A Money Tree on a Desert Island

The topic of MMT popped up yesterday. Modern Monetary Theory, also known as the Magic Money Tree.

Of course, all the arguments back and forth on such topics tend to get lost in theory. People really do love a good theory. Intellectuals support theories like normal people back a horse or choose their favourite football team. They find one they like, then stick all their money on it. "This one is right - this team is the best. All the others are bad."

Personally, I'm more a 'make do and mend' type person. I don't think any theory can map onto life perfectly, and more to the point, I think when people try to force the real world to conform to a theory - any theory - things start getting bad. So I prefer to look at things from the ground up. Don't get too heady.

Anyway, one thing I like to come back to when the topic of debt and printing money comes up is how what matters are the percentages, and how they are balanced, rather than the ever-growing numbers themselves.

For example..

(I get to use my favourite sandbox once again - the desert island.)

Imagine there are two people on a desert island, and there are 100 notes (bits of money). And each has 50. Then, they decide to print more money. Let's say, another 900 notes. So now they both have 500 each.

The situation remains exactly the same. The still both have 50% of the island's wealth.

Let's say, originally, when there were 100 notes in circulation, a coconut cost 10 notes, but now, thanks to inflation, with 1000 in circulation, one costs 100. There's no real difference. They can still just as easily buy a coconut. A coconut still costs one fifth of their wealth.

It's a bit of a silly example, but it goes to show that the amount of money in circulation isn't the issue. It's the balance. There could be a billion notes on the island, but if each possesses 50% it doesn't make any difference to the circumstance.

Back to reality..

So, in the wider scheme of things, it's about the balance of money. It's about relative wealth. The question should be, "Are things getting more balanced?" Not, "How can the economy possibly keep going with a zillion-billion-gajillion dollars in circulation?!"

Of course, the problems are compounded by debt. Money tends to be lent into existence. So a billion gets injected into the economy, but on the condition that the billion needs to be paid back. With interest. Naturally, the debt is therefore bigger than the injection. You could have zero interest debt, or negative interest, to mitigate this fact. However, there isn't really anything stopping a government from creating new money sans debt. A fresh injection of cash, out of nowhere, that doesn't need paying back.

So you could just stick £100 of fresh money into every individual's bank account to inflate away the ever-growing debt.

Just because this could be done, doesn't mean it doesn't come with downsides though. If you were a foreigner would you hold UK pounds, or accept them as payment, if you knew the citizens of the UK were just going to gift themselves another £100 as and when they liked.

So the debt does serve a function. It's a punishment or cost that prohibits people from inflating.

Again, personally, I think you have do whatever you need to do to balance things, and you need to do it in moderation. A little bit of this, a little bit of that. I'd be open to sticking a little bit of "out of thin air" cash (jubilee money) into everyone's bank account to help adjust the clearly crazy and unsustainable imbalances we have now. However, we're stuck in the middle between idealists. Believers in MMT, who would take this acknowledgement as a green light to print whatever they want. "Hey, we can print money! Let's just fund every socialist dream we've ever had this way!"

And people on the other side of the argument. Who want to go back to the gold standard; who are expecting the dollar to collapse at any moment. The irony is, these people understand the problems caused by inflation very well, and they understand how it unfairly benefits those with assets and not the regular wage worker, but, so wedded are they to the idea that printing money is just plain wrong, they'll never advocate for a fairer printing of money. Where the injected liquidity doesn't just trickle down from the top.