History is the most humbling of subjects. Wilfred M. McClay, Woodrow Wilson International Center
As I’ve noted, the central thesis of Modern Monetary Theory is that a government that borrows in its own currency can never default, because it can simply keep printing money to pay its debts. Hyperinflation, says MMT, can’t happen because as soon as dangerous inflation breaks out the government will simply raise taxes substantially, quashing demand.
To describe these ideas as being merely naïve would be, well, naïve. For one thing, as I’ve mentioned, the notion that a Progressive government would raise taxes on the middle class merely to make up for its own foolishness is outright silly.
In addition, you may have noticed that MMT skips right over the addictive quality of government spending. In the history of human governments, government spending has gone only in one direction: up. Every spending program quickly collects partisans, like you-know-what collects flies, and these folks will ensure that the program never ends.
Governments that engage in hyper-spending, as MMT advocates, are simply engaging in an even more addictive activity. We can observe countless examples throughout history of governments launching massive spending programs and keeping it up until hyperinflation destroys the currency and, in all likelihood, the government itself.
Almost always, there seems to be serious justification for the over-spending. The entire history of Latin America, for example, is the story, played out over and over, of governments trying to keep themselves in power by buying votes from the poor via huge spending programs.
The fact that these people are, in fact, actually poor, seems ample justification for the programs. After all, it’s much easier to borrow vast amounts of money and distribute it to the poor than it is to go through the hard slogging of building a growing economy that will, over time and much more surely, reduce poverty permanently.
Consider Venezuela, where staggering overspending by the Chávez regime has led to hyperinflation currently running at 10 million per cent per annum and a failed state.
Consider Argentina, blessed with many natural advantages but now in technical default on its debt – for the ninth time in its history and the third time since 2000. Inflation is running at 55% and the government is falling.
Or consider Brazil, a leftwing workers paradise a decade ago where vast government spending – mainly huge cash payments to the poor – was bankrolled by a Chinese-fed boom in commodity prices. This might have seemed fiscally responsible if you believed the commodity boom would last forever. It didn’t, of course, and when that bubble burst not only did the economy collapse and inflation skyrocket, it was also discovered that breathtaking fraud had been perpetrated. Former President Dilma Rousseff was impeached and convicted and former President Lula da Silva is serving a 12-year prison term. Meanwhile, Brazil has lurched far to the right under the presidency of former army captain, Jair Bolsonaro.
Or, leaving Latin America for a moment, consider Zimbabwe, where the government’s immense money printing to support its various wars, to line the pockets of Mugabe (who died recently-but-too-late) and his cronies, and to underwrite its failed agricultural policies, caused inflation to reach, in November 2008, 80 billion percent month-on-month and 90 sextillion percent year-on-year.
Granted that these were countries that were borrowing in dollars, not their own currencies, but the main point is that they demonstrate the addictiveness of government spending, and the massive addictiveness of massive government spending.
In any event, we don’t have to look far to observe the consequences of governments overspending even when borrowing in their own currencies: Athens, Rome, and Great Britain, just for starters. In most cases the overspending was used to deal with vastly overextended empires. It resulted not just in the usual hyperinflation, but also in the loss of each country’s reserve currency status, a harbinger of the decline-and-fall to come.
But just for the fun of it, let’s focus on Germany – specifically on the Weimar Republic, Germany’s first democracy, launched after its defeat in World War I. Colossal money-printing led, naturally, to hyperinflation: the mark, which had traded at 4.2 to the dollar in 1919, traded at 1 million to the dollar in 1923.
The resultant social instability hollowed out the political middle in the country, and power shifted to the radical extremes: the National Socialists on the right and the Communists on the left. By 1933 the Nazis had won and a few years later Germany launched World War II.
Sixty million people died in that war, including six million Jews, homosexuals and gypsies who were murdered by the Third Reich. When MMT goes bad, as it inevitably does, it goes very bad.
But before we leave our good friends the MMT theorists, let’s put Germany in perspective. Sure, it was a rising power in the 1930s and one of world’s largest economies. In 1935 all the major economies were still suffering from the Great Depression, but even so Germany’s economy was less than half the size of the US economy.
That economic mismatch helped Germany lose the war: even with the help of Italy and Japan, Germany proved to be no match for the US, Britain and the USSR.
So, yes, MMT caused a catastrophe not just in Germany but throughout the entire world. But suppose we were to implement MMT not in a rising-but-limited power like Germany, but in the most powerful country in the history of human civilization, a country whose military strength is estimated to be roughly seven times greater than that of all the other countries in the world combined, a country whose GDP is larger than that of Japan, Germany, India, France, the UK and Italy combined?
Wouldn’t it be interesting to see what sort of cataclysm MMT could wreak on that country and on the world at large? How curious are we?
Next up: The Worst of All Possible Worlds
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