kapital in existence, it does so by promoting specific taxes. The most important is Progressive Income Taxation, which places higher Taxation Rates for those who have more Kapital and lower Rates for those who have less Kapital. The idea here is not necessarily to reduce the Quantity of Kapital in favor of Currency Appreciation (to offset the effects of Currency Depreciation). Rather, it is to promote wealth redistribution, which is entirely different from any contractionary monetary policy.
One should realize that where there is the possibility of imposing a Progressive Income Tax, there is also the possibility of a “Regressive Income Tax.” A Regressive Income Tax by contrast is the opposite: higher Taxation Rates on those with less Kapital and vice versa for those who have more Kapital. After all, the concept of Income Taxation, as I pointed out in The Work-Standard (2nd Ed.), stemmed from governments trying to finance the wartime expenditures of the First World War. The American taxation system in particular is very much an historical testament to that fact.
With wartime expenditures in mind, MMT’s definition of what constitutes as an Inflation/Deflation Rate is centered around a central government’s expenditures. The more Kapital being ‘spent’–that is, put into circulation, the more likely the Inflation Rate will rise as a result. The Quantity of Kapital that could have been earned as State Revenue for the central government is instead a source of Deflation.
Inflation = More Government Spending (“State Expense”)
Deflation = Less Government Spending (“State Revenue”)
Conversely, an Income Tax will result in less, not more Kapital, going toward a war effort. After all, MMT did cite Income Taxation to remove Kapital from circulation, reducing Inflation and thus mitigating the effects of Currency Depreciation. If MMT cannot account for a wartime purpose of an Income Tax within its own Liberal Capitalist framework, why bother with MMT for any conceivable peacetime purpose?
Moreover, MMT even maintains that the Quantity of Schuld can be higher than the Quantity of Kapital because there are no constraints regarding Schuld itself when the central government borrows in its own Fiat Currency.
Quantity of Kapital ≤ Quantity of Schuld
Where is the central government going to ‘borrow’ its loans from? Are the loans coming from its own central bank or from the LCFIs (Liberal Capitalist Financial Instruments)? If it happens to be the latter, is this coming from the issuances of government-issued bonds or other securities?
The former has to be understood as the real exception here for MMT, seeing how it began its original premises from the idea of ditching notions of its Sovereign Debt and by extension its Revenues and Expenses. Given that the central bank is controlled by the central government (which has sovereignty over the nation’s currency), the central bank has to be lending to the central government to facilitate MMT’s interpretations of Currency Depreciation/Appreciation and Inflation/Deflation Rate.
Of all the places where a central government under Liberal Capitalism can obtain Kapital, the central bank has become the last place in the decades after the Death of Bretton Woods. This came as a consequence of the shift in Exchange Rate Regimes from the Bretton Woods-era Fixed Exchange Rates ($35 USD per 1 Ounce of gold) to the post-Bretton Woods Floating Exchange Rates. It may seem superfluous for anyone too devoted to MMT (and I have not found a suitable rebuttal to this issue), but having the central bank lend Kapital to the central government is also another source of Inflation and ipso facto Currency Depreciation. The Quantity of Schuld created from such lending by the central bank contributes to the rate of Currency Depreciation.
Am I to assume that the real source of what passes as the primary source of spending (and Inflation) by the central government happens to be the central bank? Even if the central government borrows in its own currency, would such heightened spending lead to its own currency becoming too devalued, even for promoting more exports with respect to the Balances of Trades and Payments?
Categories: Financial Warfare