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From The Market Ticker

Last night’s “debate” with Stormin’ Norman, who seems to believe that:

• An index value in a fiat world, with no anchor to measure against, demonstrates the absolute strength of a currency.  (No it doesn’t; measure against a tangible item one cannot increase at-will, such as gasoline, wheat, corn, etc.)

• The amount “saved” by the population (which is in and of itself a fraud; the “personal savings” rate is computed in the economy as personal income less personal expenditures; note that this counts paying a debt as “savings“) is exactly identical to government deficit spending.  This in turn implies that should the government not run a deficit the people cannot possibly spend less than they make.  How this sort of silly conflation occurred in people’s minds is beyond me, but it persists.

• The government “doesn’t need to” tax to raise revenue; the “purpose” of taxes is to compel the population to accept the currency preferred by government since it must pay those taxes in that currency.  In other words, deficit spending serves to regulate inflation and unemployment while taxation is not used to fund the government, it is used to force acceptance of the currency involved. 
• The foundation of the above is that there are two distinct economic units within the system; government and non-government.  This in turn relies on the claim that (G – T) = (S – I) – NX, where “G” is government spending, “T” is taxation, “S” is private savings, “I” is investment and “NX” is net exports (positive if you’re exporting net-net, negative if you’re a net importer.)  Notice that the entire production/consumption cycle is ignored in the above equation.  That is, it is a true equality but ignores essential components of the actual economy.

• MMT finally argues, as a consequence of the above, that a government does not actually “borrow” anything when it issues debt denominated in its own currency in that you cannot borrow back your own currency (which you control the issuance of.)  Therefore, MMT argues that the more government debt is issued the more wealth the private sector accumulates.

was quite amusing.

The problem is that these claims, in particular the last claim, must fit into the fundamental economic equality, which is:

MV = PQ

That is, “M” (credit and currency in circulation) * “V” (velocity, or times each unit of credit or currency is used in the economy) = P (price of each unit of good or service) * Q (quantity of each good or service)

PQ is what we called “GDP”; by definition all units of production of goods and services that are sold times their price is equal to the GDP of the nation.

“V”, or velocity, can be thought of as the “animal spirits” index.  The more confident businesses and consumers are in the economy the more-likely they are to exchange currency or credit for a good or service; that is, the higher the likelihood that they believe the necessary expenditure on goods and services from a future capacity to acquire more “M” will be possible.  This can be indirectly influenced but not directly controlled.

Finally, “M” is not just currency but also includes all circulating credit that is expended in the economy.  The latter is almost-always ignored by mainstream economists but this is a trivially-proved self-delusion as virtually everyone uses credit interchangeably with currency in their daily lives.  You pump gas and swipe your credit card to pay for it, you pull out the VISA card in the store interchangeably with $ 20 bills, etc.

So let’s presume that the government simply “emits” 100% of GDP into the economy by “creating money” through the purported “sale” of Treasury Instruments.  The Central Bank monetizes those by pushing a button and now Treasury has $ 16 trillion dollars, which the government decides to evenly distribute to everyone.  That is, tomorrow you go to your mailbox and find in it a check for $ 51,499 for every man, woman and child in your household, payable to you, printed out of literal thin air.

You’re wealthy according to MMT!  Happy days are here again, let’s go have a party!

Uh, wait a second.

Remember, MV = PQ.

“V” hasn’t changed.

But “Q” hasn’t changed either; when you woke up this morning there weren’t new factories that magically materialized, there weren’t any new jobs that magically materialized, there weren’t new services invented out of thin air, none of that happened. 

In fact, what happened is that “M” was dramatically increased.

Since “Q” didn’t change, and “V” hasn’t changed (yet), what does the fundamental economic equality say must occur?

That’s right — “P” must rise in an exactly ratable amount.

It has to, because third grade arithmetic says that it must as a matter of economic axiom.

As such the so-called “wealth” created by this MMT action is a scam, because “P” (price) immediately rises across the economy in the exact amount of the “money” that you created.

GDP (defined as “PQ”) rises but this is not economic progress, it is inflation! 

That is, it’s bad, not good.

But wait — why is it bad?  Isn’t all that new money worth the same as the old money in aggregate (that’s what the fundamental equality says), right?

Ah, you see, you forgot something very important.

Not all the money or credit I want to spend today was acquired today.  Some of it was acquired yesterday, last year, or last decade.

But when that “money creation” happens all of the existing units of “M” are devalued by the exact ratable amount of the new monetary emission.  It cannot be otherwise; again, the fundamental economic equality must hold. 

Therefore what deficits do is destroy saving, not enhance it, as they intentionally and ratably trash the value of all such saved units of currency.

Now compare this act of destroying the value (denominated in non-monetary terms — e.g. gallons of gasoline, bushels of wheat, etc) of the tokens used for exchange (what we call “dollars”) with the government deciding to tax the same amount from the citizens instead.

Economically they are identical – If the IRS man shows up at your door and demands 50% of everything you have acquired in dollars “to date” or if the government renders your saved dollars worth 50% less the impact in terms of gallons of gasoline, pounds of steak, or medical care for your grandmother that you can purchase with your currency and credit 10 minutes later is exactly the same.

In other words the government’s decision to run a deficit is exactly identical economically to the government deciding to raise taxes retroactively on all existing currency and credit by exactly the same amount of money! 

That is, the claim that MMTers make that government deficit spending is “wealth” in the private economy is false; such an act does nothing other than devalue the currency and credit in circulation and by doing so the impact on purchasing power, which is all you care about, is exactly identical to that of having that currency and credit confiscated by taxation!

This, incidentally, is why the economy has not recovered even though the government has run deficits from 8-12% of GDP sequentially for the last four years.  This, for those who are not math-challenged, is an approximate 50% compounded devaluation in terms of GDP over those four years. 

This has been partially offset by productivity gains in the economy, which should generate gains in purchasing power. 

But this emission of “money” has been so massive that nominal median family income (before inflation) has actually decreased!  Now add to that the massive increase in costs of “things” that are essential over the last four years — milk, gasoline, meat, etc — many of which are up 100% or more and you find that the actual economy and personal purchasing power behaves as the above describes must happen, not as the MMT adherents imagine.

That outcome occurred in the economy because arithmetic is not theory, it is fact.  2 + 2 = 4, not 6, and no amount of arm-waving will ever change that fact.

Worse, it is saved units denoted in currency, that is, wealth, that form capital.  Capital formation is the engine of innovation; one saves wealth which is then risked on a venture not certain to succeed in the hope that the innovation you produce through doing so rises in value in the economy and people are compelled by their desire to acquire your innovative good or service in exchange for their labor. 

Without wealth one is forced into trying to get others to finance your innovative attempts by taking out loans.  But that means the total cost of your innovation’s development rises precipitously and the more money emission that is taking place the higher the cost goes because nobody ever intentionally lends money at a loss.  Since time has value, risk has value and indirection has a cost in that it increases inefficiency it is therefore always more expensive to borrow to fund innovation than it is to form capital from savings.

It gets worse. 

All economies naturally run in a state of mild deflation as a consequence of improvements in productivity. That is, through innovation one hour of human labor does and should buy more tomorrow than it does today. This in turn makes saved capital more valuable in terms of future purchasing power, which is good, not bad.  That is the incentive to save capital which in turn makes available a pool of resource that is tapped to invent and innovate, driving future productivity increases! 

This is a virtuous cycle that has through the ages resulted in the improvement of our human condition — a cycle the MMT theorists seek to intentionally destroy.

MMT is, in fact, nothing more than the belief in Unicorns that crap out pretty colored candies, when the truth is that Unicorns are mythical creatures and what’s being emitted from the back end of the horse you are calling a “Unicorn” are not candy.