Source: commons.wikimedia.org - dick clark mises
Modern Monetary Theory
The global financial system has been in intensive care for the past decade, with near-zero interest rates and significant asset-price manipulations via printing presses providing life support. Recovery is shaky, and given the facts, it's more fair to believe that the global monetary order has a structural defect. This is in the shape of "Modern Monetary Theory" (MMT), which has risen to prominence from obscurity.
A sovereign state that makes its own money, according to MMT, is not constrained by fiscal limitations. While this is undeniably true, MMT's argument is based on the notion that the government may and should spend as much as it wishes. Price inflation is the sole constraint. Proponents of MMT contend that by enacting solid employment policies, the government can achieve full employment, avoid the short-term trade-off between employment and prices, and boost the natural employment rate closer to full employment.
Source: the economist - otto dettmer
Under the modern monetary theory, the government of a sovereign state that issues its own currency does not rely on tax collection to fund its expenditures. Money is a state product that circulates as a result of government spending. There is no doubt that a fiat money issuer cannot go bankrupt since taxes are not needed to pay the budget.
So, since the government cannot go bankrupt or insolvent, why does it need to collect taxes? The short answer is no, it does not.
Government Doesn't Need Your Tax. It's a Form of 'Control'
In his book "The Seven Deadly Innocent Frauds," Warren Mosler, a well-known American economist, hedge fund manager, and politician, examines tax and the true role it plays in government solvency, referring to it as a "deadly innocent fraud."
Deadly Innocent Fraud #1: The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.
Fact: Federal government spending is in no case operationally constrained by revenues, meaning that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.
There is a very good reason why the government taxes us. Taxes generate a continual demand in the economy for dollars, and hence an ongoing necessity for individuals to sell their goods, services, and labor to earn dollars. With tax obligations in place, the government may buy goods with otherwise worthless money, because someone needs the dollars to pay taxes, just like the coupon tax on the children creates an ongoing need for the coupons, which can be earned by doing chores for the parents.
"Denationalization of Money"
Source: commons.wikimedia.org - dick clark mises
In his 1976 book, 'The Denationalization of Money,' Nobel laureate Friedrich Hayek argued that the government monopoly on money must be eliminated in order to end the repeating bouts of high inflation that have gotten more pronounced over the previous century.
In his book, he writes extensively about 'private money,' and how money, unlike law, language, or morals, does not have to be 'made' legal currency by government. Instead, he speaks of 'four defects' - inflation, instability, undisciplined state expenditure, and economic nationalism - that share a common cause and a common cure: the replacement of the government monopoly on money with competition in currency supplied by private issuers who, in order to maintain public confidence, will limit the quantity of paper issued and thus maintain its value.
Despite the fact that there have been multiple economic and market collapses in the previous 100 years, including 1929, 1937, 1973, 1987, 1991, 1997, and 2000, most people can undoubtedly relate to the most recent major event.
2008 Financial Crisis
Source: commons.wikimedia.org - gary dee
Western leaders' interpretation of the free market was influenced by intellectuals such as Milton Friedman, who believed that if things went wrong, they could step in, modify the system, and get things back on course. However, the Austrian school of economics, notably Hayek's worldview, claims that it was that arrogance that skewed the vision of the market economy, causing the 2008 economic disaster. To understand how governments, rather than markets, may have created the crisis, we must go back to the years preceding it.
January 2001, the Federal Reserve reduced interest rates because it was 'concerned' that the US economy was faltering. They lowered interest rates for the same reason that central banks usually do: to make it easier for businesses and consumers to borrow and invest. The Fed's decision to slash interest rates is seen as planting the seeds of a financial disaster. In reality, practically every government involvement in the market, such as bailing out failing enterprises, imposing trade restrictions, or manipulating interest rates, risks causing economic damage in the long term.
In the years after 2001, the Fed continued to slash interest rates, which contributed to a property boom that could not be sustained, and early in 2007, the US American housing bubble burst and the global financial crisis began.
Source: commons.wikimedia.org - respres
In reality, the Fed should not have been determining interest rates at all. This fundamental denial of the role of the state in market regulation distinguishes Hayek from other free market theorists, since he felt that markets would do a far better job of regulating themselves if governments would just leave them alone.
When the government fixes interest rates, it is a sort of price fixing, comparable to how the Soviet Union fixed food prices. The market, not the government, should determine interest rates.
The final question is, how would the market "set" interest rates or regulate itself without the possibility of significant market participants' corruption and manipulation?
Blockchain & Cryptocurrency
Decentralized Finance (DeFi), powered by digital money and built on blockchain, is the answer to the age-old conundrum of how a market can self-regulate without the possibility of market manipulation or corruption.
Let's start with the invention of Bitcoin, which happened in 2008. Following the 2008 financial crisis, a mystery individual or group of individuals known as "Satoshi Nakomoto" published a groundbreaking white paper that proposed a simple peer-to-peer electronic payment system that would eventually become Bitcoin. The embryonic blockchain technology underpinning Bitcoin has been lauded as having the same radical potential as the printing press or the Internet in the decade since its debut, in particular posing significant challenges to established banking industry.
Blockchain, in simple terms, is a digitally distributed, decentralized, public ledger that exists across a wide network. With the use of cryptography, a blockchain guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party. The notion is not new; cryptographers and computer scientists Stuart Haber and Scott Stornetta presented it as a research project in 1991.
The usage of blockchains has proliferated in the years following Bitcoin, with the emergence of numerous cryptocurrencies, non-fungible tokens, smart contracts, and, of course, decentralized finance.
Decentralized finance, built on a sufficiently decentralized and secure blockchain, provides a means for a market to fully self-regulate. Interest rates, for example, are automatically modified based on supply and demand, determined using mathematical algorithms on DeFi applications.
We can be confident that the system is transparent and truthful since everything is available on a blockchain at all times, including trade volumes, outstanding loans, and total debt, and none of it can be modified or manipulated. On these grounds, no government intervention is ever required.
Summary
Modern monetary theory supporters are correct in claiming that the sovereign state may create as much fiat money as it wishes, but this does not negate the law of scarcity. Money's value diminishes as it becomes less scarce, even if it remains the sole currency accepted by the state as a form of payment for taxes. Consider this for a moment: of the 750 currencies that have existed since the 1700s, only approximately 20% survived, and all of those that remain have been devalued. Consider the chart below.
In essence, the value of gold is not increasing; rather, the value of everything around it is decreasing. The same is true for Bitcoin.
So, the question is, does the existing system really work?
DISCLAIMER: The information contained in this article is for educational purposes only and does not constitute any form of advice or recommendation by Wheatstones, and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.