Modern monetary theory – a self-defeating ideology

Econ Bro | Associate | Free Market Foundation | mail me |

Modern monetary theorists argue that nations with monetary sovereignty can never run out of money to fund projects. They can always issue more currency whenever they need it.

According to Modern Monetary Theory, a country has monetary sovereignty if it meets the following criteria:

• Controls its currency.
• Does not have debts denominated in another currency.
• Is a fiat currency not backed by any commodity.

Following these criteria:

• Togo does not have monetary sovereignty. It is part of a monetary union that has its currency issued by the central bank of the West African Monetary Union (BCEAO – L’UEMOA in French). Up until recent reforms, BCEAO was heavily influenced by France.
• Interestingly, France doesn’t have monetary sovereignty either. France yielded its monetary sovereignty to the European Union in 1999. That’s when it gave up the French Franc for the Euro.
• Nigeria has large dollar-denominated debts, so it has weak monetary sovereignty.
  America not only controls its own currency, but also has its debt in the US Dollar. It would be considered a monetary sovereign.

Modern Monetary Theory and sovereignty spectrum

We should note that MMT does not consider monetary sovereignty a binary concept. It is best to think of it as a spectrum of monetary sovereignty, with some countries having more and others less.

– Stephanie Kelton

According to MMT theorists, monetary sovereignty is not binary but lies on a spectrum. Some countries have more monetary sovereignty, and some have less. This means that countries that do not necessarily meet all the criteria for monetary sovereignty can still issue currency to fund projects, though with some limitations.

Despite South Africa’s dollar-denominated debts, MMT theorists believe it still has some monetary sovereignty. This is because South Africa has and controls its own fiat currency. This leads SA MMT theorists to call for issuing new currency to combat unemployment and other economic problems.

True monetary sovereignty

One cannot help but notice that on the MMT list of monetary sovereigns, prosperous countries make the top of the list, while poor countries rank at the bottom. It would appear that monetary sovereignty has more to do with the strength of the economy and of the currency than with the independence of a currency.

My conviction is bolstered by the fact that a currency can have sovereignty – as MMT theorists define it – and still be entirely worthless.

A currency is only as good as its purchasing power. So, if a country meets the MMT criteria for sovereignty and is worthless, I conclude that the MMT definition of monetary sovereignty is flawed. I therefore define a country with true monetary sovereignty as one with a strong economy and currency.

The US dollar, the world’s most sovereign currency, began to achieve global reserve status at the Bretton-Woods Conference. This partly happened because of its economic strength, its massive gold reserves (a symbol of wealth), and the dollar’s previous link to gold.

The dollar’s gold tether made it somewhat difficult to issue more of it without additional gold reserves. This implies that the limitation to dollar supply increases is partly responsible for its monetary sovereignty.

Monetary sovereignty is earned – not by having a non-convertible fiat currency or by not having debts denominated in another currency. It is earned by having a productive economy.

There isn’t a single country ranked as having high monetary sovereignty that isn’t a prosperous country. Coincidentally, all the countries that control their own currency but rank low on the monetary sovereignty spectrum are poorer countries. This is one of the things MMT theorists get wrong.

Modern Monetary Theory erodes monetary sovereignty

Perhaps the biggest consequence of currency issuance, especially as MMT theorists posit, is the price inflation that is all too common with it.

Whether or not money supply increases confer any benefit is contested to this day, but all economic schools of thought – including MMT – unanimously agree that it can cause a general rise in prices (price inflation).

The erosion of the Papiermark’s sovereignty

The Papiermark was the currency of the Weimar Republic after it untethered from gold. It was a fiat currency that met all the MMT criteria for monetary sovereignty. Yet, very few countries in all of world history have experienced comparative levels of price inflation like the Weimar Republic.

The issuance of the Papiermark eventually eroded its monetary sovereignty. It eventually became a worthless currency, not worth the paper on which it was printed.

The erosion of the Naira’s sovereignty – Nigeria versus L’UEMOA

By MMT standards, because their currency [XOF] is issued by L’UEMOA, Benin and other L’UEMOA countries have no monetary sovereignty. However, Nigeria controls its own currency (NGN) and has weak monetary sovereignty.

In August of 2012, one NGN traded for 3.2 XOF. Following MMT prescriptions, Nigeria issued more of its currency. Today, one NGN exchanges for 0.42 XOF. Despite having monetary sovereignty [as MMT theorists define it] over L’UEMOA countries, Nigeria has further weakened its monetary sovereignty by implementing MMT-like policies.

In conclusion

The conclusion is two-fold:

• Monetary sovereignty as MMT defines it is flawed.
• MMT policies erode monetary sovereignty.

If countries follow MMT policy prescriptions, they weaken their monetary sovereignty and make their currency worthless. MMT erodes monetary sovereignty – the very concept upon which it rests. It’s ultimately a self-defeating ideology.