MMT, NCT, or Reality?


I have gotten involved in an online discussion of the article Why Understanding Fiat Currency Matters For Scientists: We Are Being Pitted Against Public Health on the New Economic Perspectives web site.

I gave my opinion that it is not true that “money” created in the United States by the FED can only be put into circulation by issuing government debt. I was told that I was entering into a controversy between the proponents of Modern Monetary Theory (MMT) and New Currency Theory (NCT).

I was directed to a paper Modern Money by Joseph Huber. He explained the difference between MMT and NCT. I think that Huber agrees with the idea that he attributes to MMT:

Money does not need to be loaned into circulation, but can equally be spent into circulation, free of interest and redemption, i.e. debt-free.

He then goes on to point out myriad ways in which MMT misunderstands how to put this concept into practice and how NCT gets it right.

I think both theories have some truths while they ignore other truths. It mainly comes down to the difference between reality and theory.

The paper goes back and forth in describing the belief systems of MMT. It advocates NCT (new currency theory). However, it suffers from the problem that other systems (including MMT)  do in thinking of money as all one thing or all another.

Just like the particle and wave duality in physics. Neither electrons nor light are all particle or all wave. In actuality they have properties of both. In other words particle are idealized models of reality. Waves are also idealized models of reality. At this point we have no words to adequately describe reality. We make models of certain aspects of reality. These models are useful in different domains. Theorists can continue to search for more and more complete models that eliminate some paradoxes of the existing models. It is open to conjecture as to whether or not there will ever be a model for which we can never find an unexplained paradox. That does not stop us from using models, but we need to be prepared for black swans.

Some of the items in reality that neither MMT nor NCT theory seem to comprehend are examples from the shadow banking system.

When a person does a naked short sale of a stock, that person is “creating” shares of a stock with no authority from the issuer of the stock. While technically illegal, the volume of naked short sales is huge. There have even been many cases where the number of shorted shares is greater than the number of shares issued by the company.  If you happen to be an innocent owner of any shares in that company, you will think you own something of a certain monetary value.  That value will be even less “real” than stocks not subject to naked short selling.  The company can be put out of business through no fault of its own, but only due to the consequences of naked short selling.

As long as we are on the subject, what about the idea of counterfeit money and plain old fraud? If you have an economic theory that pretends these things do not exist, then you don’t have much of a complete theory at all.

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