I used quarters, dimes and pennies. Quarters were used as government bonds, dimes as mortgage-backed securities, and pennies as fiat money.
Modern Monetary Theory (MMT) has always bothered me in the caviler way it treats inflation. It recognizes the problem but assumes that it is easily managed. Here I present supporting empirical evidence that inflation is feature of the method used to create fiat money.
To find empirical evidence in a working economy, you first need a working definition of money, a source for creating money, a reason for expecting money to be used in the general economy, and then a theoretical link between money and prices. We will build a framework that will (hopefully) accomplish this.
Our framework will describe a system capable of including a nexus found between banks, money, and incremental access into the general economy. In the interest of brevity, we won't spend much time on definitions, depending instead upon the common knowledge of how all of us conduct business to provide most of terminology and associated relationships.
We try to keep it simple.
Advocates of the Modern Monetary Theory (MMT) emphasize that government never needs to default on it's obligations because it can always pay by using fiat money. What they intend to convey, although they may not realize it, is that they expect that government can pay using real fiat money that government itself creates. We will outline a conventional ontology, typified with a descriptive phrase, so that we can better understand the mechanics of MMT when making policy decisions..
Why is this important? MMT proposes government spending unburdened by limits of taxation, funded as necessary by the creation of money. We need a standardized way of describing the MMT vision of creating money, We'll propose a common sense catchphrase that starts the user down a pathway of common understanding.
Years back, a wealthy lumberman came into a small western valley and decided here would be a good place to start a large cattle ranch. There being no large cattle ranches in the area, he decided to buy up small farms. He proceeded to do this and built a ranch big enough to be noticed but not big enough to be self-perpetuating. Today the ranch is being subdivided for housing. Part has been sold back to the state for wildlife enhancement.
In the last post, we postulated a money creation event and then lightly explored responses from decision makers who had two different theories of money positioned in their minds. Disruptions to otherwise stable work patterns and resource allocations were found. Here we focus more carefully on the financial and economic forces at work when money is created.
The essay "Hard Money, Soft Money, and Economic Ontologies" described the differences between hard physical money and soft ethereal money in a very general way. It then went on to build on the concept that trade between ontologies depends upon physical money. Here we will use a model to demonstrate why this might be correct and add some reservations related to valuation over time periods.
We will build the model by using what might (at first) be considered a two sector model. To dismiss the model as a simple two sector economic presentation would be to miss the essence of the concepts presented. This model is about two ways of economic thinking driven by two different circumstances positioned in the minds of decision makers in each of two ontologies. We use the word ontology in place of 'sectors' to emphasize that the two groupings have, for good reasons, different time-related concepts of 'money'.
V. Ramanan gave my thinking quite a boost when he posted his comments on a recent critique of "neochartalism by Costas Lapavitsas and Nicolás Aguila at the Developing Economics blog titled Monetary Policy Is Ultimately Based On A Theory Of Money: A Marxist Critique Of MMT."
Ramanan's contribution to my thinking revolved around the idea that the international acceptance of currencies does not fit into a soft currency framework. This realization fits perfectly with my earlier thinking that society functions systematically with the private economy operating under a hard, Physical Money constraint at the same time that the government sector acts out a soft, Ethereal Money existence. As both Ramanan and C.L. with N.A. point out, international trade also functions systematically under a Physical Money constraint.
It turns out that this realization is an important part of building a better understanding of the effects we might expect as MMT style fiscal policies come to be practiced more vigorously around the world.
