It looks like we are ready for the next evolution of central banking.
Central Bank Digital Currencies, Modern Monetary Theory and debt monetization… all these things are already there.
And aside from Bitcoin there aren’t many ways to escape the system.
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Monetizing the debt
If you are reading this chances are that you have already heard of MMT. But let me give you a refresher.
MMT stands for Modern Monetary Theory although I’m not completely sure what is supposed to be modern about it.
The idea behind MMT is that a government should print as much money as it fancies and generate as much deficit as it wants to finance its spendings.
According to this monetary theory there is no downside in doing so.
Except maybe inflation.
But usually any mention of the risk of inflation in the MMT system is answered by “don’t worry about it, we big brains at the Federal Reserve will manage the issue”.
Sure, if you say so…
But what I find most fascinating with the MMT supporters is that they act as if it isn’t already what the government is doing.
I mean MMT is about monetizing the government debt.
And essentially to monetize the debt:
The US Treasury is issuing bonds.
Those bonds are bought by the Fed with money created out of thin air.
The Fed gives any interest generated by those bonds back to the Treasury.
So the Fed just gives newly created money directly to the US Treasury which is then using that money however it wants.
Now look at what’s actually going on in the market.
The US Federal debt is soaring in 2020.
And the Federal Reserve is soaking a lot of it by directly purchasing US Treasury bonds.
At the end of the day this amounts to creating money for the government out of thin air.
The MMT crowd might object that this isn’t enough.
Since the Federal Reserve and the Treasury are separate entities it is true that in principle there is no guarantee that the Treasury bonds will be bought by the Fed.
But at the same time the Fed is committed to QE infinity with very little concerns about inflation risks.
So isn’t it very likely that as the government is issuing more debt the Fed will buy an ever increasing fraction of it?
I think that’s the case.
The trend is already there:
Over time the Federal debt is being held less and less by foreign investors.
The US financial sector still owns the majority of the debt for now.
But the Federal Reserve is starting to play an increasingly large role.
We might not be already living in the dream world of MMT but we are pretty clearly on track for more and more debt monetization.
If you believe that central bankers will control inflation and that debt monetization won’t lead to a dramatic debasement of fiat currencies then good for you.
But it certainly doesn’t hurt to convert at least some of your cash to Bitcoin just in case...
Monopoly money
Talking about MMT, here is a thread about monopoly money… errrrr, sorry I mean the US dollar by the great priestess of MMT Stephanie Kelton:
Let me highlight some of the points made in this thread.
According to Stephanie Kelton the US government is outside of the game when it comes to money.
In that she isn’t wrong. The combination of the US Treasury and the Federal Reserve give the government a special power.
The power to create monopoly money or points...
Contrary to what Stephanie Kelton argued in another post there is no disagreement between the MMT and the Bitcoin community regarding how the system works.
Governments can print as much money as they want and choose to distribute it however they want.
The difference lies in what we think the consequences of unrestrained money printing are:
The MMT crowd thinks money debasement is not an issue while the Bitcoin crowd thinks it is.
The MMT crowd believes the economy can be run efficiently via central planning while the Bitcoin crowd believes it can’t.
The MMT crowd thinks central bankers can control inflation while the Bitcoin crowd thinks it cannot.
The MMT crowd doesn’t spend much time thinking of the global dynamic currencies while the Bitcoin crowd does.
It isn’t that Stephanie Kelton isn’t aware of those issues. She just dismisses them as being no big deal:
You already know what I think about that. In my opinion Modern Monetary Theory is too narrowly focused on trying to solve complex problems with centralized methods.
History is showing that decentralized systems are better at producing antifragile solutions and that’s why I’m betting on Bitcoin.
Escaping the dollar
We are seeing more and more efforts from various countries to try to escape the global dollar system.
Some like China or Russia are attempting to build a parallel system based on their own digital currencies.
But smaller states do not have enough weight in the global economy to go run this experiment. Instead they are directly jumping to the Bitcoin solution with their central banks attempting to use it as a reserve asset / global trade currency.
The latest addition to the list is Iran.
Digital Euro
The Central Bank Digital Currencies are moving forward.
How likely is it that all the citizens of the Eurozone will get a digital wallet directly at the European Central Bank in the years to come?
Looking at this thread from the president of the ECB the probability is growing by the day...
That’s it for today. If you have learned something please subscribe and share to help the newsletter grow.
Cheers,
Nick
The Ecoinometrics newsletter decrypts Bitcoin’s place in the global financial system. If you want to get an edge in understanding the future of finance you only have to do two things:
Click on the subscribe button right below.
Follow Ecoinometrics on Twitter at https://twitter.com/ecoinometrics.
Done? That’s great! Thank you and enjoy.