[MD] At MoneyDelusions we are under no delusion about what money is. It is clearly “An in-process promise to complete a trade over time and space”. It is only and always created by traders … not money changers or the governments they institute.
Here we examine articles that display obvious delusions and expose them. ZeroHedge is full of such articles. They recognize that the current money process is flawed, but they don’t know what money is. Therefore, they repeatedly propose equally or even more flawed alternatives. The [MD] Money Delusions annotations reveal and correct their confusion.
From ZeroHedge: MMT: Recipe for Revolution
Authored by Robert Wright via The American Institute for Economic Research,
Historian Stephen Mihm recently argued that based on his reading of the monetary system of colonial Massachusetts, modern monetary theory (MMT), which he cheekily referred to as PMT (Puritan monetary theory), “worked – up to a point.”
[MD] The Federal Reserve system we employ works up to a point. That point is 4% short of optimum … i.e. it yields a 4% annual inflation… on purpose. But worse, it enables an encroaching government that freely counterfeits the money.
One can forgive him for misunderstanding America’s colonial monetary system, which was so much more complex than our current arrangements that scholars are still fighting over some basic details.
[MD] What was so complex about it? Let’s see if he ever tells us. Hint: No he doesn’t.
Clearly, though, America’s colonial monetary experience exposes the fallacy at the heart of MMT (which might be better called postmodern monetary theory): the best monetary policy for the government is not necessarily the best monetary policy for the economy. As Samuel Sewall noted in his diary, “I was at the making of the first Bills of Credit in the year 1690: they were not Made for want of Money, but for want of Money in the Treasury.”
[MD] In a proper MOE (Medium Of Exchange) process, there is no “policy” at all. It is perfectly objective. The article tips its hand by the second paragraph. Samuel Sewall should have noted “I was at the ‘counterfeiting’ of the first Bills of Credit…” He alludes to money being created by something or someone other than government as being the norm. But gets that close and still doesn’t get it … that it is always and only created by traders.
While true that colonial governments controlled the money supply by directly issuing (or lendin) and then retiring pieces of paper, their macroeconomic track record was abysmal, except when they carefully obeyed the market signals created by sterling exchange rates and the price of gold and silver in terms of paper money.
[MD] Note use of the words “lending” and “issuing” but not the word “creating”. In a proper MOE process it is not “lended” nor “issued”. Money, being a promise, is “created” by the promise maker… a trader. It is “destroyed” as he delivers on his promise. If he doesn’t deliver (i.e. he DEFAULTS), his default is immediately mitigated by INTEREST collection of like amount. This guarantees zero inflation by the operative relation: INFLATION = DEFAULT – INTEREST = zero. He recognizes that money is ultimately destroyed (he says “retired”) but then loses it as he addresses the fictional “macroeconomic track record”.
MMT in the colonial period often led to periods of ruinous inflation and, less well-understood, revolution-inducing deflation.
[MD] A proper MOE process “guarantees” perpetual zero inflation.
South Carolina and New England were the poster colonies for inflation, in part because they bore the brunt of colonial wars against their rival Spanish and French empires. Relative peace and following market signals eventually stabilized prices in South Carolina.
[MD] Fails to elaborate by revealing that they were commodity based economies, and thus took the brunt of the “tariff” load that rewarded the money changers and funded the governments they instituted.j.. and put the load on the traders and their customers.
In New England, however, Rhode Island for decades was able to act as a “money pump” that forced inflation on other New England colonies until they abandoned MMT entirely in the early 1750s.
[MD] In a proper MOE process, “traders” are the only money pump. And they won’t pump promises they can’t see clear to delivering.
In New York, New Jersey, and Pennsylvania, by contrast, legislatures followed market signals and were never pressed as hard militarily as the buffers to their north and south were. They therefore did not inflate away the value of their paper moneys by issuing too much.
[MD] “Market signals”? Like wetting the finger and holding it in the air? In a proper MOE process there is only one signal. That is DEFAULTs. And proof that nobody gets it? Show me anywhere a time series of DEFAULTS. You can find innumerable time series for INFLATION and INTEREST. Why do you suppose that is? In a proper MOE process, only the exact correct amount of money is ever “issued”. It’s not subjective at all.
After the French and Indian War, however, the Middle Colonies suffered from a large deflation rooted in wartime excesses, structural economic changes, and new imperial regulations. Real estate prices plummeted and debtors’ prisons overflowed. The direct result was colonial unrest over the Stamp Act, which quickly escalated into a pamphlet war, a trade war, and then a shooting war.
[MD] All due to confusion of what money really is … and who creates it and why.
About the only time the colonial monetary system functioned effectively was when paper money circulated in tandem with full-bodied gold or silver coins (specie). When the government found itself in dire straits, as it did during the American Revolution, the value of paper money vis-a-vis specie slipped.
[MD] And here is the “monetary” nonsense… “in tandem with specie”. The last sentence should read “when the government counterfeited, the value of the money slipped”. This is obviously because they had no mechanism of linking defaults to interest collections for the automatic negative feedback mechanism needed for stability.
This was the market’s way of signaling that too much paper money was in circulation at the current price level and that further emissions would spark inflation. This is precisely what happened. Yes, America eventually won the war, but only after returning to a monetary system anchored by the precious metals.
[MD] The monetary system had nothing to do with winning the war or precious metals. What really happened is that the American trader prevailed in spite of government and money changer bad behavior.
While the prospect of returning to a more solid monetary anchor after the inevitable failure of MMT may intrigue some, the socioeconomic costs of hyperinflation would be enormous. With everyone’s savings destroyed, as in Germany in the 1920s and Venezuela today, the end result is impossible to predict, but undoubtedly thornier than rosier.
[MD] The “end result” is well known. You have a reset; responsible traders get screwed; manipulators and speculators walk; and it starts all over again. Institute a proper MOE process that knows what money really is and the problems are extinguished as long as it is employed.