Over at the Mercenary Seeking Alpha page, the debate on Modern Monetary Theory (MMT) continues to chug along.
Like the Energizer Bunny, it just keeps going and going — 175 comments and counting. You can see them here.
I’ve tried to extricate myself multiple times, but keep getting pulled back in.
Below is an off the cuff thought experiment, dreamed up after hearing that “governments must run deficits” for the umpteenth time.
Tell me if you can see the flaw (or if you agree)…
Imagine it is the 22nd century, and all forms of government have been completely privatized. What was previously the country known as the United States is now territory 22A, run by GoverCorp.
GoverCorp is a publicly traded private enterprise. It conducts all the necessary functions of the old federal government we are used to, and negotiates four year contracts with the citizens of territory 22A including the right to physical and legal enforcement.
Govercorp does not issue or administer the currency, however. Instead there is a central clearinghouse run by another corporation, ClearingCorp, which handles transactions as a form of “credits” of major corporations like Wal-Mart, General Electric, and P&G (or their 22nd century equivalents).
The economy functions as it does today in a monetary sense, except everyone’s currency is backed by the “full faith and credit” of powerful Fortune 50 corporations. The various credits issued are completely fungible, based on a seamless system of exchange facilitated by ClearingCorp.
Meanwhile ClearingCorp, like GoverCorp, is also publicly traded and investor owned. ClearingCorp earns its profits by taking a tiny transactional cut — the equivalent of 1/100th of a cent — on every transaction conducted.
Now here are the questions:
- Why couldn’t this scenario theoretically work?
- In this scenario, why would it matter whether GoverCorp (the privatized version of government) issued debt (i.e. ran a deficit) or not?
- Furthermore in this scenario, why couldn’t the necessary “deficits” to expand or contract the money supply as dictated by the economy’s needs be handled by the private corporations issuing the credits (or banks issuing loans, i.e. creating new money as debt, against the same)?
Point being, from at least a theoretical standpoint we can reason to the following:
- No matter what, we still need a real economy. In the above example, productive wealth is embedded in the currency-issuing corporations (that presumably offer goods and services that people want and need).
- Governments do not “have” to issue deficits. Heck, governments don’t “have” to have a damn thing to do with the money supply at all. Theoretically they can stand aside from it and collect taxes in the manner that a public utility collects payments via negotiated bargain if need be. Apart from moral questions relating to freedom, fairness and social change, it is possible for government duties to be a purely administrative function.
Given the above, what the heck happened to Modern Monetary Theory, i.e. inviolable assumptions that governments “must” run deficits… that those deficits “must” grow with the economy and so on. Where did it go?
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