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Jan Krikke is a former Japan correspondent for various media and former managing editor of Asia 2000 in Hong Kong. He pioneered the study of axonometry, the Chinese equivalent of European linear perspective overlooked by Jean Gebser. He is the author of several books, including Leibniz, Einstein, and China, and the editor of The Spiritual Imperative, a macrohistory based on the Indian Varna system by feminist futurist Larry Taub.

FATAL FLAWS IN JOE CORBETT'S DEFENSE OF MMT

Jan Krikke

In a recent contribution to Integral World, my good friend Joe Corbet argued that the US national debt of $32 trillion is inconsequential and that Modern Monetary Theory (MMT) backs up this view. Corbett's basic argument is that a government issuing its own currency (by fiat) can never go bankrupt. It can always print additional money to cover its debt/expenditures.

If this theory is taken to an extreme, we could argue that the US government can print enough dollars to make every US citizen a millionaire. Needless to say, it can't, and the reason it can't is the blind spot of MMT. A case can be made that MMT has been used as a fig leaf for monetary malpractice.

Gold standard

At the Bretton Woods Conference of 1944, the victors of WWII agreed to make the US dollar the new world reserve currency. The dollar was pegged to gold at about $24 per ounce. The US government would change dollars for gold on demand. In 1971, President Richard Nixon took the dollar off the gold standard. The closing of the so-called gold window was "temporary" to calm the market. But the gold window never reopened. Why?

The US was living beyond its means. In the 1960s, the country fought two wars at the same time: the war on poverty (Lyndon Johnson's Great Society), and the war in Vietnam. Government spending went through the roof. Other countries became concerned about US spending and whether is was adhering to the Bretton Woods Agreement. Did the US have enough gold to back all the money it issued? France was the first country to take action. In the late 1960s, France sent a warship to New York to repatriate its gold. Like most other European countries, France moved its gold reserves to the US for safekeeping during WWI. Nixon, fearing other countries would follow suit, responded by closing the gold window.

The following chart shows the impact of Nixon's decision to end the gold standard and issue money by "fiat". With the brake on spending removed, US spending and debt increased far in excess of GDP growth. The price of gold increased, which is another way of saying that the value of the dollar decreased.

It stands to reason that few politicians objected to the increase in spending and the ballooning national debt. They could not get (re)elected by promising spending cuts or raising taxes. Deficit spending became the norm rather than the exception. During the 2008 financial crisis, it became clear the US government was not going to tighten its belt and was simply going to print its way out of problems. "Quantitative Easing", a euphemism for currency debasement, exploded. It went stratospheric during the Covid crisis. In 2020 and 2021, the US government issued more debt than it had in its entire history.

Interest payments on the national debt are now the second largest item on the US government budget, exceeded only by the $800+ billion defense budget. Being heavily in debt means that the US government now has to borrow money to pay interest on its debt.

China the inflation buster

Despite the excessive expansion of the money supply, US inflation has remained relatively low since 2008. One of the main reasons: cheap Chinese imports.

In the past two decades or so, the US has been sending about a billion dollars a day (!) to China to buy stuff (much of what is sold at Walmart and Amazon is made in China). China recycles its dollars by purchasing US treasuries and rolling out its global Belt and Road Initiative. But the gravy train is about to be derailed.

Despite cheap Chinese imports, inflation in the US has risen, making the dollar and dollar-denominated assets less attractive. If the yield on US Treasuries is three percent and inflation is 6 percent, investors lose three percent a year. For institutional investors like pension funds with a 10, 20, or 30-year investment horizon, that is a problem.

The latter also explains why Saudi Arabia is moving away from the "petro-dollar," an agreement forged by Nixon after he closed the gold window to assure the world would continue to use the dollar despite it no longer being tied to gold. Like China, Saudi Arabia is reducing its reliance on the dollar.

Reserve currency cycles

We only have to look at history to show that reserve currencies shows a clear pattern. They typically last a century, and all of them collapse due to currency debasement. This explains a renewed interest in gold. Last year, central bankers around the world bought a record amount of gold. They are concerned about the sustainability of US debt as well as debt in other G7 countries. Gold is "insurance" against collapsing currencies and will be used to recalibrate currencies in the event of a monetary reset.

MMT is not to blame for the enormous debt bubble created since Nixon closed the gold window. But it lulled many people in a false sense of security. It is true that the US doesn't ever have to default. But economists have predicted that the cost of servicing the national debt may reach $1 trillion. That represents an opportunity cost of mindboggling proportions.

"Central banks bought the most gold on record last year, WGC says", www.reuters.com, February 8, 2023