Austrians and MMTers should be on the same side
By Rogue Economist
Austrians and MMTers should be on the same side. After all, both camps understand the relationship between money and credit, and both understand the full ramifications of having fiat money. They should be on the same side arguing against economists who argue that demand can be created by flooding the banking system with reserves, and both should be on the same side arguing against those who think that increasing inflation expectations is an effective way to get an already over-indebted economy to take on more debt.
As it turns out, these two groups are the most ardent critics of each other, thereby giving the mainstream enough bullets to shoot both of them both down with each other’s bullets. MMTers are shot down with the branding that they don’t care about inflation, while Austrians are shot down with being crazy gold bugs.
As I see it, both have a good understanding of monetary transmission, except each follows this understanding to two of its logical outcomes. Austrians believe that having fiat money in the economy will lead to continuous malinvestments, endless bubbles, and will eventually destroy the credibility of the currency. MMTers embrace fiat, and believe that it is precisely the government’s ability to spend fiat that enables it to offset the private sector’s need to save, to take over when the private sector is deleveraging, restructuring, or just plain fearful of investment, so that the economy does not spiral into cascading deflation.
MMTers are different from the mainstream because they distinguish between fiat being used to fuel government spending, which translates into actual income for the economy, and fiat being issued just to encourage people to spend today what they would otherwise spend at some future date. MMTers recognize that when a person is devoid of income, no amount of inflationary push will nudge him to spend money he does not have, or borrow money that no lender will ever prudently provide him.
But MMTers, just like Austrians, recognize that having fiat money could lead the private sector to extend more credit than is prudent during a boom, and this excess lending eventually leads to a ponzi scheme where the last person holding the now bust asset is unable to pay his debt, and the last person holding the bad debt loses his ability and compunction to lend some more.
Austrians, however, prescribe that the best way to handle a bust is to let it take its natural course, so that people who made bad investments lose, and those who plan to invest do so when the economy settles at a stable floor. MMTers, on the other hand, do not believe it logical for government to leave a private sector bust to itself, precisely because people who have just lost income will not be the right ones to start spending again, and investors who just lost equity are not the best ones to start investing again.
But regardless, both can look at the economy granularly, and see debtors and creditors, investors and investees. Mainstreamers only see buyers and sellers, and believe that just dropping money will solve the problem of non-existent buyers. Mainstream do not see how this money will be transmitted from fiat issuer to end consumer without aggravating consumer’s already heavy debt load. There is no such thing as balance sheet recession to the mainstream, no such thing as leveraging and deleveraging.
Austrians and MMTers see this dynamic, and so should take a common stand against the mainstream who can easily shoot them both down like fleeing rabbits. For my part, though, while I see how Austrians see the dangers of fiat, and therefore want to take it away from those who can issue it – from the government, by going back to the gold standard, and from the banks, by advocating a 100% reserve lending, I don’t share the same prescription.
As I’ve mentioned it previous posts, I don’t believe the gold standard is apt to our current level of economic development and population. I don’t believe 100% reserve lending addresses the needs of today’s economic reality, or ever did the reality of a growing economy at any time in the past. And I also believe that recessions cannot be left alone, particularly when private businesses are no longer willing or able to do their regular job of investing, producing, hiring, and selling. I do believe though that government should support a more organic revival of the private sector by supporting the local businesses who hire the most people in aggregate. It should also respect that a recession is the best way also to reverse and break the previous boom’s tendencies towards monopoly and concentrated market power. Government should not use fiat spending to perpetuate that status quo.
Fiat is now the reality. The best way to control politicians and bankers from abusing it is to strictly enforce macroprudential monitors and controls.
Rogue Econ has been a banker and financial consultant in several countries. He writes a blog called Rogue Economist Rants.