March 7, 2021: Inflation, MMT and Bitcoin 🖨️💸
Part 1 of a 2 part series on Inflation, MMT, and Bitcoin
This past week, the yield curve temporarily surpassed Curve Finance as the curve of people’s attentions.
With a large increase in spending, we’re seeing sudden interested in Modern Monetary Theory (MMT). You can imagine how a “deficits don’t matter” philosophy comports with $1.9T worth of stimmy. Bitcoin also frequently enters the conversation as a possible hedge.
This begins part 1 of a 2 part series examining these topics. Today we focus mostly on MMT and inflation, the next release focuses more on inflation and bitcoin.
The MMT Primer
The concept behind MMT is the premise that a currency issuing state like the US or China can print as much money as it likes. They have a monopoly on their money supply and choose when and how much to print. Government deficits mostly don’t matter in MMT. What are you going to do, default on an IOU to yourself? Enter the first common complaint:
In MMT, the rationale for taxation is not to collect revenue to cover deficits, but to actually give the currency value. The need to pay taxes creates demand for citizens to accumulate money in the first place. Absent taxes, there’s no need for money. With the threat of taxes, then the government can offer people money to perform services (jobs) and people will feel have to agree. It’s a bit clearer when illustrated by example.
Suppose a parent creates a million fun-bucks to hand out for performing certain chores. Intelligent kids would just roll their eyes and go back to watching videos on their phones. If the parents instead say “you must pay me 1000 fun-bucks per month or I’ll flush your phone down the toilet,” then suddenly the kids might hustle to work for fun-bucks. The parent doesn’t need the fun-bucks from the kids to cover deficits, but simply because the threat gives it value in the first place.
In the MMT universe, unemployment is a major concern, a sign that you’re not giving out enough fun-bucks to get your kids to work. If the child’s phone gets flushed because you didn’t post a chore list, that’s on the parent. Without providing fun-bucks for chores, unemployment spikes and there’s not a working economy.
The final piece of the puzzle is the elephant in the room: inflation.
According to MMT, inflation is the other important check on money printing. Currency issuers can keep printing only to the point where inflation doesn’t kick in. Each economy has a sort of natural internal speed limit based on its resources and productivity, and if it prints money beyond what the economy can support then inflation kicks in.
MMT explains the reason Weimar Germany and Zimbabwe failed was not printing per se, but that the “printing” eventually maxed out the internal speed limit of the economy. This speed limit is tough to deduce but revealed by inflation and unemployment rates. If inflation starts to run up out of control, it’s a sign that the government has been overprinting.
I find both proponents and critics of MMT tend to gloss over the inflation aspect. Proponents stop at the “deficits don’t matter” tagline and push a shopping list of government spending. A more honest slogan would be “deficits don’t matter while inflation stays in check,” which might make it more palatable to critics.
MMT probably has more merit than critics allow — it’s a unique perspective shift that has some decent explanatory power. It explains why some countries have functioned for decades without ever paying off their debt. It predicts why the EU has been such a calamity for the many countries who gave up their currency printing capabilities to the Euro factory.
In fact, if you look at Bitcoin miner transaction fees as a form of a transaction tax, MMT provides a convenient answer to nocoiners who ask what gives Bitcoin its value. It’s the fees that give Bitcoin value, per MMT.
Money Printer Go Brrrrr
Should anybody claim the Fed is testing MMT, it would not be accurate. MMT requires fighting inflation. MMT would not prescribe quintupling your money supply overnight without regard to inflation. We’re clearly going to test the money printing part of the equation…
Unfair to use a linear scale? If you understand log scales, it looks more frightening.
Need more scary charts?
We’ve essentially federalized the entire US economy at this point.
For further detail, Lyn Alden’s essay on money printing is a must read.
In the MMT universe, deficits don’t matter as long as inflation doesn’t spike. Well…
This is another reason why Jerome Powell’s statement this week on inflation was notable. It seems our landlords are installing a new Overton Window. Instead of ducking or downplaying the question of inflation, Powell admitted inflation is here. Our new official Fed policy is now to let inflation play out and see what happens, which runs counter to MMT.
The really fun rhetorical trick is to brand it as “temporary” inflation, whatever that means. Ripping somebody’s arms off is a temporary process but nonetheless leaves quite a mark. Delivering these comments so close to the one year anniversary of “two weeks to flatten the curve” was a clever nudge and a wink to what “temporary” inflation might mean.
Powell deserves credit for not trying to gaslight us about the reality of inflation. At least we can now have a productive debate about “how much” inflation versus “whether or not” it’s happening.
Tracking Inflation
The official inflation rate is a reasonably good measure, but critics poke a lot of holes in it. So now us plebs get to debate whether or not we are calculating it correctly.
For instance, although food costs are tracked, they are backed out of the official measure of inflation. Supposedly because these prices are considered too volatile. But food is pretty much the only thing I myself spend money on and therefore the only way I could see the effects of inflation hit my wallet. If I take a wheelbarrow of dollars to the store to buy bread, that’s not inflation. Incidentally, food prices are up 3.7% on the year, and expected to rise further:
Ultimately, defining what goes into the basket of goods has a major effect on inflation rates. The full list of goods includes fractional pieces of 800-some items they adjust based on changes in consumer behavior. Need to make inflation look lower? Just assume people buy more TVs.
One more extreme measure, the Chapwood Index, suggests cost of living may have already been rising as much as 12% in some metros over the past few years:
The Billion Prices Project was an effort to counter official Argentina government figures on inflation by crowdsourcing data on goods prices to provide daily indicator. The team behind the initiative is also tracking a spike in inflation:
What Can You Do?
Have fun getting poor. From this great article Pumping Iron by @CryptoHayes:
“The end game of rampant inflation is always war and/or revolution. Show me a regime change, and I will show you inflation. When you work your ass off only to stand still or get poorer, any “ism” that promises affordable food and shelter for the unwashed masses will reign supreme. If you are starving to death, nothing else matters except feeding your family. The symptoms of inflation are populism, social strife, food riots, high and rising financial asset prices, and income inequality.”
Do you have a plan to generate a return on your money as high as 25%? You’d better hope to get very lucky. Some Curve pools may get you there if you want to stay in dollar denominations. Many people draw a straight line towards Bitcoin.
Since we’re running up against our word count limit, we’ll push the deeper discussion of Bitcoin and inflation to part 2 of this series. The quick preview is that it’s not so cut and dry. If Bitcoin is expected to serve as a hedge against inflation, then why doesn’t its price move accordingly?
Yes we suck for not having fixed Curve Market Cap. Soon!
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I think someone stole his money and he Mad. Alfred e Neumann mad