The most dangerous idea in history

How do you destroy a country from within?

We looked yesterday at a country that has already destroyed itself, via a hyperinflationary collapse. Life is tough in Venezuela right now.

You could argue reckless spending brought Venezuela down. Or over-reliance on oil. Or pursuing a socialism, despite its obvious flaws.

And you’d be right. Up to a point.

But I think something else happens first. Something that precedes those political or economic decisions. I think it’s far more dangerous. In fact, I’m seeing it more and more all over the world.

The first thing – the root of the corruption – is always an idea.

An idea takes hold. It starts on the fringes. It starts small. Then it captures more and more people. It seduces. And ultimately it imprisons people.

In Venezuela that idea was very simple. We can live at each other’s expense. It’s the same seductive idea behind all socialist revolutions. It doesn’t work of course. It never does.

But today I don’t want to talk about socialism. I want to talk about an even more dangerous idea.

It’s taking hold right now. It’s seducing people. Economists. Policy wonks. Politicians. Soon it’ll be the bloke in the corner of the pub. Then taxi drivers, waiters and barmen. It’ll capture everyone. Watch out.

Why is it so dangerous?

See if you can guess. The idea is this: the secret to prosperity is to simply create an unlimited amount of money, and there will be no consequences of doing this.

This idea has been tried before. Many times. If there was a connection between the amount of money in circulation and real wealth then everyone would be rich. We could make everyone millionaires in one keystroke. Just credit a million pounds to everyone’s bank account! This wealth creation lark is easy!

You’ll know if you’ve ever started or run your own business that the world doesn’t work like that. You can’t create real wealth out of nowhere. It takes work. Effort. Ingenuity. Ambition Risk.

That last word is critical. Risk. If you get it wrong – if – you won’t create wealth. You’ll destroy it. Your actions might have consequences. And some of those consequences might be bad. Terrible. No one likes losing money.

Again: any entrepreneur, businessman/woman, investor – or human being with an ounce of common sense – knows this.

But a new idea is emerging that challenges that way of thinking.

Subverts it, even.

It has a suitably seductive name: Modern Monetary Theory. Or MMT for short.

Remember, this is part of an ongoing series of essays in which I’m trying to show – prove to you – why you should be worried about the existing financial system.

You might hate gold and bitcoin. But my thesis is their recent performance signals something is up. Something is wrong. The “legacy” system of fiat money controlled by central and private banks is too open to abuse. Too easily corruptible.

It seems to me MMT is the idea that will corrupt is beyond all repair, if we haven’t already reached that point.

Let me show you why.

I won’t lay out how MMT works for you. As you can guess I’m biased. So let me quote someone who does believe in it. Here’s a piece in favour of MMT from Prospect magazine:

MMT not only threatens powerful vested interests in our societies, but also challenges the hegemony of mainstream macroeconomists who have been able to dominate the policy debate for decades using a series of linked myths about how our fiat monetary system operates and the capacities of currency-issuing governments within such a system. 

MMT allows us to break out of the illusory financial constraints that for too long have hindered our ability to imagine radical alternatives and to envision truly transformational policies, such as the Green New Deal, in the knowledge the issue is not whether we can ‘afford’ a certain policy in financial terms but only whether we have enough available resources–and political will–to implement it. This is a massive paradigm shift. 

Paradigm shift indeed.

Short version: existing policy creates “constraints” on the economy, like whether we can “afford” to do something. This apparently is an illusion.

If you control the money supply, you can “afford” anything. So long as there are people out of work or businesses operating at below full capacity, you should simply keep creating more money.

Don’t borrow it. Don’t lend it. Don’t tax it. Just create the money and spend. Use taxation to slow the economy down. You don’t need the tax revenues, of course. You just tax people to cool the economy and control inflation.

Sounds good, right? It’s consequence-free living! Everyone can be rich. We just have to create enough money.

Good luck to you if you believe that. You’re beyond my help. Because it’s nonsense of course. Nonsense on stilts. But that doesn’t mean some very highly educated people think it’ll work.

Here’s my take. Anyone that says there’s no limit to what a country can afford is lying. Affordability is really a question of cost. If we have X, the cost will be Y. Can we afford that cost?

To pretend we can afford everything anyone could want if we simply create enough money is nonsense. It just shifts the cost somewhere else. It hides it. It pretends there’ll be no consequence, which is wrong.

There is always a consequence. Every action has an equal and opposite reaction. It’s just the MMT crowd are assuming that reaction can only be positive. That simply isn’t the case.

The elephant in the room in any conversation with an MMT fan is inflation. It’s the big risk. Pumping the economy with newly minted cash is inflationary. That’s the only real “constraint”, apparently.

When inflation takes off, you raise taxes to bring it under control.

Hmmm.

To me that sounds like a risk. A big one. If things get out of control – and all that new money fundamentally changes people’s relationship with money leading to a loss of faith in the currency – then you risk a currency collapse. A hyperinflationary melt-up. Savers, retirees and the middle class get ruined.

That side – the risks, the potential consequences – is never really explored by MMT proponents. Mostly because they think it’ll never happen.

Which is the real problem. A conversation with an MMT theorist goes like this:

You: Aren’t you worried about inflation?

MMTer: No. We’ll raise taxes to bring it down.

You: But what if you’re wrong?

MMTer: I’m not wrong.

You: How can you know that?

MMTer: I’ve modelled it.

You: What if your model is wrong?

MMTer: It’s not wrong.

You: How can you be so sure?

MMTer: I’m not wrong, I’m an economist.

And that’s the real problem, isn’t it? We can’t know the future. Only be real about the risks.

It’s all there for you in the name. Modern Monetary Theory. It’s a theory. It requires testing.

In any other field a theory would be tested against a control. That way you can observe what your theory/input actually does, and doesn’t do.

Not so economics.

When it comes to monetary theory there is no control. And no one gets to choose whether they’re a test subject. We’re all automatically opted in. Every penny we’ve ever earnt or will earn become data points in someone else’s experiment. 

That’s why it’s so important MMTers downplay or disguise the consequences of their ideas. If people understood the risks they’d say, “No thanks.”

Which brings me back to my central point this week. Central being the operative word. Any system that is highly centralised and controlled in a top-down fashion is susceptible to corruption.

And if a seductive enough idea comes along… it can hijack the entire system. At that point, your fate is out of your own hands.

Which is why investors have turned to gold for millennia.

It’s your shot at opting out of the experiment.

Your chance to take control of at least a portion of your wealth.

And if MMT hits, it’ll likely send gold soaring. I’d be looking at $3,000 for starters, roughly double where we are today.

Which is why I recommend you get the latest thinking on what’s next for gold from some of the world’s top gold experts. To do that, you should register for our free gold summit. You can do that here. If you get yourself registered ahead of time you can get up to £500 of gold investing research free of charge.

And you might just find out how you can not just profit from gold, but amplify your gold gains.

Here’s the link you need again.

Best,

Nick O’Connor
Publisher, Exponential Investor

Category: Commodities

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