by Kyle Johnson

 

My verdict is in the title. And I suspect you'll feel the same if you watch this “documentary” promoting modern monetary theory (MMT).

Admittedly, it’s difficult to adequately discuss complicated topics like economics within 1.5 hours. But that’s no excuse for a horribly disorganized film that fails to present coherent arguments.

MMT economist Stephanie Kelton proclaims that “95% of the problems that we have getting better policy is probably down to the words we use to describe what’s actually happening.”

I’m happy to play by her rules.

Below is a synopsis of MMT as described in the film. This is followed by claims and statements essential to the MMT thesis. A few simple observations and basic questions raise serious issues.

You might find reading this article frustrating. But we can profit if we properly understand the MMT end game, so bear with me.

 

MMT Basics

Here’s the MMT theory in a nutshell…

Only governments can create money. Taxation gives money its value. The federal government is the sole issuer of US money.

Simple accounting demonstrates that government spending is both necessary and good. The example given in the film is a government spending $100 into an economy and taxing $90 back out. This creates a government deficit of -$10, which “currency users” experience as a “surplus” of +$10.

Deficits can be too big or too small. This is determined by inflation, not debt. Overall, government debt isn’t scary. It represents the “savings” of the citizenry. Kelton says the US national debt should be called a national savings account.

MMT proponents ultimately conclude that the government can (and often should) spend to break loose “idle” resources—money people would not otherwise want to spend or invest.

Let’s dive deeper to see how MMTers arrive at their general thesis.

 

Money and Taxes

If you appreciate the meticulously well-reasoned ideas Ludwig von Mises set forth in his book A Theory of Money and Credit, you’ll find the film’s treatment of history and money rather sloppy.

The film presents a brief history of the standard account: markets existed and money was later invented by private actors to break them free from the burdensome limitations of barter. Much later, humans formed governments, which then took control of money.

However, one statement from MMT economist Pavlina Tcherneva unintentionally contradicts the MMT view. She admitted, “money has existed for thousands of years before markets were developed. Rather than gold, for most of time people have used clay, or sticks, or shells, or paper.”

She later says, “money is not a physical object, it’s a unit of measure.” After a brief overview of ancient Mesopotamia, Tcherneva then claims their clay tablets are the earliest form of money. But she later claims that the clay tablets were accounting records.

I’d dispute that accounting records are money. Regardless, Tcherneva’s statements are not internally consistent, leaving the audience unclear on what the MMT definition of money is.

While offering the MMT position on the history of money, economist L. Randall Wray calls ancient Mesopotamia the “very beginning.” Wray says Mesopotamian accountants invented writing.

But Homo sapiens has been around for an estimated 300,000 years. A historic site in Turkey, Göbekli Tepe, predates Mesopotamia by thousands of years. There, archeologists discovered writings about the builders’ deities. If these people had writing, it’s not reasonable to assume that they didn’t have any system of accounting. The huge scale of their constructions almost requires believing they did.

This omission doesn’t prove that everything MMTers say is wrong, but it calls their scholarship into question.

Contradicting Tcherneva, MMT economist Mathew Forstater insists that “money is a tool invented by political authorities to organize and mobilize real resources.” Viewers are told that governments came first. They invented money. And only later did markets develop.

Also contradicting Tcherneva, Wray claims “money has always been the debt of the issuer. There is no such thing as money without debt.” He says that gold coins in circulation were the debt of the issuing king.

Nonsense.

Gold didn’t circulate as a debt token representing wealth; it was wealth. If kings or princes had debts, it was with gold—real, portable wealth—that they paid it off.

A king or emperor’s stamp on bits of metal was an assurance of weight and purity. Such coins standardized value to speed up exchange—you didn’t have to weigh grains of gold (and silver) if you knew the amount in any given coin. This didn’t make them promissory notes. They were the value one got if one redeemed a promissory note.

Wray highlights the use of tally sticks across medieval Europe. A tally stick is a piece of wood carved with a unique pattern that would be broken in two. Kings would “spend” one of the halves into the economy and accept its return as tax payment. This would be checked against the retained half to fight counterfeiting and help with accounting for the gold, grain, or other real asset it represented. Wray insists that tally sticks were money and insinuates they were more important than gold. But if a king awoke to enemies at the gate, I suspect he was most worried about his pile of gold, not his pile of sticks.

Wray also claims that “a media of exchange is [a] relatively unimportant” feature of money.

Only a modern academic could think this. It’s precisely because gold and silver do such a great job as both stores of wealth and as media of exchange that they became the most accepted forms of money in history.

Black markets are one way to look at economics disconnected from the state (or the debt of kings). Today, most dark-web drug markets rely on a privacy-focused cryptocurrency called Monero. Where’s the debt? Who issued it? How is this possible if Wray is correct?

 

Taxes and IOUs

Viewers are told that taxation gives money value. Money is an IOU, which itself is just a tax credit. MMTers liken paying taxes to a reduction in one’s societal chore obligation account.

Tcherneva states, “tax is that motor, that engine of transferring resources. Money is really just the vehicle.” MMT proponent Lua K. Yuille claims, “it is the taxation system that gets the whole monetary system going to begin with.”

Taxation comes in various forms. The film focused on personal income tax.

In the US, the first personal income tax was imposed during the Civil War and repealed soon thereafter. The income tax as we know it today was implemented in 1913. Obviously, US money had value during periods of no direct national taxation, turning this theory on its head.

Today, countries like the United Arab Emirates and Qatar have no personal income tax. Bermuda and the Bahamas have neither personal nor corporate tax. And yet their currencies have value.

Briefly returning to Monero: where’s the tax agency giving it value?

There are other forms of tax, of course, but it’s quite a stretch to say that the average American—or Argentinian, for that matter—values the US dollar because the US collects tariffs in US dollars.

The need to pay any tax in the currency of a given jurisdiction does create demand for that currency in that place, and that utility creates some value. But I’d argue that this is peanuts compared to legal tender laws that require the use of the currency.

Moreover, the US dollar became the world’s reserve currency because it remained backed by gold long after other major powers abandoned their own gold standards. That backing with physical value—not debt—made it the most liquid, durable, and globally fungible asset in the world.

And when the US abandoned the gold standard decades later, The Powers That Be at the time knew the dollar still needed more than the “good faith and credit” of the US government to retain its monetary crown. Hence the petrodollar system, creating global demand for dollars, propping up their value after they joined the rest of the world’s fiat currencies in becoming floating abstractions.

 

House of Cards?

In the film, MMTers speak with great confidence. But why should we believe a monetary theory with no coherent explanation of money—nor even much relation to the facts of history?

 

Government, the Federal Reserve, and Banking

Kelton claims that MMT’s strength is its understanding of financial plumbing. “[W]e issue the US dollar. The federal government can issue more dollars any time it likes ... Congress holds the power of the purse... They’re the source of the US currency.”

MMT economist Fadhel Kaboub claims “the federal government is the only issuer of the currency.”

Yes, the US Treasury prints physical bills as authorized by Congress, but due to fractional reserve banking, the money supply is far larger than that. And it’s the Federal Reserve—a quasi-private agency—that “works” to expand and contract money supply through whatever policies its Federal Open Market Committee deems appropriate.

 

The Fed’s “Dual Mandate”

Kelton claims that Congress gave the Fed a dual mandate: “[W]e want full employment and we want low inflation.”

But that’s not what the law says. The Board of Governors of the Federal Reserve System is to conduct operations as to promote effectively the goals of “maximum employment, stable prices, and moderate long-term interest rates” (12 US Code § 225a).

I appreciate that “dual mandate” is commonly used, even by Congresspersons and Fed officials. But Kelton insisted that we use words correctly, and the Fed is clearly tasked with three goals.

It has become accepted in mainstream economics that “stable prices” is a euphemism for “ever-increasing prices—as long as the rate is modest and unchanging.” The arbitrary figure many central bankers have recently adopted is 2%. Many economists now push for 3%. But people whose bills keep rising more than their pay do not agree that this is price stability.

 

The Fed’s Toolbox

Kelton exclaims, “the Fed has one tool. One tool! The overnight interest rate. Find the magic interest rate that puts the whole US economy in balance.”

But the Fed’s balance sheet is north of $7 trillion and represents the biggest bank bailout in history. Kelton knows this. However, I suspect many viewers do not. Kelton delegitimizes herself by pretending the balance sheet doesn’t exist or is of trivial importance.

 

Commercial Banking

Every critic of fractional reserve banking laments the ability of commercial banks to create money. But only an astute layman watching the film would spot a glaring contradiction.

Toward the beginning of the film, Wray states, “every dollar that exists was created by the US government.” He later states, “because they have this ability to create money, (commercial) banks need to be regulated.”

MMTers complain about being misunderstood, but fail to speak accurately and with consistency.

 

Inflation

Lazy critiques of MMT claim they believe we can print an infinite amount of money without deleterious effects. However, MMTers do recognize limitations. But the ability to control inflation is the only brake pedal in the MMT model.

Kelton says the best defense against inflation is a good offense. Prospectively, you must consider what impact proposed spending will have on inflation. She describes a hypothetical infrastructure spending bill which would increase inflation to a “problematic” 3.5%. Just have a careful evaluation! She flippantly remarks, “an economist could do this.”

Well, she’s an economist, and the 12-month CPI hit 9.1% in June of 2022. Strangely, the film included no inflation forecasts from Kelton herself. Why not?

Curiosity led me to check her X account. Kelton believes she nailed the whole “transitory” inflation debacle. In November 2021, she wrote:

“Tran·si·to·ry: Of or pertaining to the transition out of a COVID-hampered economy.

“The relevant variant in the model was never ’time.’”

But this is merely special pleading. Time is fundamental to any reasonable definition of transitory.

MMTers had carte blanche to prove they’ve mastered inflation. But they failed to establish a track record of accurate, numerical inflation forecasts. They display no special knowledge of inflation whatsoever.

It would be foolish to assume that word games would properly restrain inflation under an MMT regime.

 

Econ and Finance 101?

It’s difficult to have a conversation about economics and finance without a certain understanding and agreement about popular terms like savings, wealth, assets, and debt. I was unprepared for how MMTers use these words…

Kelton says the US debt clock should be renamed to the “US dollar savings clock.”

What is the definition of savings?

Wray proclaims, “the US government debt that we’re leaving to our grandchildren is their financial wealth.”

What is the definition of financial wealth?

I doubt their definitions would survive application to real-world scenarios.

The GAO estimates that since fiscal year 2003, federal agencies have made $2.7 trillion of “improper payments.” Let’s assume this figure is accurate for the sake of argument. What portion of this sum is savings? What portion is wealth? Are fraudulent payments a net negative or positive?

The Pentagon has failed six consecutive audits. In 2019, it made a reported $35 trillion worth of “accounting adjustments” to “balance” its books. How do MMTers calculate savings and wealth related to DOD spending? Is all government spending savings and/or wealth?

This isn’t some sort of “gotcha.” Economic calculation is essential to sound economic policy.

There’s no use getting into the weeds regarding fiscal policy. I’m not even sure how MMTers differentiate between assets and liabilities. Wray claims that “nobody can hold a financial asset unless somebody has issued a debt.”

Every day, hobbyists venture into the wilderness and find gold nuggets and flakes. Even MMTers can’t deny these have value. So who issued the debt?

Despite being released in 2023, this film makes no reference to Bitcoin, Monero, and other cryptocurrencies. While Austrian economists debate whether they qualify as money, Wray’s statement seems to deny they are even financial assets. This isn’t merely comical, it’s disqualifying and unacceptable to younger generations.

 

Capital Allocation

Failed doomsday climate predictions date back decades. But viewers are told that society has less than six years to avert the worst-case climate scenario. MMTers pose as saviors, eagerly volunteering to oversee the spending of trillions on the Green New Deal.

I understand that egalitarianism has popular appeal. But capital allocation is a skill. Entrepreneurship and capital markets largely determine how resources are allocated. Every day, participants battle to stay alive. Wise decisions are rewarded. Sustained losses eventually prove fatal. Fear of failure ensures that resources are allocated with great caution and care.

But everything changes when government allocates capital.

Most voters have no skill or experience in capital allocation. They elect politicians who are equally unqualified. And with rare exception, their economic advisors have only read about capital allocation in books—they have no meaningful real-world experience.

If attempted, the Green New Deal would likely be the most resource-intensive project in history. What kind of mining experience do nearly all voters, politicians, and their economic advisors have?

Precisely none.

The Green New Deal explicitly rejects nuclear energy. This leaves wind, solar, geothermal, and the like. But these have already proven incapable of reliably meeting current energy demand—let alone the explosive growth in demand we now expect. Improvements must be made.

What kind of science and engineering experience do nearly all voters, politicians, and their economic advisors collectively have?

Again, none.

So for the first time in history, some developed economies are trying to transition to less-dense forms of energy. And start to finish, novices in capital allocation, mining, and technological innovation demand to make the key decisions.

A scary proposition. But it gets worse.

In the private sector, profit and loss matter. But as MMTers happily point out, the government can never run out of money! Who cares if their investments turn a profit?

You’ve probably heard of Solyndra, the solar panel company that defaulted on its $535 million government loan. There’s ample evidence that fraud was involved. But as far as I can tell, nobody at Solyndra was even charged with a crime. I find no evidence that a single politician or bureaucrat involved was fired or demoted.

Were taxpayers punished? I think so. But I’m genuinely unsure what MMTers would say. They might argue that the failed $535 million loan represents taxpayer “savings” or “wealth.”

$535 million up in smoke. Seemingly no real consequences for anyone directly involved.

MMTers imagine they are avant-garde. But being cutting edge means building on past learning, not ignoring it. The brilliant French economist Frédéric Bastiat explained the “seen” and the “unseen” in economics to us over two centuries ago. Let’s apply those ideas to Solyndra…

The $535 million lost could have been spent elsewhere. Solyndra had offices, manufacturing facilities, and machinery. They used scarce resources like copper, indium, and gallium. What would have become of these resources in the absence of the government loan?

Nobody, including MMTers, will ever know. The real resources consumed by Solyndra could have been put to better use. But all financial losses and all wasted resources can be forgiven under the guise of fighting an “existential threat.”

Admittedly, $535 million is chump change in the US federal budget. But remember that the Green New Deal calls for about $7 trillion in spending annually on Solyndraesque “investments.”

Thankfully, MMT is not the dominant economic philosophy in DC. But the US government is already spending money on economically questionable green initiatives. MMT gives politicians intellectual cover to spend even more. So of course, there’s potential for MMT’s influence to grow.

Climate alarmism will continue. Net zero is a laughably absurd goal. But many voters don’t seem to know or care about physics.

And MMT says that’s fine.

But there’s good news for any rational person frustrated by incoherent nonsense getting taken seriously because it tells people what they want to hear.

There is a silver lining to this madness.

The push for ever-greater amounts of spending is highly inflationary. That’s bad—but it’s predictable. This means we can make money if we speculate accordingly.

Monetary metals are an obvious beneficiary of MMT run amok. Commodities in general and just about everything real should benefit as well. Energy minerals should do especially well if MMT coupled with the green agenda channels more and more money into resource-intensive “renewable” projects.

The world may be facing “laugh or cry” choices today, but if you’re a savvy speculator, you may be able to laugh all the way to the bank.

KJ

 

P.S. Green or not, every energy solution requires copper. Many require silver. Thankfully, some governments understand we need nuclear energy. Investors can learn how to profit by subscribing to our free, no-hype, no-spam newsletter the Speculator’s Digest.