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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick


April 10, 2019

“MMT is about using word games to make people believe that the U.S. can have Northern European levels of government spending without Northern European levels of taxation. It’s a great PR campaign because the far edge of the Democratic Party, particularly of the socialist leaning, very progressive left, is saying we can have everything, and pay for it with freshly printed cash. You don’t have to worry about taxes.”

– David McAlvany

Kevin:Well, as promised, Dave, you’ve done an awful lot of research on an old idea that a lot of people think is new – Modern Monetary Theory – just a new name for an old, failed idea.

David:And it’s no surprise that we are hearing this popularized and coming from the legislative halls of Washington, D.C. And it is a juicy offer because it provides something of a free lunch.

Kevin:You know what it reminds me of? In a way, you go back 500 years to Ponce de Leon, who was looking for this elusive thing called the fountain of youth. The thought was, if you could find it – and I think he was looking in Florida and that region – you could have close to eternal life.

David:There are still a lot of people in Florida looking for the fountain of youth.

Kevin:(laughs) That’s true. It doesn’t seem to be working.

David:(laughs) No. But what is unique about the Modern Monetary Theory crowd is that, go back 10-15 years ago and there was the idea that maybe we could have a basic minimum income, or maybe we should focus on guaranteed jobs, and that has been refined. If you look at the way their community has directed the conversation, now it is really focused on guaranteed jobs. This is sort of a world where justice and equality are extended to all. It sounds pretty good to be true, particularly when you think about the price tag.

Kevin:Dave, if this stuff worked, I would sign up – guaranteed jobs and free money and continued growth. Why wouldn’t any of us sign up except for the knowledge of the past?

David:And this is where, reflecting on the past, there is nothing new here. This concept has been rebranded as Modern Monetary Theory, and it is currently taking the nation by storm. But where does the influence come from? This is sort of the latest, greatest bright idea, and we can actually trace its record through at least three centuries, and if we wanted to take a couple of hours instead the limited time we have today we could actually track it back three millennia in terms of the same proposition and the same funding mechanism for the proposition—minor variations, but virtually the same thing going back three millennia.

Kevin:Dave, most people think of their money a little like they think of air – they never think of it. When I’m breathing I’m continually needing air. I just take it for granted that it is there. Money is the same thing. Most people just try to figure out if they have enough to pay the bills this month. They’re not trying to philosophically figure out what the heck money is until it’s threatened.

David:I’m training for an open water swim here pretty soon. One of the recommended tips for doing open water swims where there is lot of chop in the water and some waves and things like that is get used to not breathing. What that means is, when you’re in the pool training for it, maybe you ordinarily breathe every three strokes. Well, extend that to five, and then extend that to seven.

Kevin:And learn not to panic without it.

David:Exactly. But your body does panic without it, and you’re right, we do take for granted something like air.

Kevin:Until you can’t get it.

David:Exactly. Exactly. I think most people, when they reflect on money, it’s a practical reflection. It’s not a particularly philosophical one. It is things like, “How much of it do I have? What can it be exchanged for? What quantity of money represents a significant amount of wealth?” And then maybe, and this verges on the philosophical, “How does the steward of such wealth protect it? How do you put it to good use?”

Kevin:Look at the person in Venezuela. They probably took their money for granted, just like they did air, until all of a sudden their money didn’t buy anything.

David:Of course, being a student of philosophy, maybe I tend toward the philosophical question, but there is a more philosophical question, one that affects all of us every day. The question is, “What is money?” We did a video maybe three or four years ago, and you can find it on YouTube, called “What Is Real Money?” But there are several questions when you are thinking about what is money, and the simplest is this: What do you buy things with?

To be more specific, it is a quantity of some physical asset. It is divisible. It is useful in the exchange for goods or services. And the reality is, through time, many things have been experimented with. Many assets have been tried in that regard. Over thousands of years you have this trial and error, and through that trial and error, gold and silver proved to be, by far, the best options.

Kevin:It is interesting, looking back just at the last century, bars of soap have been used as money. Cigarettes in prison have been used as money. Vodka. Klaus Buecher told me when he was in Germany during the war, after the war when the Deutsch mark collapsed, Vodka was used. The problem is, central banks don’t store a third of their reserves in cigarettes or Vodka, but gold, they do.

David:Right. So you have the added value of a concentrated form of wealth, something that doesn’t erode or go away. There are lots of reasons why gold and silver became the best options, but you boil it down to relative scarcity and the endurability of precious metals, and that elevates them above the options. So again, back through the list of things – shells, feathers, agricultural commodities, which obviously don’t store very well, but even things that do last a little bit longer – bronze, copper. And then we have paper and certificates which have a long history as well, but not as the most reliable means of exchange and store of value.

Kevin:We’ve seen gold used as money, we’ve seen gold and silver, here in America, used as money. That was called bimetallism.

David:There is some debate between two camps, focusing either on exclusively gold backing, or gold and silver backing, and the populists of the time liked the idea of an easy money policy. And they got more easy money by having something that was easier to access, which was silver. So the bimetallist argument played out in Frank Baum’s story, The Wizard of Oz.

Kevin:It is interesting, in the book The Wizard of Oz, Dorothy was originally wearing silver slippers, walking on the golden road.

David:(laughs) Again, these ideas have a long history, the gold backing, the gold and silver backing, and some would argue that value to that kind of a monetary system is intrinsic to precious metals. Others maintain that the value is related to the quantity of labor needed to produce it.

Kevin:That is sort of the bitcoin argument, isn’t it? The quantity of labor – that’s the main thing that they lean on.

David:That’s right. So I think cultural consensus over the millennia is that metals are, indeed, precious. So the gold monetary system has stood the test of time around the world. It has endured beyond any experiment of a purely paper variety. And accordingly, we have the abandonment of our metallic standard, and we have seen a significant cost of that. One of the things that we mentioned last week is this idea that there once was a 20-to-1 exchange ratio between the dollar and an ounce of gold. Then with the devaluation in 1933 it went to 35-to-1. And now if you do the math it’s north of 6,000-to-1 in terms of the exchange rate of one ounce of gold to an inflation-adjusted – be clear on this – number of dollars because of the devaluation we have seen in the price of gold. What that argues also is that gold at $1200-$1300 is undervalued relative to its inflation-adjusted price.

Kevin:It also shows me – you mentioned the abandonment of the metallic standard. Well, that was just an official abandonment.

David:And what has changed through time is now that we have a larger quantity of dollars in circulation the limit was 20-to-1, the limit was 35-to-1. Now, in terms of the quantity of dollars in circulation we have over 6,000-to-1. There is no limit as to what we can print or create. So this is the story of a gradual devaluation. America has done this, moving away from the metallic standard, in stages from 1922 with the new gold exchange standard, 1933 with the out-and-out devaluation under FDR, and then finally in 1971 with the end of the Bretton-Woods agreement.

Kevin:You talked about the abandonment of the metallic standard but that was just the official abandonment. In other words, the government abandoned the metallic standard, but gold continued to hold its value. I think that is a key here. A couple of weeks ago, we talked about how you paid for a haircut in gold, what would have been 50 cents worth of gold 100 years ago, now is 33 dollars’ worth of gold, but it was the same weight in gold. I think part of that official abandonment comes from blaming gold for the great depression. That was one of Ben Bernanke’s main theses. We’re just going to go ahead and blame gold for the Great Depression, and that is commonly accepted in the economic community to this day.

David:And the idea there is that you have a restraint on liquidity. And what you need in a time of crisis is greater liquidity, but you can’t do anything to solve that problem, a liquidity constraint, because gold is naturally constricted. So that is the argument – “Look, we wouldn’t be in this problem if we had had more money to throw at the issue. What that doesn’t address is what happens if you have all the money in the world to throw at a problem. That may solve a liquidity crisis, but it doesn’t necessarily solve any other crisis. In fact, it may cause a series of crises thereafter.

Kevin:But don’t we have a long history of experiments of trying to remove those restraints?

David:And I think this is where we talked a little bit about metals and bimetallism where precious metals are sort of valued as a core to the currency. Paper currency alternatives also have a long history. You look at paper money experiments and they date back to ancient China, and if you’re looking at non-gold credit claims, this goes back to Mesopotamia where it could be argued that these money-like qualities associated with clay tablets which show who owes what to whom, they date back even further to ancient Mesopotamia.

Kevin:Speaking of that, even in Greece a few hundred years before Christ, there was a law given for anyone who would try to take the money off of the silver standard would be killed. It was a death penalty to remove the money from the silver standard. Well, guess where that came from? They had removed restraint before. They went through a hyperinflation and a collapse, and they realized you can’t do that.

David:That’s what most academics don’t appreciate is that there are social and political ramifications which can be the undoing of a nation when you begin to toy with the value of the currency. Yes, in the short run you can throttle the advantages of liquidity, but in the long run there are things like – again, you mentioned the case in Greece, they took it so seriously, having an established value for a currency. And the only reason they did that, the only reason they codified it…

Kevin:It came with pain.

David:Exactly. You see that from a generation to generation basis. There is a generation which cares about a certain set of values, but they only are committed at a deep level based on their personal experience of tragedy and pain. Notice that the central bank in Germany has had a deep commitment to stable value and they are the curmudgeons in Europe.

Kevin:That’s because they destroyed their currency twice in the 20thcentury, completely.

David:That’s right. So they have this deep, visceral, almost pain memory. It’s like, “We can’t go back to that, we don’t want to do that. That’s a bad idea.” So the value of money – let’s go back to the paper issue and the experimentation with paper currency alternatives, because you define the value in money differently. It’s not intrinsic, it’s not socially agreed upon, and it’s not according to the labor that goes into its creation.

Kevin:If you’re trying to sell the paper side of things, the no restraint side of things.

David:That’s right. So the value of money in this view, and this plays into MMT, is that value is assigned by government, and it sustains its value because of the government’s power to tax. So you say, well, we’re never going to go broke because we can always increase taxes. So with the power to print, and not being restricted by a scarce commodity resource to back the currency, nations that have tried these experiments have all watched them fail as the increase in quantities of money ultimately compromise quality.

So again, the increase in quantity ultimately compromises quality and leads to the currency extinction events we associate with inflation. So this paper money system referred to as fiat money is also known as chartelism. So this is where, again, MMT is not new, we’ve known chartelism and its various iterations through the centuries, and even through the millennia.

Kevin:So here is a pop quiz for you. Name one single occasion, since it has been tried so many times, where it was a success.

David:Because it hasn’t worked in the past doesn’t mean it won’t work this time. That is the idea – this time is different. Maybe it didn’t work in the past but a new name has been given to the old school of chartelism and that is Modern Monetary Theory, or MMT for short. That is what we mentioned earlier. And it focuses on the state’s role in creating money. And it promotes the idea that because the state has the power to tax, because the state has the power to print, because the state issues debt in the same currency that it prints, we should not be afraid.

We shouldn’t be of high levels of debt, we shouldn’t be afraid of deficit spending. In fact, under these conditions, they would argue, it is impossible for a government to become insolvent. That is a huge claim, but that is one that goes in lockstep with the MMT theory – if you can print your own currency, and you can issue debt in your own currency, it is impossible for a government to become insolvent.

Kevin:If you look at the proponents of the MMT, they are also talking about other things that don’t seem likely to actually be able to happen. I’m thinking the Green New Deal.

David:Yes, well, if we all had our wishes, right? And if wishes were horses, guess what? Beggars would ride. This is the reality. Today’s proponents of MMT mix economists and social justice warriors in terms of who is involved in it, and they define a range of spending initiatives – you said a Green New Deal.

Kevin:Yes, 88 trillion, I think I read, was what the Green New Deal actually would cost.

David:And then you have Elizabeth Warren’s idea of health coverage for all, a mere 93 trillion to cover that. Universal basic income, making sure that everybody has something coming in every month, and maybe gets to pursue the good life with greater free time. It’s like Thorsten Veblen’s theories of a leisure class, except it is not for those who have money, as in an excess of money, it’s for those who have enough to go spend and experience leisure.

Kevin:But you can see where this sells to the person who thinks, well, maybe you can print all the money you need.

David:They’ve moved away from arguing on UBI, Universal Basic income. They have put more emphasis on job guarantee programs that eliminate all unemployment. That is one of their key focuses now. And they are basically saying, look at the wealth or poverty of a nation. Why would you have anyone unemployed? These are resources which should be utilized and it is time to pay someone something for doing something.

Kevin:Well, it’s excellent PR, though, for the people who seem to be discredited right now.

David:Well, discredited or not, I think MMT solves the PR and marketing problem for progressives, which is, really, how do we pay for this stuff? Because the MMT crowd is providing a creative approach for taking care of the old issue – back to this idea of a free lunch. Come on, we all know that there is no such thing as a free lunch, so who actually pays for the free lunch? With their plan, there is no need to raise taxes. There is no concern about increasing debt. And those are the issues which become politically contentious. From the fiscal side, you have the fiscal hawks who don’t want to see an increase in debt. From the constituents of the upper middle class and the middle class, these are folks who would say, “Raise taxes? Are you kidding me? We do all of the working and bleeding and dying in this country and you want us to give even more?” So again, we’re talking about political contention which goes away if you just say, “Hey, listen. We can borrow all we want. We can spend all we want.”

Kevin:“As long as we can print all we want.”

David:That’s right, because if you are borrowing in your currency, you can also determine the supply of currency units to pay back that debt. If you control the printing press, so the argument goes, you can pay for anything, including amount of existing debt, no reason to worry about the 22 trillion dollars in debt. What a passé idea? Why have you been concerned in the least about that debt? All you have to do is hit “command P,” the print function, and you have all you need.

Kevin:Couldn’t we also call that legal counterfeiting? Let’s pretend like you and I are playing a game of monopoly, and I’m a player that has a certain amount of money. You’re a player that has a certain amount of money. That’s how the whole game works. Except I can continue to print money. Every time I want to buy a property I just print more and more money. Not only is that a game that will fail, the currency will fail, because at some point I lose credibility.

David:I think that is really the issue, that ignored in the proposal by the chartelist crowd, the MMT crowd, is the issue of maintaining credibility,

Kevin:For the currency.

David:At the front end, let’s just give them, for the sake of argument, the benefit of the doubt. You are assigning an official price. Great. You just assign an official price by mandate, the government says, “These currency units are worth X, Y and Z. Assigning an official price is different than maintaining a stable value through time. You have to assume a high degree of control in the system for price-setting to work.

A public policy blogger, Matt Brunick, actually quite socialist in his leanings, if you get a chance to read any of his things, but this is interesting. He says this: “MMT is about using word games to make people believe that the U.S. can have Northern European levels of government spending without Northern European levels of taxation.” We go back to this idea – it’s a great PR campaign because the far edge of the Democratic Party, particularly the socialist leaning, very progressive left, is saying, “We can have everything, and pay for it with freshly printed cash. You don’t have to worry about taxes.”

Kevin:Let me throw this out to you. Let’s say that we’re in a command and control environment. Let’s say that we are in a sphere that is sealed. In other words, no one else has to give credibility to our money. We’re basically told the value, we’re in a system that has to use that value. I’ll tell you where I’m going with this. There was an experiment with something called the biosphere down in Arizona. It was like an enclosed greenhouse but it was to produce its own oxygen from inside.

Now, it didn’t work. One of the past residents of the biosphere looked at the people inside and realized they were just slowly suffocating, so they broke the window to get some oxygen in. It’s very hard to actually have an enclosed system. But we know that the dollar can’t have its own value in an enclosed system because we need international trade. How do you keep international credibility during a period of time of modern monetary theory?

David:You do have this advantage in a command and control environment, you can use declarative statements to establish worth.

Kevin:In a sealed system.

David:Right. But you also have to have the power of coercion in order to maintain a set established price. So you have to have an enforcement mechanism and usually that is a high penalty.

Kevin:And a captive audience.

David:That’s right. Otherwise the market will vote, and the market will weigh that price that has been mandated, and weight it on a scale of risk and reward. And the price won’t stay put, even if that is movement unofficial in what we would call the black market. Currencies have always been, and will always be, a game of confidence. And so in that game of confidence you have the willing participants, and they represent a vote of confidence, or those that can be corralled and cowed into using it by force.

Then you have the unwilling participants that will opt out, or can opt out – can – maybe will is more appropriate. But that is a vote of no confidence when they opt out. And then you have values rise, obviously, as a reflection of confidence, and they fall as a reflection of the failing of confidence, as owners of the asset or of the currency abandon that and it is reflected in the price.

Kevin:I’m looking at Russia last year. Russia started voting against the dollar without really telling anybody. They started selling most of their treasuries. Russia has already voted against the dollar, maybe looking ahead at some changes that they see coming down the pike. But in hyperinflationary periods, that is exactly what is happening. People are voting against that particular currency. They are exiting the currency.

David:You remember we were in Argentina in 2014 and the official exchange rate was something like 12-to-1, except the street exchange rate was more like 18-to-1.

Kevin:They wanted our dollars, and they were not going to be traded at the official exchange rate. They wanted out of their own currency.

David:Right. So they called it, in Argentina, the blue market. But the reality is, what we are talking about is the black market emerging to tell you what the actual price is. The street rate trumps the official stated rate, the mandated rate. So you have the Kirshner government who had established and mandated the price and yet everybody knows it is unrealistic.

Kevin:It was meaningless.

David:So now we have a 46-to-1 exchange rate with the currency down in Argentina. It has continued to deteriorate over the last four to five years. To your point, the history of super- and hyperinflations – these are periods marked by a delegitimizing process where the official assigned value gets second-guessed, and the currency of the country becomes something like a hot potato. No one wants to hold it for very long due to the short timeframes between one level of devaluation and the next.

So the currency efficacy, its vitality, its effectiveness as a means of exchange is diluted, and of course, as a store of value, is diluted by the mass printing, and a return to the market of previously held notes. What do I mean by that? You not only have the printing function, but you also have the repudiation function which is where people say, “What I have I no longer want,” and there is more supply that hits the market because no one wants to keep what they have.

Kevin:If I were to say M equals P divided by Q to the square root of X, and we can print money as long as we can tax, most people are going to say, “Well, he must know what he is talking about. If you can’t convince ’em, confuse ’em.

David:Right, so what you just told me is the math supports it, really.

Kevin:Of course.

David:And this is, through time, how confusing the issue is a bit of a problem. You have, under the cover of accounting tautologies, the MMT crowd says that there is maximum benefit, and there is minimal risk, in blending your fiscal policy spending objectives – how we want to deliver benefits like jobs to everyone – with the monetary policy machinery, which is just the ability to print money and credit.

Kevin:But you’ll never get elected boring people. As boring as it may seem, you have to define money in a way that it doesn’t lose credibility, right?

David:That’s right. And the way that you define money is critical to long-term economic and financial market stability. So yes, that is a boring topic. Nobody gets elected saying, “We believe in sound money.” You know what? That actually does sound pretty boring. But there are a few anecdotes which I think illustrate how important it is, and I think they move our conversation, Kevin, from the theoretical to the practical.

Kevin:An almost perfect mirror would be somebody that you have talked about numerous times, and just recently, John Law.

David:Right. So let’s put the theory of money, and the difference between metallism, bimetallism and chartelism, which has been re-called MMT, or branded as MMT, let’s put it in the context of historical realism.

Kevin:So let’s go into the TARDIS, the time machine, go back 300 years, and look at whether this worked in the past.

David:I loved our conversation with Antoine Murphy, where we’re talking about Richard Cantillon, we’re talking about the Mississippi Bubble and what was happening in France at the time. John Law was famous, and ultimately became infamous – actually he started as an infamous guy. He was an escaped convict accused of murder, convicted of murder, escapes from prison, makes his way to France, and all of a sudden ingratiates himself to Louis XIV.

Kevin:He told Louis XIV that he could have MMT.

David:That’s right. He made a name for himself as an economist and monetary theoretician there in the 18thcentury. He argued in his book, Money and Trade, which is a pretty brilliant book, written in 1705, that expansion of the money supply was necessary for economic development, and that an increase in the quantity of money would not be inflationary because the increase in economic activity that it created would also increase demand for the newly printed money and eliminate the risk of inflation. Now, I say it is brilliant because no one had formalized this thinking. There had been paper monetary experiments in the past, but nobody had created a theory around money and its growth as a means to drive growth in an economy.

Kevin:Is this not exactly, though, what the now theory MMT is proponent of?

David:This is consistent with MMT where spending is the accelerator, taxation the brakes. So who is the audience? Louis XIV leaves France bankrupt. You have multiple wars, you have funding of a lavish lifestyle, and Law’s ideas on banking and finance management won him and audience with Louis XIV.

Kevin:“Tell me more, tell me more.”

David:“Tell me what I want to hear.” The big take-away here is that Law engineered a monetary policy coup in order to solve the fiscal concerns of the French state, and he was, because he answered the problem of the day, elevated to Minister of Finance. A Scotsman, in France, elevated to Minister of Finance. Law went about liberating Louis from a massive quantity of debt.

Kevin:But it didn’t look exactly like free money. You always have to have a twist that makes it look real. He was talking about taking equity from the New Frontier, the new country, the United States, before it was the United States, and backing this free lunch with something that looked like equity.

David:Debt-to-equity swap where demand in the exchange would create an artificial demand for the French currency. That was part of Law’s scheme, converting the national debt into equity in the Mississippi company. You have French Colonial development, which stretched across half the United States and was the exclusive asset of the Mississippi company. So Mississippians, the early investors in the Mississippi Company scheme, were being described by a newly coined phrase. Do you know that this is where the term millionaire came from?


David:The millionaires were the early Mississippians who had gotten in early on the scheme, and as their fortunes grew there was a lot of enthusiasm for this project. And so Law’s process required the elimination of gold from the monetary system.

Kevin:Of course you have to take discipline out. We talked about that earlier.

David:And then there was the increase of French currency, called the livre at the time, in circulation. Ordinarily this increase would have depreciated the currency.

Kevin:Except everybody wanted it at the time. They wanted in. Fear of missing out.

David:Right. And it was demand for shares in the company which created artificial demand for the currency because you had to transact. You had to buy French financial assets to then exchange for shares in the Mississippi company. So actually, the currency strengthened for a time as foreign capital poured in to speculate in shares while the national debt was largely extinguished. You have Joseph Schumpeter, an economic historian who described Law as in a class by himself. He worked out the economics of this project with a brilliance, and Schumpeter says, yes, profundity, which places him in the front ranks of monetary theorists of all time.

And he is right, this was a brilliant scheme, but you have a guy with street smarts like Richard Cantillon who says, “This is a brilliant scheme, but it is destined to fail. I see the flaws within the brilliant scheme because not all the details add up. Not all the numbers add up.” And so Cantillon plays it for his own benefit and makes a fortune ten times over, not only on the rise of shares, but also then on the decline in shares, and then basically for a third time in the currency exchanges. People are trying to get out of the French currency and he provides an illegal means for them to get out.

Kevin:Two of the great movies of my early childhood were with Paul Newman and Robert Redford. You remember Butch Cassidy and the Sundance Kid? But The Stingwas about a confidence game, and what you see is they have to put this whole scheme together to convince people to bet on horses and they think that it is a sure deal, it is a free money type of deal. And it is tested several times by the character that ultimately gets stung. He doesn’t believe it, he tests it, and then he starts believing it, and that confidence builds to the point where he bets it all, and then loses it all.

David:Right. To me, MMT, the fiat money theme, like all variations on the fiat money theme – confidence. Confidence is the key. The confidence and belief of people that they are in on something, that it is on the ascendency, that there is a benefit here that can’t be explained away – that keeps them in the system and that keeps them playing the game.

Kevin:Yes, they must have some inthat nobody else has had in the past.

David:Now the flip side is also true. As confidence erodes, the system breaks down rapidly and the quantity of money in circulation all of a sudden matters again. It doesn’t matter how much is floating out there – but now, when it is moving in reverse, it does. You find self-interested individuals, they exit the system – if they are permitted to. Go back to the case in France. Getting out of Law’s chartelist monetary scheme was not so easy. You had foreign currency exchange which was curtailed. You had gold and silver forbidden, with the penalty of complete estate confiscation levied on those caught with any real quantity of gold or silver in their possession. A coin here or there wasn’t going to matter, but if you were found to be hoarding precious metals – complete estate confiscation. We’re going to take it all. Fascinating – you go from the 1720s, 70 years later, just 70 years after Law’s experiment in France, monetary and fiscal mismanagement triggers the total collapse of the French currency – again.

Kevin:Yes, in less than a century.

David:The guillotine symbolized the populist demand for justice and equality in that latter episode. Now we’re talking about Robespierre, we’re talking about the French Revolution. And in that episode, anyone trying to get out of the failing currency faced the death penalty. So at first it was estate confiscation in the 1720s. By the 1790s it’s the death penalty. Twice – twice in the 18thcentury the French currency was destroyed using a chartelist system.

Kevin:You brought up how German and Europe had been influenced by the hyperinflations of Germany in the 20thcentury and I remember talking to a man whose family had lived through both. They had mortgaged their house three times to own it. They had lost the currency, they had lost the house over and over right after World War I, the early 1920s, then right after World War II. This is the man who said that they actually used Vodka as a trade unit for a while. But twice in the 20thcentury we have seen the same thing in Germany. Let’s look at some of the other countries – Zimbabwe, Venezuela – we could go on and on.

David:Yes, within the last two centuries, the 20thand the 21stcenturies, you had a similar blurring of lines between monetary policy tools, the ability to be able to print or create credit and money, and fiscal policy agendas. It has created dangerous economic and political effects, which then ultimately have been accompanied by currency market debacles. So you have collapse of one sort or another, which has accompanied the chartelist approach to money in every scenario.

This last year my family was watching the Super Bowl and the Rams were in the game. Who else was in the game? Oh yeah, the Patriots were in the game – again.

Kevin:Again. Everybody just plays the Patriots. That’s how it works.

David:And I said, “If anyone can tell me, as you are watching this game, I want to know if you have been listening to me at the dinner table, about what happens to money and monetary destruction during periods of inflation, if you can tell me which of the players on the field has the same last name as the central banker in Europe who destroyed the monetary system, I’ll give you $1,000.” I said, “You only have one guess, so figure it out and then tell me,” because they would have said, “Is it, is it, is it, is it, is it?”

Kevin:This sounds so much like a McAlvany conversation during a Super Bowl. Nobody in the rest of the nation had that conversation, Dave.

David:And so nobody guessed. I knew I was pretty safe.

Kevin:Is there really a Havenstein on…

David:There is a Havenstein on the Los Angeles Rams.

Kevin:On the Rams, really?

David:Yes, he is the offensive tackle, #79, for the Los Angeles Rams. So this was not a Rob Havenstein, this is Rudolph Havenstein.

Kevin:And his namesake would be known for the destruction of money in Germany in the 1920s, if anybody even remembers.

David:Nobody knows, nobody cares. I was hoping that my kids were listening, and lo and behold, they missed that detail. And I think they are more inspired to listen to the details now. Rudolph Havenstein, lawyer, banker, introduced an aggressive monetary solution based on chartelism in the late teens in the 20thcentury in Germany. His stated opinion was that more money would help consumers pay higher prices in the post Versailles Treaty environment. So he printed more, and he printed more, and he printed more, and he printed more…


David:And we had hyperinflation that followed in the early 1920s, 1919-1924.

Kevin:Yes, but we never learn. In the United States, look at the 1960s.

David:Well, that was huge case because the Johnson administration was experimenting with a blend of fiscal policy objectives and the abuse of monetary policy machinery. So that fiscal and monetary policy mélange there in the 1960s and 1970s – you had the Great Society programs, along with the war, and those commitments were being underwritten through deficit spending and the printing press. It ended up eroding our standing as a country in the international monetary system and led to, and then precipitated the collapse of the Bretton-Woods agreement which had been in place since the 1940s.

Kevin:And turned into real high inflation in the United States in the 1970s.

David:It created the worst domestic inflation in the United States since the Civil War.

Kevin:But you have new leadership in Rhodesia, so let’s rename the country. Let’s call it Zimbabwe. Let’s go ahead and create our own currency that will be sound and stable – Mugabe.

David:Right. Mugabe-land – Robert Mugabe experimented with a chartelist mandate as well. Again, you define the official currency exchange rate and then you enforce it because you have the enforcement mechanism, and what you end up with is exactly what we saw in Zimbabwe, where they are printing – ultimately, the end of the story is they are printing 100-trillion dollar notes.

Kevin:That won’t buy a milk carton.

David:No, a 100-trillion dollar note was the equivalent of 40 cents. But Argentina and Venezuela in recent years have tried to pay debts, cover the costs of social programs, with freshly printed paper script. All these are economic disasters today. You have rampant inflation, which is a lingering issue. The 21stcentury, like the centuries that preceded it, is full of human tragedies which are tied foundationally to the definition of money.

Kevin:You said human tragedies. Yes, what we are talking about here – this is why it is important. This isn’t just about money, and it’s not just about economics. It’s about starvation. It’s about war. That is where these hyperinflations end. But Dave, let’s face it. If you are an MMT person, you are really arguing against another flawed system. What we have had over the last ten years has to go. It is not sustainable, either. Quantitative easing and artificially low interest rates and financial repression – if I’m an MMT guy trying to sell my side of the story I’m going to say, “Oh yeah, really? You think artificially low interest rates are the way to go? You think quantitative easing is the way to go?”

David:Actually, the skids have been greased for the MMT crowd, and I think a lot of the blame for the current interest in MMT stems from the central banks of the world having popularized the use of zero interest rates, and having already used quantitative easing.

Kevin:So what we would call a problem, you are basically saying, grease the skids. They’re not necessarily saying the system won’t work, they’re saying let’s just make it more efficient.”

David:Yes, they’re saying that the QE measures which were a part of market triage during and since the global financial crisis, are an example of how we shouldn’t be afraid of spending lots of money. We have become comfortable, frankly, with the extremely abnormal. Today, you look at over 10 trillion dollars of debt. This is sovereign debt, which yields less than zero percent, and it is a result of these radical policies in place. But the crowd is growing that assumes that debt is not a concern. Again, rates have never been at these levels in 5,000 years.

Kevin:Right. This is something that is completely new. But is this not, really, ultimately, if it leads to inflation, a default?

David:I think absent from the analysis is that inflation is a form of default. It is an implicit default on debt. And so while they will argue that having all of these tools in place, you will never default on your debt. Well, there is no reason to explicitly default on debt, but the MMT crowd has no need to explicitly default when you already have the implicit default via inflation.

So the political course that they are charting leads directly to that implicit debt default through currency depreciation. And again, in the modern moment, in this present moment where everyone is focusing their attention, you get all the benefit up front. Where you see the tragedy is for those who have to pick up the pieces in the next two years, five years, seven years, 25 years, etc.

Kevin:This goes back to the confidence game that we talked about, the movie The Sting. The ultimate person who pays is the person who thought they were going to get the game. The people will pay for this default.

David:David Ricardo, an economist back in 1817 said, “Experience shows that neither a state nor a bank ever has had the unrestricted power of issuing paper money without abusing the power.” And he goes on to say that, “In all states, therefore, the issue of paper money ought to be under some check or control, and none seem so proper for that purpose as that of subjecting the issuers of paper money to the obligation of paying their notes either in gold coin or bullion.”

Two things that stand out – number one is just reflecting on the history of money and saying, “The abuses there – we see it over and over again. If you don’t have something that ties out to a real asset, ultimately it is going to go haywire, and if you give the state the opportunity, the unrestricted power to issue paper, they will abuse the power, and there will be a consequence. So don’t let it happen.”

Kevin:Spend all you want. We’ll make more.

David:Right. What political consequences are there from creating a free lunch? I think as we head into the 2020 election, even the 2024 political cycle, if you gave politicians direct access to unlimited resources using the printing press to generate the currency needed for handouts – you tell me – does that shift the balance of power? Who actually pays for the free lunch in the end?

Kevin:You and I have both talked about the analogy of taking air for granted, but actually what we are talking about is a slow suffocation. When someone dies of carbon monoxide poisoning they never smell it. It is just that there are less and less and less oxygen molecules in the atmosphere. The air doesn’t smell any different. And they ultimately go to sleep and die.

David:So, we all do. Who pays for the lunch in the end? We all do.


David:That’s where it is meted out equally. But actually, on a disproportional basis, to those who live on a fixed income, to those who are retired and cannot do anything to increase…

Kevin:They’re becoming monetarily suffocated.

David:That’s right. So money matters – the definition, the theories – in forming state and free market behaviors. And ultimately, yes, the less philosophical does matter, too. How much of it do I have? What can it be exchanged for? What quantity represents a significant amount of wealth? How does a steward protect that wealth and put it to good use? History showsus. It reveals that the benefits are there, but they are front-loaded, and the risks, along with the ultimate costs, are far greater than appreciated as time wears on.

We go back to ancient Greece where they say, “No. If you mess with our money ever again, the death penalty for you, because you have no idea what the social and political consequences are. You have no idea. And if you have lived through it, you would never experiment with this again.”

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