Modern Monetary Theory vs. Bitcoin: Economic Theory Of The Future

 

A bit of a warning: today’s newsletter is a little dense, but I wanted to cover this topic as I find it highly fascinating.

 

I want to talk about two of the most powerful economic theories emerging today: Modern Monetary Theory and Bitcoin.

 

What’s clear: Modern Monetary Theory is the thesis and Bitcoin is the antithesis.

 

Modern Monetary Theory (MMT) is often defined by central tenet that, “A country cannot default on debt denominated in its own currency”, and yet some early proponents of MMT have outright rejected this core tenet.

 

Bill Mitchell, another authority on MMT, goes on to claim that Modern Monetary Theory is not a revolutionary new system or drastic threat to the current establishment; it is the current establishment:

 

“The reality is that MMT just describes the system that most countries in the world live under and have lived under since 1971”

 

So, MMT merely describes the Global Economy today, i.e., the existing fiat currency system. Mitchell also elaborates the common core tenet stating, “Governments are not constrained in their spending by a need to raise revenue.” And yet, he states a platitude that is often also an anthem of the Bitcoiners community, “Currency has no intrinsic value.”

 

To defend MMT, and despite two temporary and harsh crashes this century, many elements of the world economy have enjoyed extended periods of prosperity.

 

Doom and gloom you say? Things have never been better!

 

But we can’t ignore ballooning government spending, in unison with Central Bank policy (historically low interest rates + growing trillion dollar balance sheets), which has provided the stimulus for the economic landscape we know today.

 

Outside of MMT, classic Austrian-style economists believe that the stimulus of loose fiscal policy in the short-term will eventually lead to horrible long-term risks:

One of the best economic charts of all time, from Ray Dalio’s Bridgewater

 

We saw that in action nearly 100 years ago. Unconstrained government spending with loose central bank policy and money printing as the cherry on top set the equation for catastrophic societal consequences. If history rhymes, then the Great Recession of this century may have merely been a foreshock if Global Credit continues to swell.

 

Instead of letting the Global Economy meltdown in 2008, governments rallied to sign a new lease on life for the credit system, with the invention of Quantitative Easing, i.e. “Money Printing”, the culmination of 100 years of divergence exacerbated by Bretton Woods and leaving the Gold Standard.

 

While such unconventional monetary action may have averted a Great Depression of the 21st century for the past decade, it may ultimately corrode the viability of Capitalism on a longer timeline.

 

We know this story, and it’s why Bitcoin, and its genesis hash, was the beginning of a digital alternative to traditional Central Banking and Government debt, creating a currency that is independent of most of the typical machines of national economic monopoly.

 

Unlike government debt spending, or central bank decisions impacting the flow, access, and distribution of currency across the globe, Bitcoin has programmatically restructured money as we know it.

 

Instead of governments arbitrarily shocking or inflating the supply of money (by spending, capital control, or central banking), Bitcoin offers an alternative.

 

Bitcoin ideals set it apart from MMT:

 

Predictable & programmatic money inflation schedule

Geographically unlimited & permissionless access to the network

 

Ballooning government debt is historically correlated with hyperinflation and ultimate social misery. Although steady/predictable government debt growth may allow midterm prosperity, there may be a swelling risk that the system crashes harder once a real shock occurs.

 

In cases of hyperinflation like Venezuela today and pre-Nazi Germany in the past, populations of innocent people become economic hostages during hyperinflation. Theoretically, Bitcoin could become a universal economic escape hatch- to allow individuals insurance against local economic meltdown. Anyone with internet access can potentially access this alternative store of value to guard their wealth.

 

However, Bitcoin itself is subject to extreme volatility and is still technologically limited. While holding promise as an alternative to a possibly corrupt legacy global economy, Bitcoin has political dysfunctions of its own.

 

Similar to MMT, the myth of Bitcoin can easily get out of control, and there are competing camps within the Cryptocurrency sphere vying for control of the narrative. However, predictable and permissionless digitally native currency will likely prevail as Bitcoin’s narrative. Past the hacks, scams, bubbles or token hyperinflation, the other elements of cryptocurrency may emerge later after Bitcoin, to further expand the scope of this new financial alternative.

 

What interests me is that, as opposed to MMT, BTC takes a drastically different philosophical approach to government debt. Allowing individuals an alternative against endless government debt may actually disable the financial monopolies that support MMT’s current fiat system.

 

Other more logical proponents of MMT, like Bill Mitchell, may applaud Bitcoin as an independent free-market alternative actually affirming MMT as he says:

 

“All of the imbalances in the foreign exchange market are resolved by the price of the currency fluctuating. What that means is that domestic policy instruments — the central bank and fiscal policy — are free to target domestic policy goals knowing that the exchange rate will resolve the currency imbalances arising from trade deficits, trade surpluses, et cetera.”

 

If global government debt and central banking issuing easy money is truly a long-term threat, then the entire world economy is at incredible risk.

 

If the world economy does face a reckoning, there will be no safe haven found amid fiat currency. It is yet to be seen if Bitcoin is a safe harbor or simply another boat on the open seas.

 

What’s clear is that the future of the world economy is being created by the evolution and divergence of both Bitcoin and Modern Monetary Theory on the fringes.

 

In the coming days, Modern Monetary Theory may be taken to its extreme by global politics; Bitcoin will raise an even more extreme alternative. Only time will tell which will prevail, or how the synthesis will emerge.