Stage One: Yielding to Dreamers
The allure of certain ideas can be dangerously deceptive, especially when they promise a brighter future. Just like a stray cat, if you ignore them, they may fade away. This has been our stance toward Modern Monetary Theory (MMT). Its principles seem so misguided and reckless that one wonders why we even entertain them.
However, when the promise of a social utopia tantalizes the masses, rationality often takes a back seat. In times of despair, even the most implausible ideals can appear appealing. After years of rising wealth inequality, many are grappling with profound hopelessness. The staggering $1.6 trillion student loan crisis and the 102 million Americans out of work only compound this feeling.
People are on a quest for a glimmer of hope. As a result, they are drawn to the optimistic rhetoric of theorists, reformers, and others who peddle quick fixes. The thirst for a softer, easier way of life has given rise to ideas like MMT, heralded by prominent figures like Alexandria Ocasio-Cortez and Bernie Sanders. Even influential investors like Ray Dalio have suggested that MMT is “inevitable.”
But here’s a crucial warning: steer clear of the MMT Kool-Aid when it comes your way. Here’s why…
Stage Two: Buyer’s Remorse
At its core, MMT promises endless prosperity without the accompanying hardship—an enticing proposition for many. The theory posits that because the government can create its own currency, it cannot default on dollar-denominated debts. Thus, it can print as much money as needed to stimulate the economy without worrying about debts or deficits.
Should this reckless monetary expansion trigger inflation, MMT offers a simplistic remedy: raise taxes and issue bonds to withdraw excess money from circulation. The purpose of taxes, in this view, is not to fund government expenses but to regulate the money supply to achieve a delicate balance between growth and inflation.
MMT appeals to advocates of larger government. They can initiate grand projects freely, deferring taxation until later. While the theory defies logic, it continues to amass a growing number of supporters.
Interestingly, MMT is not a novel concept. It has been attempted numerous times in the past—always with disastrous results. A notable example is Weimar Germany’s hyperinflation in the early 1920s. Yet another instructive case occurred during the French Revolution in the late 18th century.
Even 230 years ago, some of Europe’s most influential leaders fell prey to the temptation of easy money. Mirabeau, a prominent statesman of his time, believed that printing money would revive the economy. Once France took the MMT path, there was no turning back.
Andrew Dickson White, a co-founder of Cornell University, chronicled this episode in his work, Fiat Money Inflation in France. Here’s a brief excerpt capturing the essence of buyer’s remorse:
“Though paper money had increased in amount, prosperity had steadily diminished. In spite of all the paper issues, commercial activity grew more and more spasmodic. Enterprise was chilled, and business became more and more stagnant.
“Mirabeau, in his speech which decided the second great issue of paper, insisted that though bankers might suffer, this issue would be of great service to manufacturers and restore prosperity to them and their workmen. The latter were at first deluded, but were soon rudely awakened from this delusion.”
Stage Three: Plunder, Corruption, and Prostration
As the 1790s unfolded, every economic downturn in France prompted the government to print even more money. According to MMT’s flawed principles, raising taxes should have been the solution to preserve currency stability. However, the dire state of the economy made this impossible. Money printing created fleeting economic spikes, but ultimately led to devastating crashes and increased wealth inequality.
Between 1790 and 1795, the price of flour skyrocketed by 11,250 percent, alongside other prices experiencing a similar surge. By 1797, France’s currency became worthless, plunging the country into economic chaos.
White’s recounting serves as a crucial warning against repeating past mistakes. Here are several poignant excerpts:
“Now began to be seen more plainly some of the many ways in which an inflation policy robs the working class. As those scheming in city centers grew wealthy, the producing classes, having more currency, became impoverished.
“The schemes and speculations born during the inflationary period absorbed countless small fortunes, leaving behind a few bloated ones in urban centers. This crippled many rural workers.”
“Corruption was not limited to the business world; it permeated official circles. Men once deemed virtuous became luxurious and reckless. Mirabeau himself, who had once risked it all for constitutional government, was now secretly accepting bribes.
“What was initially a stealing from the population morphed into a deep-rooted corruption among officials. Inflation led to luxury, which in turn bred corruption, spreading like a weed.
“The belief that government needs could be met purely through paper money became pervasive, and soon the assignat printing press was the government’s last recourse. The volume of currency inflation escalated daily.”
“This financial system intermingled with a political regime, each worsening the other. After eliminating royalists and leading republicans, radical factions began to eliminate each other. This culminated in the rise of the Directory, which found the nation destitute and reliant on printing even more money.”
“Such is the narrative of a relentless attempt to replace natural financial laws with legislative authority. Every similar endeavor throughout history has led to comparable outcomes, signaling the indisputable reality of financial laws.”
“It resulted in the utter financial, moral, and political ruin of France—a situation only a figure like Napoleon could eventually resolve.”
Thus, we observe the three stages of MMT. Those advocating for this theory remain oblivious to the destructive fire they are igniting. Stay vigilant and resist the illusions they peddle.
Sincerely,
MN Gordon
for Economic Prism
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