MMT Is Fake Economics

In this era of monetary fiction, one tends to read all types of undocumented and misguided views on monetary policy. However, if there is one that really is infuriating is the MMT science fiction.

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One of its main principles is based on a fallacy.

“A country with monetary sovereignty can issue all the debt it needs without default risk”

First, it is untrue. A report by David Beers at the Bank Of Canada has identified 27 sovereigns involved in local currency defaults between 1960 and 2016 (database here).

(source: Bank of Canada, David Beers)

David Beers explains: “A long-held view by some investors is that governments rarely default on local or domestic currency sovereign debt. After all, they say, governments can service these obligations by printing money, which in turn can reduce the real burden of debt through inflation and dramatically so in cases like Germany in 1923 and Yugoslavia in 1993-94. Of course, it’s true that high inflation can be a form of de facto default on local currency debt. Still, contractual defaults and restructurings occur and are more common than is often supposed”.

(source: Bank of Canada, David Beers)

No, a country with monetary sovereignty cannot issue all the debt it needs without default risk. It needs to issue in foreign currency precisely because few trust their monetary policies. Most local citizens are the first ones to avoid domestic currency exposure and buy US dollars, gold, or cryptocurrencies (now), fearing the inevitable:

Most governments will try to cover their fiscal and trade imbalances by devaluing and making all savers poorer.

“A country with monetary sovereignty can issue all the currency it needs” is also a fallacy.

Monetary sovereignty is not something the government decides. Confidence and use of fiat currency are not dictated by the government nor does it give said government the power to do what it wants with monetary policies. Citizens all over the world have stopped accepting the government-issued and denominated currency when confidence in its purchasing power has been destroyed after increasing the money supply well above its real demand.

That is why the Sucre in Ecuador or the Colon in El Salvador collapsed or why the Argentine peso and the Venezuela bolivar or the Iran Rial are widely rejected by local and international citizens. There are numerous fiat currencies that have failed or disappeared.  As Michael Sanibel writes, “a nation’s currency is not exempt from the laws of supply and demand, so the more that is printed, the less it is worth“. Currency collapses and failures are frequent, but, more importantly, even if some survive, its domestic and international demand is irreparably damaged.

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