We are about the experience “the worst economic downturn since the Great Depression,” according to International Monetary Fund (IMF) Chief Economist Gita Gopinath. The coming economic downturn will be the result of the lockdown measures that were put into place by governments around the world to combat the spread of the Coronavirus.
As several central banks are switching on the printers in an attempt to stimulate the economy with a fresh round of quantitative easing, economic theory is brought into the forefront of public policy.
In this article, we discuss Modern Monetary Theory in today’s world and how Bitcoin (BTC) relates to it.
In a nutshell, Modern Monetary Theory, also known as Modern Money Theory or MMT, is an economic theory that suggests that governments that issue their own fiat currencies should print as much money as they need.
According to MMT, government spending is not constrained by funds coming from taxation and debt issuance. Instead, the contested economic theory suggests that governments can print as much money as they require for spending as they have a monopoly on the issuance of money.
Opponents of MMT highlight that “endless” money printing will lead to massive government debt and skyrocketing inflation.
MMT supporters, however, believe governments cannot default on their debt because they can print more money to pay for it. Additionally, they believe that inflation can be combatted with policy actions (such as taxation) and that it only really becomes an issue once “real resources” such as labor, capital, and natural resources have been fully exhausted.
Former Federal Reserve Chairman, Alan Greenspan, once famously said: “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”
While this may sound preposterous, in a way, he was right. When the US government debt moved toward its “debt ceiling” in July 2011, Congress passed the Budget Control Act of 2011 to increase the debt ceiling to prevent the United States from defaulting on its debt obligations.
While the decision to increase the debt ceiling was not paired with throwing on the central bank’s printers, it showed the government’s ability to create its own rules that are seemingly above the laws of the free market. And printing more money is one of them.
MMT is making a comeback but not everyone’s a fan
Additionally, the recent US stimulus packages, which involve the Federal Reserve printing money in an attempt to bolster the economy, shows that – to a certain degree – MMT is part of the world of modern economics.
While economists love to argue about economic theory as much as Crypto Twitter loves to argue about everything, MMT has found its way into economic policy actions to some extent.
However, that does not mean that everyone’s a fan. The list of notable economists who oppose MMT is arguably longer than its list of supporters.
Fed Chairman Jerome Powell, for example, recently stated at a Senate hearing: “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong.”
Similar views are held by the likes of former Treasury Secretary Larry Summers, former IMF chief economist Kenneth Rogoff, and Nobel Prize-winning economist Paul Krugman, who all disagree with the notion that printing an infinite amount of money cannot harm the economy.
The often-cited, albeit extreme example of excessive money printing is Zimbabwe. When President Mugabe threw on the money printers in 2000, Zimbabwe eventually suffered from hyperinflation, which led to the downfall of the Zimbabwean dollar less than a decade later.
While you cannot compare the economy of Zimbabwe with that of the United States, this case is a reminder of what increasing the money supply can do to an economy if left unchecked.
Bitcoin vs. MMT
Whether you agree with Modern Monetary Theory or not, what is clear is that Bitcoin challenges this economic theory.
The world’s leading digital currency has a fixed money supply and a deflationary issuance model. Its total money supply cannot be increased by a central bank and its issuance model cannot be altered by government policy actions. This lies in stark contrast to the fiat currency system, which is largely driven by government intervention.
As most Bitcoiners prefer Austrian Economics, it should come as no surprise that MMT is not a big hit among Bitcoiners.
Bitcoiner and partner at Castle Island Ventures, Nic Carter, wrote in a blog post that MMT is “a delightfully accelerationist atrocity […] according to which the State can ostensibly purchase unbound quantities of any good available for sale in its own currency, consequences be damned.”
While there isn’t much the Bitcoin community can agree on, the goal of creating “sound money” is shared by almost all. And for a currency to be sound money it must be scarce and free of state interference, which would suggest that Bitcoin is more sound than the US dollar.
In a Bitcoin-only world, MMT wouldn’t exist because you cannot simply mine more bitcoin than can be mined.