Will Inflation Sink MMT? Will Sanctions Hurt U.S. Dollar Supremacy?
Some brief thoughts on two important questions
Hello, friends,
Earlier tonight, a dear friend of mine asked me these two questions and I immediately knew what I was going to think about for the rest of my evening. I only had a few hours tonight before bed to write some thoughts down but I absolutely wanted to do so.
(1) Will inflation sink M.M.T.?
No.
(2). Will…
Ok, ok, I’ll say a little more on question one before moving on.
Inflation is an economic and political problem because a continuous rise in the level of prices reduces purchasing power and according to most mainstream economics, “overspending” can cause inflation. But, no, this current forty-year high inflation increase will not sink Modern Monetary Theory (MMT) because MMT is a descriptive theory of how modern fiat currency systems work. It can be said that any country that has a floating currency, monetary and fiscal sovereignty, and a fiat currency, which is a currency with no intrinsic value (this is all currencies, by the way, with no exceptions), is operating a modern monetary political-economy. And, just to be sure, as long as a government ensures that no other currencies can be used to pay taxes, you are on your way to having a modern monetary economy (Though, of course, many other variables matter too in terms of having a strong currency, including starting position; infrastucture; rule of law; types of industries, etc.)
But MMT does make some predictions, and when MMTers do so they tend to be correct. In fact, Stephanie Kelton has often written about how overspending can, in fact, cause inflation. But most people learn about MMT from it’s very vocal (and very rich) detractors instead of MMTers themselves. But, no, this current bout of inflation will not sink a descriptive theory of how money works because they are correct about how money works. Moreover, a low-probably event such as a global pandemic well into its third year can’t tell us that much about MMT, to be honest. Or at least, that is my opinion. Besides, there are worse things than inflation such as intentionally creating unemployment which the Fed has done before to rapidly “fix” inflation. Last time the Fed raised interest rates to do so, we experienced two recessions. At the time, Reagan’s economic adviser, Michael Mussa, understood this, correctly, as the Fed being willing to “spill blood, lots of blood, other’s people’s blood” to do so. Or as Kelton (2020, 52) puts it in her book on modern monetary theory, “to put it crudely, the Fed uses unemployed human beings as its primary weapon against inflation.” In terms of the well-being of people, inflation is not the worse thing in the world. We just don’t usually discuss it in terms of an equation or in terms of trade offs.
(2) Will sanctions hurt the U.S. dollar?
Though my friend didn’t explicitly include in his questions to me why he was asking this question, I suppose it has to do with the current sanctions regime and Russia’s war/terrorism in Ukraine. Before I began to read up on this latest debate, here is what I said to my friend, in a text:
The U.S. dollar has no real competitors and the U.S. Fed is like the world’s central bank. And every time there is an economic crisis, more dollars, not less, are sought after, including right now. The only possible competitors: euro, renminbi, and I wouldn’t bet on those against the U.S. dollar which is king. Still.
Even 20 years from now, the share of the currency basket will be only slightly different; and with climate change battering the world, inertia and network economics (hat tip to Adam Tooze here for the language) ensure that the U.S. will remain at the top.
It’s hard to predict anything longer than 20 years but certainly the U.S. only every comes out stronger when there are global crises.
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After I sent that text I went to my “GoTos” in this space and by that I mean one person because he’s fucking brilliant: Adam Tooze and his Chartbook. I was happy to see that he had recently written on this very subject. And it turns out another old friend (not literally for me; by old friend I mean “author I read a number of years ago for class”) recently penned an essay on this topic. In the Financial Times, Barry Eichengreen recently suggested that people might need to worry about the “stealth” erosion of the U.S. dollar. The evidence he cites is portfolio diversification, which, fair enough, is a fact. I like what Tooze writes in response:
“All of the non-traditional currencies that Eichengreen and his co-authors identify are very much part of America’s extended financial security system. They are all recipients of swap lines. If it came to the crunch in a confrontation with Russia or China who would doubt which side they would be on? Rather than seeing them as rivals or substitutes to the core dollar system is it not plausible to see them as extended buttresses of that system, providing options for diversification whilst continuing to benefit from the liquidity and sophistication provided by America’s financial markets.”
Tooze graciously links to another newsletter that makes a similar point. He links to a newsletter written by Joseph Politano, who is Financial Management Analyst at the Bureau of Labor. Politano makes two important points, the second point being subtle yet true. His first point is the main point and it’s about how untouchable the U.S. dollar is. This is worth a quote:
“The US Dollar’s position as global reserve currency is so strong as to be nearly unassailable. No other country has the proper mixture of deep capital markets, clear rule of law, massive economic size, and technological dynamism. The Chinese Renminbi is a much, much smaller proportion of global trade, foreign currency reserves, or global savings. If America’s idiosyncratic foreign policy is pushing countries away from using its currency, than China’s even-more-idiosyncratic foreign policy should cause countries to think twice before giving up the dollar. Nor are Russia’s stockpiles of gold or China’s ability to buy sanctioned commodities in any way substitutes for the decades of institutional legwork necessary to establish a reserve currency. China, for its part, has made exactly zero indication that it even wants to be a reserve currency issuer—as it comes with great responsibilities that the Chinese Communist Party does not want to bear. The dollar has been through much, much worse than this without losing its reserve currency status—and the implementation of sanctions against Russia will not upend the global monetary system.”
This newsletter really is a MUST read. The second point is subtle. But it’s also worth repeating: the Internet runs on sensational, bad news. Politano is strong here: “The internet runs on negative news—and the financial world is no exception. ‘The US dollar will likely continue its 70 year reign as global reserve currency’ doesn’t get clicks or sell papers, and so it doesn’t get written or shared. But that doesn’t make it any less true.”
Indeed. If it bleeds, it leads. And if it gets gold bugs or crypto quacks excited, you can be sure it deceives.
I’ll leave you with one of my favorite quotes about money ever:
“The process by which money is created is so simple that the mind is repelled”
– J. K. Galbraith
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Thanks for reading and sticking with me,
Patrick M. Foran