My Turn: Money, wealth and balloon navigation

For the Monitor
Published: 2/24/2019 12:35:12 AM

Bruce Currie’s Feb. 17 Sunday Monitor piece (“The Deepest of Pockets”) put me in mind of the story about the lost balloonist who shouts, “Where am I?” to a man on the ground. The man answers, “In a basket under a balloon.” In his essay on Modern Monetary Theory, Currie, the man on the ground, offers some facts that are true, but they are useless or worse as aids to navigation.

His first observation is that the United States operates with a fiat currency, unredeemable in any hard asset such as gold. That’s true. His second observation is that, because the government can create money without reference to any specific store of value, Congress has the power to spend at will, effectively creating money. That is not exactly true but some advocates of MMT would have it so. From these two premises, he concludes that the U.S. government cannot go broke because it can always print more money to pay its debts.

This is where the balloonist comes in. The government can print money and use it to pay its nominal debts – the balloonist is in his basket. It cannot, however, force an unwilling market to accept that printed money if it perceives no value in it, nor can it show the balloonist how to get home.

MMT advocates (and Currie) argue that the government can always maintain a demand for its printed money by requiring that taxes be paid in its legal tender. However, were dollars not in demand for anything other than paying taxes, there would be nothing to stop taxpayers from converting some other asset into just enough dollars to pay taxes at the moment when they were needed, just as one buys but never holds euros when one uses an American credit card in France.

If we follow this idea to its logical conclusion, the government would have to raise taxes to 100 percent to create an economy-wide demand for otherwise unwanted dollars.

What underlies Currie’s misunderstanding is a confusion between money and wealth. Wealth is real goods and services that people need, want and are willing to trade (pay) for. Money is a brilliant invention for streamlining commerce and storing and measuring wealth, but it is not what makes us prosperous any more than wires make electric power.

Currie makes an oblique allusion to this fact when he dismisses the threat of inflation, but he skates by it at a good clip.

Currie goes on to propose that the federal government, by creating and spending money, actually creates wealth by stimulating activity through a multiplier effect. If this were true, Venezuela would still be the richest country in South America and Zimbabwean vendors would not be hawking billion dollar notes to passing tourists. New real wealth is produced by people creating goods and services that other people want and will buy. This predates government created money by centuries.

There is a good reason why we might be fooled into thinking that MMT predictions of an endless government cornucopia are correct. The U.S. economy is the largest, most dynamic and most diverse national machine for making wealth that has ever existed, and it is integrated with a world economy that, in total, is even larger and more dynamic.

The U.S. position in the world allows it the privilege of paying its debts in the world’s reserve currency (USD). This means that people in other countries and their central banks make a point of holding U.S. dollars to use in international transactions and protect against currency fluctuations. They continue to do this because the value of the dollar is relatively stable. Inflation comes from too many dollars chasing too little real wealth.

Our size and status allow our government to print money in excess of the increase in real wealth partly by allowing us to export inflation via our reserve status and partly because, up to now, the inflationary effect is a small (but not negligible) percentage of our total wealth.

But our government could easily blow it. The temptation to abuse this power is immense and is currently given force by those calling for massive government spending for all kinds of purported good works.

Currie’s suggestion that the spending, rather than incurring a cost and a risk, would actually be a direct benefit is no more credible than the idea that you can make yourself lighter by jumping up in the air. The current antics in Washington should be fair warning of how the political process would dispose of ever greater portions of the country’s GDP.

Useless walls, endless wars and rent-seeking special interests would overwhelm whatever real wealth is created by government spending, and the difference between that wealth and the money created would be inflation and waste, not prosperity.

No government, no matter how large and influential, is immune to the laws of economics any more than it is to the laws of physics. We cannot get out of the balloon’s basket.

We had better find a better way home than Currie has on offer.

(Christopher Carley lives in Concord.)

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