Money buys nothing, while products always and everywhere buy products.
Which means governments that produce nothing can only spend insofar as they have taxable access to private sector production, not an active printing press. Without the former, they have no spending power. None.
The obvious requires stating firstly because Modern Monetary Theory (MMT) is having its proverbial 15 minutes. The latest outbreak of astrology asserts that governments can spend as they wish by printing fiat monies exchangeable for goods, services and labor. But for one problem: money once again buys nothing.
Production buys production, which is a reminder that governments don’t have access to money exchangeable for goods, services and labor because they have printing presses, but because they yet again have taxable access to money earned by private producers in exchange for production. There’s a difference.
Figure that most countries have a fiat currency, but as evidenced by the spending footprint of most governments not the U.S., the printing of those fiat monies in no way powers consumption. To believe otherwise, is to believe that the only reason governments not the U.S. spend so much less than U.S. politicians do has to do with a deep-seated Classical economic streak within non-U.S. politicians. No, not a chance.
Politicians exist to spend, but can once again only spend insofar as they have access to the exchange media that are an effect of production, and because they are, that other producers will accept in return for their own.
Applied to the U.S., the dollar doesn’t buy market goods because it’s printed more than the real, won, or bolivar, but because producers both in the U.S. and around the world view accept it in return for their own production. Put another way, if the dollar ever becomes quite a bit more unreliable than it presently is, consumption in the U.S. and the world won’t decline as much as consumption measured in dollars will decline.
Money that’s no longer trustworthy soon enough disappears from circulation. Which means if Americans cease producing for dollars, the circulation of dollars stateside and globally will plummet.
The simple, crucial reality is that producers, not governments, decide which exchange media circulate. That’s why so-called “money printing” without regard to production invariably results in the printed medium disappearing from circulation. Paraphrasing Adam Smith, the sole use of money is to facilitate the exchange of market goods, and the producers of those goods will only take “money” that exchanges for a commensurate amount of production.
This is all very important not just because of the impossibility that is MMT, but because economic thinkers who profess total disdain for MMT continue to promote the fiction that the Fed, or some kind of other in the federal government with access to the “printing press,” is somehow monetizing enormous amounts of federal spending and debt. It’s the anti-MMT crowd making a MMT argument. The argument is bogus.
Producers alone decide what money circulates, all based on getting products in return for the products they bring to the marketplace. Which is a reminder that the Fed not only can’t “print” demand, it also can’t monetize federal debt. In other words, if the U. S. ever finds itself reliant on the Fed to borrow, then it will have long before ceased borrowing altogether.
Originally posted to Real Clear Markets.
