Opinions and facts
Facebook launched Libra and suddenly everyone (especially in the crypto space) is an economist with strong opinions about monetary policies. It’s great, but as Big Lebowski eloquently put it: “Yeah, well, that’s just, like, your opinion, man.” (BTW, this post is not about FB or Libra).
Often, people forget there is a difference between opinions and facts. I don’t want to waste time arguing with anyone about opinions, but just want to share some interesting perspectives on how money works in today’s economy with anyone interested in facts.
Imagine that the US government has decided it wants to issue its own cryptocurrency (let’s call it US token or UST) . The issuing part is easy, but the question is why would people accept it. Creating demand for any token is the biggest, most important challenge of every crypto project. Luckily for the government, it can decide that from now on, all the federal taxes needs to be paid in UST. People and businesses will now scramble to get UST to pay their taxes or their assets are liquidated or they go to jail. The demand side is sorted.
So, the government can issue tokens to the public and can use it to pay for labor, goods and services. People and businesses accept payments in UST because they know there is on organic market demand for it. When the taxes are paid back to the government, the tokens are burned (destroyed).
As long as the demand for tokens is equal or higher than the supply, the government can issue more tokens without the price of the token going down (devaluating). The initial demand is a (complex) function of tax obligations and the velocity of the token (propensity to either spend or store). Also, as long as there is spare, unused capacity in the economy in terms of labor, production capacity or capita, the increase in the UST supply will result in productivity increase and not cause the increase (inflation) in the prices of things the government buys.
It is also reasonable to assume that people and businesses will hold a balance of UST in their accounts and might also use it for payments, as not all the UST will be used for paying taxes immediately. Therefore, there will be a positive (greater than zero) circulating UST supply.
Now, replace UST with USD (the dollar) and replace the circulating token supply with the public debt. This is how MMT sees the economy of every sovereign country that can issue its own currency (keep in mind this does not apply to the Euro Zone countries of the EU).
I hope this explains why public debt or a budget deficit doesn’t have to be a terrible, scary thing. Also, why increasing the money supply does not have to result in inflation.
Obviously this is a very general, simplified (for starters, you need to include the banks, that create over 95% of the money supply by issuing debt), yet accurate explanation of how money works. This is how MMT explains it. I can’t recommend studying MMT enough to anyone who wants to understand modern economics and specifically the role of money. This school of thought is deeply rooted in data and the practical aspects of banking and financial markets.
Here is a great intro to the subject: MMT vs. Austrian School Debate. I know (for some mysterious reason) the Austrian School’s view on money is very prominent in the crypto space.
Please fight the darkness of ignorance and spread the light of knowledge by clapping and sharing this.
Michal is a practical economist* and technologist, who builds solutions that work in the real world and knows how a company can become the Uber platform instead of an Uber driver.
He is also a successful business executive, project director and Subject Matter Expert with hands-on experience in Blockchain and AI projects. After receiving his master’s, he worked in project finance, real estate, energy and software development for both startups and international enterprises.
*(as opposed to the ‘conversational’ economists, who can explain why things went wrong after the fact…)
- Economic/Blockchain adviser, AmaZix and Kalgera
- COO, Chief Economist @ PioneerVentures.io