The Three Stages of Modern Monetary Theory

Stage One: Yielding to Dreamers

Some ideas are so bad they’re best ignored.  Like resentments – or stray cats – if you don’t feed them, they’ll go away.  Before long, they’re forgotten altogether.

That has been our approach to Modern Monetary Theory (MMT).  The idea’s so obviously foolish, reckless, and outright suicidal.  Why feed this dorkus maximus of economic thought?

Alas, there are times when promises of social utopia prove too intoxicating to pass up.  It doesn’t matter if the promises are absolute fantasy.  When hopes are diminished beyond redemption, any old falsehood will warm the hearts and soften the minds of otherwise intelligent people to ideas of pure madness.

After a decade of increasing wealth inequality, the masses have reached a moment of certain hopelessness.  Maybe the $1.6 trillion student loan crisis has something to do with the despair.  Maybe the 102 million Americans who do not currently have jobs are contributing to the angst.

Currently, people are after an ounce of hope they can latch on to.  Promises of the more abundant life have the greater populace yielding to dreamers, schemers, theorists, reformers, and scoundrels of all stripes.  A means to an easier softer way is in high demand.

Hence, fresh pitchers of Kool-Aid – like MMT – are being served up to meet this unquenchable thirst.  The usual cast of characters, including Alexandria Ocasio-Cortez and Bernie Sanders, are promoting MMT as a solution to all the downtrodden’s problems.  Ray Dalio, hedge fund manager extraordinaire, recently said MMT is “inevitable.”

Today we offer an explicit warning: Don’t drink the MMT Kool-Aid when the cup’s passed your way.  Here’s why…

Stage Two: Buyer’s Remorse

MMT, as you may have heard, offers booms without busts, money without limits, and a one way ticket to pleasure island.  The nuts and bolts of the theory state that a government that creates its own money, like the USA, cannot default on its dollar based debts.  Therefore, the USA can print all the money it needs to amplify the economy – debts and deficits be damned.

Should such overt dollar debasement lead to price inflation, MMT has just the solution.  Raise taxes and issue bonds to remove the excess money from circulation.  Taxes, you see, are not for funding government spending.  Rather, they’re for throttling back the money supply to attain the magical balance of growth and inflation.

MMT, no doubt, is a system for big government statists.  They can hatch boondoggles first, and leave taxation for later.  The whole theory, or lack thereof, is absurd.  Yet a growing base of supporters find it appealing.

What’s more, MMT is hardly modern.  In fact, it has been tried many times before…with a 100 percent success rate of failure.

Of course, Weimer Germany’s epic episode of hyperinflation in the early 1920s is one of the more memorable experiments with money for nothing.  But another instructive affair went down during the decade long French Revolution of the late-18th century.

Roughly 230 years ago MMT was tried by the strongest and shrewdest men that Europe had ever known.  France’s leading statesman of the day, a master orator named Mirabeau, a man with only the best of intentions, succumbed to the temptation of the printing press.  Once the Country’s economy and finances had been put on the MMT course there was no turning back.

Andrew Dickson White, cofounder of Cornell University, documented the French experience in his work, Fiat Money Inflation in France. Here is a brief account of the buyer’s remorse stage:

“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, had 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 for a time deluded, but were at last rudely awakened from this delusion.

“The plenty of currency had at first stimulated production and created a great activity in manufactures, but soon the markets were glutted and the demand was diminished.”

Stage Three: Plunder, Corruption, and Prostration

As the 1790s progressed, each downturn in France’s economy was countered with evermore issuances of paper money.  According to the slippery tenets of MMT, the French Government should have raised taxes to preserve the currency.  However, this is where the forgiving world of theory meets the forbidding world of reality.

With the economy gutted by all the funny money it was politically impossible to raise taxes.  Paper money issuances preceded short spikes in economic growth, followed by painful crash landings.  The wealth equality promised was exacerbated by greater wealth inequality.

Between 1790 and 1795 the price of flour increased 11,250 percent, and all other prices increased by a comparable amount.  By 1797 France’s currency was worthless and its economy in shambles.

White recorded the ugliness so that we may not repeat it.  Several choice excerpts follow:

“Now began to be seen more plainly some of the many ways in which an inflation policy robs the working class.  As these knots of plotting schemers at the city centers were becoming bloated with sudden wealth, the producing classes of the country, though having in their possession more and more currency, grew lean.

“In the schemes and speculations put forth by stock-jobbers and stimulated by the printing of more currency, multitudes of small fortunes were absorbed and lost while a few swollen fortunes were rapidly aggregated in the larger cities.  This crippled a large class in the country districts, which had employed a great number of workmen.

“Nor was this reckless and corrupt spirit confined to business men; it began to break out in official circles, and public men who, a few years before, had been thought above all possibility of taint, became luxurious, reckless, cynical and finally corrupt.  Mirabeau, himself, who, not many months previous, had risked imprisonment and even death to establish constitutional government, was now – at this very time – secretly receiving heavy bribes.

“The artful plundering of the people at large was bad enough, but worse still was this growing corruption in official and legislative circles.  Out of the speculating and gambling of the inflation period grew luxury, and, out of this, corruption.  It grew as naturally as a fungus on a muck heap.  It was first felt in business operations, but soon began to be seen in the legislative body and in journalism.

“And now was seen, taking possession of the nation, that idea which developed so easily out of the fiat money system; the idea that the ordinary needs of government may be legitimately met wholly by the means of paper currency; that taxes may be dispensed with.  As a result, it was found that the assignat printing press was the one resource left to the government, and the increase in the volume of paper money became every day more appalling.

“This system in finance was accompanied by a system in politics no less startling, and each system tended to aggravate the other.  The wild radicals, having sent to the guillotine first all the Royalists and next all the leading Republicans they could entrap, the various factions began sending each other to the same destination: Hebertists, Dantonists, with various other factions and groups, and, finally, the Robespierrists, followed each other in rapid succession.

“After these declaimers and phrase-mongers had thus disappeared there came to power, in October, 1795, a new government, mainly a survival of the more scoundrelly, the Directory.  It found the country utterly impoverished and its only resource at first was to print more paper and to issue even while wet from the press.

“Such […] is the history of the most skillful, vigorous and persistent attempt ever made to substitute for natural laws in finance the ability of legislative bodies, and, for a standard of value recognized throughout the world, a national standard devised by theorists and manipulated by schemers.  Every other attempt of the same kind in human history, under whatever circumstances, has reached similar results in kind if not in degree; all of them show the existence of financial laws as real in their operation as those which hold the planets in their courses.

“It ended in the complete financial, moral and political prostration of France – a prostration from which only a Napoleon could raise it.”

Thus goes the three stages of MMT; those pushing for it haven’t a clue of the fire they’re playing with.  Don’t yield to their lies.


MN Gordon
for Economic Prism

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17 Responses to The Three Stages of Modern Monetary Theory

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  2. Mike LoPresto says:

    Very good info that I’m pretty much familiar with. The question I have is HOW DO WE PREPARE.

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  10. Sounds like you have not read anything that goes deep into MMT.

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  17. Hans says:

    An excellent treatise on the failure(s) of MMT, Mr Gordon.

    It appears that each and every espouser of this theory has a
    different opinion of it’s functionality. I originally encountered
    this economic theory on, which was wholly endorsed
    by the website owner, Mr Cullen Roche. It was only after several
    years of debate, wherein he renounce the viability of this theory.

    I purchased the book “The 7 Deadly Frauds of Economic Policy” by
    Warren Mosler, an economist. I read it twice, as I started having
    misgivings regarding the workings of this theory.

    Hear is L Randall’s new packaged website and still defending MMT.
    His original MMT website became uninhabited; no one posted and
    Mr Randall did little himself.

    Another good read about MMT and the three main proponents.

    And then there is the Austrian view of this theory, of which I subscribe

    How I personally view MMT? It is the ability of governmental units
    to tax, spend and become debtors without any and all consequences.
    This is a modern day theorem for today’s liberal [leftist] economists,
    wherein the central government plays an all important role in the
    activity and function of the economy.

    MMTers, are indeed post Keynesian and much more.

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