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Modern Monetary Theory (MMT) is back in the spotlight, prompted by a new film Find the money And a The last section Which went viral on Bitcoin Twitter and Fintwit. In the clip, Jared Bernstein, Chairman of the Council of Economic Advisers to the US President, appears unable to describe the simplest basic concepts of government debt and money printing. He claims that MMT is correct but some of the (basic) language and concepts are confusing to him. A very shocking statement given his role.
In this post, I will outline several major flaws in MMT that perhaps you, dear reader, will be able to use to move forward and debunk MMT. The stakes are high, as MMT adherents are gaining positions of power in governments around the world, Mr. Bernstein explains. It is a very dangerous proposition to put these people in power, because they will quickly destroy the currency and cause economic disaster. As Bitcoin users, we believe that Bitcoin will replace the credit-based dollar, but we want the transition to be natural and relatively uneventful. A major currency collapsing without Bitcoin ready to take over would be disastrous for many.
Introduction to MMT
Modern Monetary Theory is a post-Keynesian macroeconomic framework that asserts that fiscal deficits are essentially unimportant, that monetary policy should be subordinate to fiscal policy, and that monetary authorities should issue base money to finance massive government programs. MMT promises to eliminate involuntary unemployment and address social issues such as poverty and climate change. Modern Monetary Theory is rooted in the belief that all money is state-created, and is designed through legal frameworks to facilitate government control of economic activities.
According to MMT, a government, which can issue its own currency at will, cannot go bankrupt. However, there are obvious limitations to this power, such as the inability to control the value of the currency. MMT also redefines the traditional functions of money—medium of exchange, store of value, and unit of account—asserting that these functions are merely byproducts of government policy rather than intrinsic properties such as scarcity and divisibility. This theory leads to the controversial idea that the government can dictate that any item qualifies as money — be it IOUs, IOUs, or Bitcoin — based solely on legal declarations, ignoring its properties, a concept that stands in stark contrast to real-world economic dynamics. .
There is no coherent theory of value
The most important flaw of MMT is its approach to the theory of value. Instead of a subjective theory of value, where prices emerge through the preferences of individual actors, such as personal spending or saving decisions, MMT replaces this with a democratic or collective theory of value.
According to MMT, the value of money does not derive from its utility in monetary functions—such as a medium of exchange, store of value, or unit of account. Instead, the value of money in MMT stems from collective acceptance and trust in the country that issues it. It is assumed that this acceptance imparts value for money. In other words, MMT reflects the traditional understanding: it is not that something of value becomes accepted as money, but rather that something becomes valuable because of forced acceptance as money.
The value of money depends on the state being an economic calculator of sorts, rather than individual market actors. The overall preferences of society combined with the experience of central planning enter into the equation and the result is full employment. This is not a joke. They have no theory of value beyond what has just been explained.
MMT Mechanisms: Taxation and Fiscal Policy
Modern Monetary Theory offers a skewed understanding of fiscal policy and taxation, suggesting that taxes serve as the primary load for demand for money issued by a country. Modern monetary theory followers say that government spending would cause the value of the currency to fall without taxes. This point reveals a remarkable contradiction: while MMT fanatics vehemently deny that deficits matter at all, they simultaneously claim that taxes are necessary to counteract the negative effects of deficits.
Furthermore, MMT believers ignore the broader dynamics in currency markets. Taxes alone do not necessarily enhance the demand to hold currency. Individuals may choose to reduce their holdings to a minimum due to fears of currency depreciation, and convert other assets to cash only when necessary to meet tax obligations. For example, a person may work primarily with an alternative currency and only obtain local currency in the amounts needed to pay taxes.
In terms of fiscal policy, Modern Monetary Theory asserts that the primary constraint on money printing is inflation, which in turn is due to the availability of real resources, such as labor and capital. In their school of thought, if they print money the result is economic growth until labor and capital are fully employed. Raising taxes is a mechanism to fight inflation by withdrawing money from the economy.
Another major flaw in MMT is the required belief that the state can precisely manage the outcomes of fiscal policy. MMT ignores the inherent limitations of central planning, especially the circular logic that the information guiding fiscal policy is merely a reflection of past government actions, assuming perfect transmission of policy, without appreciation of real market data or external market dynamics. Are MMT planners in control or not? If so, it is circular. If not, it's wrong.
MMT does not recognize that there are unintended consequences that require frequent policy adjustments and undermine demand for the currency, because this means that it is not under control. Moreover, market interest rates further complicate matters for MMT fans. Careful management of the economy would lead to sharp declines in economic activity, reduced demand for currency and higher interest rates. Thus, while MMT claims that a state can dictate the use of its currency, it has no ability to control how the market values or trusts that currency.
MMT and resource allocation
The MMT approach to resource allocation emphasizes achieving “full employment” through top-down fiscal policies without addressing the efficiency of use of labor and capital. Proponents of MMT claim that by pursuing the right fiscal policies, full employment of labor, capital and resources can be ensured. However, they struggle to justify, using MMT principles, why seemingly unproductive activities such as digging holes and then filling them back in are less beneficial than employing market-derived labor and capital. This often leads to ambiguous explanations about differences in outputs, without a clear and consistent standard of value.
According to MMT, all economic activities that consume equal resources should be viewed as having equal value, blurring the lines between productive investments and wasteful expenditures. For example, there is no fundamental distinction between using resources to build basic infrastructure or to build “bridges to nowhere.” This lack of understanding of value leads to policies in which the primary goal is employment rather than the value that employment creates. The result is a massive misdistribution of labor and capital.
Conclusion and implications
The basic principles of MMT and their political implications contain critical flaws. These range from its incoherent theory of value and reliance on circular fiscal policy logic, to its failure in competitive international currency markets and impractical resource allocation strategies. Each of these risks could have serious consequences if methadone maintenance therapy is implemented on a large scale.
For those interested in the Bitcoin space, the similarities between MMT and central bank digital currencies (CBDCs) are particularly striking. Central bank digital currencies represent a shift from our current credit-based monetary system to a new form of fiat currency that can be tightly controlled through programmable policies – reflecting MMT's call for pure fiat money managed through detailed financial policies. This consensus suggests that regions such as Europe and China, which are advancing the implementation of central bank digital currencies, may naturally gravitate towards the principles of MMT.
These transformations are huge. A large economy cannot immediately switch to a new form of paper money, despite what MMTs would like you to think. The transition period will extend for years, during which we are likely to witness the decline of traditional currencies. As MMT and these governments inadvertently support Bitcoin, the choice for individuals, capital, and innovators will become clear. If people have to adopt a completely new form of money anyway, it will be a simple choice for capital, economic activity and innovation to flee to Bitcoin.