What is a Bigger Alchemists’ Dream: MMT or Transmutation Into Gold?
Great news for all who oppose the House of Lannister’s rule in King’s Landing – the final season of the Game of Thrones has eventually begun, so the status quo in Westeros will be certainly challenged. Similarly, we have joyous news for all who dislike the mainstream economics – the new theory has recently joined the game of thrones among the economic theories after the Great Recession. The fresh alternative which is quickly gaining popularity is the Modern Monetary Theory (MMT). What is it and what would it bring for the economy and the gold market, if implemented?
The core message of the heterodox macroeconomic theory called MMT is that the government which issues its own currency and in which denominate its debts simply cannot go bankrupt because it can always issue money to pay off its debts. Hence, tax revenues are unnecessary while budget deficits are meaningless – after all, the government can print money to cover its expenditures.
Well, in a sense, this is true. Governments can print money, so it cannot be “insolvent” like private individuals. This is why we hear about hyperinflations from time to time – Venezuela being the most recent example. And this is precisely why the Westerners took this power away from governments and handed it over to independent central banks. Surely, the central bankers are not fully free from political influence, but they are definitely less likely to mindlessly print money.
The MMT acknowledges the risk of inflation, but it assumes that the inflationary genie can get out of the bottle only when the economy operates at its full potential. But even then we should not worry, as the government can curb inflation by increasing taxes. So we would have to pay more in both higher prices and in higher taxes – I do not know about you, but I feel relieved! Apparently, the supporters of the MMT have not heard anything about neither all the problems with the determination of unobservable potential production, nor about the stagflation, i.e., a simultaneous occurrence of unemployment and inflation.
The MMT is fallacious at so many multiple levels that it is impossible to examine it thoroughly in a short article. But we would like to point out one more fatal flaw: the fresh theory conflates money with capital. That’s true that the government has an extraordinary power to print money (however, in the contemporary monetary system, the commercial banks create the majority of the money supply), but money is not real capital. The banknotes or electronic records are not wealth – they are media of exchange. What really matters is the amount of goods (and services) we can afford. The government may pump any amount of money into the economy – but it cannot solve the problem of scarcity of resource and magically increase the pool of real capital goods, such as factories, trucks, computers, pipes, real estates, tractors, power plants, etc.
What would the implementation of the MMT imply for the economy and the gold market? As the theory calls for even looser fiscal policy, we could expect greater government spending and further increase in the public debt. It should be clear that gold would be among the biggest beneficiary of the introduction of the MMT. As the charts below show, the yellow metal, as the inflationary hedge, shone both during the stagflationary 1970s and during the rapid accumulation in the US public debt in the 2000s and 2010s.
Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.