Modern Monetary Theory Versus Bitcoin

A future Great Monetary Divergence

Today there are two powerful economic theories emerging: Modern Monetary Theory and Bitcoin.

While the core political conversation is still shackled to the rudimentary yet perpetual debate of Left vs. Right economics:

Two emerging and extreme theories are reframing the existing economic conversation as we know it. Modern Monetary Theory is the thesis and Bitcoin is the antithesis. However, both Bitcoin and MMT are united in their dedication to evolving the conversation beyond the intellectual prison of traditional liberal vs. conservative economics.

As discontent with the current political economy grows, the extremities grow heavier, threatening to break or change the framework as we know it. And as with any topic in the Modern Age, both topics are prone to high degrees of speculation, distortion, and mass confusion. Resulting infamy and hatred by any external political tribe goes on to feed that topic’s popularity and therefore power.

To add to the complexity, a Gordian knot pulls tight between the two as both MMT & BTC have tribal subsets fighting within to dominate primary definitions of their subjects. In other words, both are hives of animosity and groupthink as one prominent MMT scholar refers us to the original definition:

Communities of scholars working within a dominant culture, which provides its members which a sense of belonging and joint purpose but also renders them oblivious and hostile to new and superior ways of thinking.

While the common definition of Modern Monetary Theory is that “A country cannot default on debt denominated in its own currency”, some early proponents of MMT have outright rejected this core tenet. The problem is that many of these MMT supporters’ proposals are fairly rational when it comes to the specifics, but a larger public dialogue metamorphizes MMT into something unrecognizable. Bill Mitchell, another authority on MMT, goes on to claim that Modern Monetary Theory is not a revolutionary new system or drastic threat to the current establishment; it is the current establishment:

The reality is that MMT just describes the system that most countries in the world live under and have lived under since 1971

MMT merely describes the global economy today: the existing fiat currency system. Mitchell also elaborates the common core tenet stating, “Governments are not constrained in their spending by a need to raise revenue.” Furthermore, he states a platitude that is often also an anthem of Bitcoiners by proclaiming, “Currency has no intrinsic value.”

The popular definition of MMT has seemingly gone on to extrapolate such core premises to extreme lengths. Governments have been steadily growing debt-to-GDP across the globe, for half a century. That ceiling is guarded poorly by various political tribes of fiscal conservatives. In America however, the primary camps of Republicans and Democrats are united in determination to spend trillions more than revenue takes in. Thereby taking MMT to unprecedented new extremes.

By Mitchell’s definition, Modern Monetary Theory already lays the groundwork for the global economy. Popular and sensationalized elements of MMT in the modern media, however, seem to want to expand the debt more rapidly than ever before, to solve more grandiose problems.

In some regard, despite two temporary and harsh crashes this century, many elements of the world economy have enjoyed two extended periods of prosperity. Ballooning government spending, in unison with easy central bank monetary policy (historically low interest rates + growing trillions on central bank balance sheets), has provided stimulus for the economic landscape we know today.

Outside of MMT, classic Austrian-style economists believe that the stimulus of loose fiscal policy in the short-term will eventually lead to horrible long-term risks:

At the beginning of last century, unconstrained government spending + loose central bank policy + money printing set the equation for catastrophic societal consequences. If history rhymes, then the Great Recession of this century may have merely been a foreshock if global debt continues to swell.

As the credit leviathan of the Global Economy threatened to meltdown in 2008, governments rallied to sign a new lease on life for the system with the invention of quantitative easing, i.e. “money printing.” While such unconventional monetary action may have averted a Great Depression of the 21st century in the medium term, it may ultimately corrode the viability of capitalism on a longer timeline.

For those fearful of such a dystopian future, a theoretical lifeboat to the Financial Crisis marked its creative alternative with a message now hashed in digital eternum:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

Bitcoin, and its genesis hash, was the beginning of a digital alternative to traditional central banking+government spending, creating a currency that is independent of most of the typical machines of national economic monopoly.

Unlike government debt spending, or central bank decisions impacting the flow, access, and distribution of money across the globe, Bitcoin has programmatically restructured money as we know it:

Instead of governments arbitrarily shocking or inflating the supply of money (by spending, capital control, or changing interest rates), Bitcoin has introduced an alternative. Also known as a distributed ledger, or blockchain, Bitcoin is founded on ideals such as:

  1. Predictable & programmatic money inflation schedule
  2. Geographically unlimited & permissionless access

Ballooning government debt is historically correlated with hyperinflation and ultimate social misery. Although steady & predictable government debt growth may allow midterm prosperity, there may be a lurking risk that the system crashes harder once a real shock occurs.

In cases of hyperinflation like Venezuela today and pre-Nazi Germany in the past, populations of innocent people become economic hostages during hyperinflation. Theoretically, Bitcoin could become a universal economic escape hatch to allow individuals insurance against local economic meltdown. Anyone with internet access can potentially access this alternative store of value to guard their wealth.

On the other hand, Bitcoin is subject to extreme volatility and is still technologically limited. While holding promise as an alternative to a possibly corrupt legacy global economy, Bitcoin has political dysfunctions of its own that sensationalize the public.

Similar to MMT, the myth of Bitcoin can easily get out of control, and there are competing camps within the cryptocurrency sphere vying for control of the narrative. However, predictable and permissionless digitally native currency will likely prevail as Bitcoin’s narrative. Past the exchange hacks, scams, token hyperinflation and bubbles, the other elements of cryptocurrency may emerge later after Bitcoin, to further expand the scope of this new financial alternative.

It can be logically assumed that all MMT scholars, of all camps, would regard BTC as a theoretical nemesis. As opposed to MMT, BTC takes a drastically different philosophical approach to money creation and access. Allowing individuals an escape hatch against endless government debt may actually disable the financial monopolies that support MMT’s current fiat system.

Other more logical proponents of MMT, like Bill Mitchell, may applaud Bitcoin as an independent free-market alternative actually affirming MMT as he says:

“All of the imbalances in the foreign exchange market are resolved by the price of the currency fluctuating. What that means is that domestic policy instruments — the central bank and fiscal policy — are free to target domestic policy goals knowing that the exchange rate will resolve the currency imbalances arising from trade deficits, trade surpluses, et cetera.”

The free-floating currency foreign exchange system of today provides an existential check and balance on MMT. Bitcoin presents another extended option. Bitcoin is a versatile addition to the existing foreign exchange markets. An alternative that will become more viable if global government debt and central banking easy money is truly a long-term threat.

All of the world’s governments + central banks will be guilty in this regard. And if the world economy does face a reckoning, there will be no safe haven found amid fiat currency. So we will see what kind of refuge Bitcoin can provide in reality, if any…

The future of the world economy is being created by the evolution and divergence of both Bitcoin and Modern Monetary Theory on the fringes.

In the coming days, Modern Monetary Theory may be taken to its extreme by global politics; Bitcoin will raise an even more extreme alternative. Only time will tell which will prevail, or how the synthesis will emerge.

Charting the digital sea — Capitalism, data, and democracy.

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