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MMT – The History of a Bad Monetary Idea

MMT - The History of a Bad Monetary Idea

MMT stands for Modern Monetary Theory - an economic philosophy on the lips of nearly every politician and economist today.  In short, MMT states that a sovereign government that controls its own currency is not constrained by its ability to issue debt.  It can simply cease issuing bonds and print money instead.  And, provided that it does not have foreign currency denominated debts or liabilities, a sovereign government can never run out of money.

In Modern Monetary Theory, the issuance of government bonds is completely unnecessary.  In fact, government debt is an artificial limitation on the obligation of the state to provide economic prosperity to its people.

Instead, proponents of MMT believe that the very act of government spending brings currency into existence.  This is both a good and necessary thing in their eyes because government spending becomes savings in the hands of the population.  Furthermore, as long as the government is receiving valuable goods and services in return for its freshly printed money, then no significant inflation will take place.  If inflation does start to take root, the government merely has to raise taxes, which has the effect of destroying currency and suppressing inflation.

The reason Modern Monetary Theory is so popular at the moment is because we've been slogging through a soft depression over the past decade.  I call it a soft depression because all the traditional economic indicators appear to be green: the stock market is up, GDP is up and the unemployment rate is down.  But it is a depression nonetheless.  Average people are feeling increasing economic distress while the global oligarchs and monopolists are becoming fabulously wealthy.

Is it any wonder that the middle class is desperate for some sort of alternative to the obvious failures of traditional economics?

The only problem is that MMT isn't really a very new idea.  In fact, it is a very, very old idea - at least 300 years old by my count.  And it is a bad idea too.  Modern Monetary Theory is really just inflationism wrapped up in a fancy new package - all the better to trick the historically ignorant.

Want proof?  Let's look back in time at episodes of MMT past.

The first major proponent of Modern Monetary Theory was John Law, an 18th century Scottish economist who later immigrated to France.  Of course, this description of the man is unrealistically kind.  In reality, he killed a man in a London duel and then fled to Continental Europe to avoid justice.  And John Law wasn't so much an economist as a financial speculator, gambler and conman.

In fact, Law was such a good conman that he eventually duped the Duke of Orleans into letting him try to solve France's economic troubles!  You see, in the early 18th century France was nearly bankrupt from fighting all the wars of the former king, Louis XIV.  The French state was nearly out of gold and silver coins and was desperately looking for a quick fix.

Enter John Law and his profoundly dangerous economic strategy.

Law believed that replacing gold and silver coinage with freshly printed paper money would spur business and increase the supply of credit.  He also planned to simultaneously extinguish the French national debt by swapping it out for shares in economic ventures.

The vague "economic ventures" mentioned above turned out to be the Mississippi Company, a firm that the French government granted a trade and mining monopoly to in the undeveloped territory of French Louisiana.

At first everything was great.  Freshly issued paper money (proto-MMT) hit the markets and commerce flourished.  And shares in the Mississippi Company skyrocketed in value, making investors rich.

Then reality hit.

 

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Much like today's Modern Monetary Theorists, John Law thought that if a little paper money was good, then a lot must be great.  The paper currency was over-issued and soon people began frantically trying to exchange their rapidly depreciating paper money for gold, silver and other real goods.  Mississippi Company shares didn't fare any better.  After rising from 500 to 10,000 livres in value, shares of the Mississippi Company collapsed in 1720.

The Mississippi Bubble, as it came to be known, bankrupted France far more thoroughly than Louis XIV's wars ever did.  Our MMT anti-hero John Law fled to Brussels before the end of 1720.  If he had stayed in France, the impoverished French people would have killed him for his ill-advised money printing scheme.  Law spent the rest of his life gambling his way around Europe, eventually dying flat broke in Venice in 1729.

Now a lot of MMT adherents might argue that John Law's initial foray into MMT didn't count because he omitted one very important step.  When inflation starts to rise, the government needs to raise taxes to remove money from the economy.

However, this objection ignores human nature.  Any inflationist monetary policy naturally creates its own constituency over time.  These special interest groups benefit from the money printing and don't want to see it stop.  And they invariably gain political power as well; wherever wealth flows, pandering politicians looking for campaign donations aren't far behind.

This is MMT's fatal flaw.  It is easy to start printing money, but almost impossible to stop printing it due to political pressure.  The United States is already riddled with powerful special interests such as the military-industrial complex, higher education lobby, leviathan banking system and technology oligopoly.  The idea that we could casually indulge in Modern Monetary Theory only to restrain ourselves at some future date is pure fantasy.

Still want more proof?  How about another historical example?

In the early 1930s, Japan was struggling with the economic effects of the Great Depression.  In comes its MMT-like savior, Korekiyo Takahashi.  As the head of the Bank of Japan, Takahashi directed the central bank to purchase Japanese government debt in effectively unlimited quantities, thus allowing the government to deficit spend with abandon.  This is more or less what Modern Monetary Theory prescribes (albeit without the intermediary step of issuing government debt).

In any case, the outcome was eerily similar to John Law's experience two centuries before.  At first the economy boomed and everything seemed wonderful.  Then, like a good central banker, Takahashi sought to turn off the printing presses now that the economy was humming along.

But a group of ultra-nationalist military officers would not have it.  They organized a coup that assassinated the central banker as he lay asleep in his bed on February 26, 1936.  This is important because the Japanese military was benefiting from Takahashi's money printing.  When Takahashi tried to turn off the money spigot, he was killed.  Needless to say, the Japanese money spigot remained open, thus paving the way for World War II in the Pacific.

 

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Now even though I think MMT is a terrible idea, it doesn't mean that I don't think it won't happen anyway.  On the contrary, most developed nations are running excessively high budget deficits right now, while the global economy is still nominally expanding.  Once the next recession hits, the cries to fire up the monetary printing press will become too loud to ignore.  And it might simply be necessary, if for no other reason than to finance the gargantuan deficits ($2 trillion plus in the U.S.) that will undoubtedly materialize during any economic slowdown.

In effect, Modern Monetary Theory will become a convenient theoretical justification for politicians and central bankers to do what they intended to do all along: spend more money!

Now, maybe you don't care about MMT or don't believe that it will impact you directly.  But let me paraphrase the famous Soviet Marxist Leon Trotsky, "You might not be interested in Modern Monetary Theory, but MMT is very interested in you."

If MMT ever comes to pass, it will destroy confidence in the U.S. dollar - slowly at first and then with stunning speed.  And the securities markets will not be far behind, either.  The stocks, bonds and mutual funds in your retirement account will not help you avoid financial ruin.

The only true defense against Modern Monetary theory is the ownership of hard assets.  I favor portable, high value density items like fine art, bullion, antiques and gemstones.  These treasures cannot be summarily printed at the whim of a venal central banker or politician.  Happily, the Antique Sage website is all about investing in antiques and other hard assets.

We would do well to realize the historical danger of trying to solve our economic problems via the printing press.  But I suspect this is one mistake humanity is doomed to repeat again and again.

 

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Ancient Ptolemaic Bronze Coins

Ancient Ptolemaic Bronze Coins
Photo Credit: highrating_lowprice

We live in an age of striking impermanence.  And yet we occasionally stumble across something that is the antithesis of the ephemeral.  Sometimes an item - a very special item - speaks to us across the void of millennia, connecting us with civilizations long dead.

This is exactly how I feel about the Ptolemaic bronze coins of ancient Egypt.

The Ptolemaic dynasty was a remarkable Hellenistic empire founded by one of Alexander the Great's finest generals, Ptolemy I.  After Alexander died unexpectedly in 323 BC, Ptolemy I carved an Egyptian kingdom out of the ruins of Alexander's rapidly disintegrating empire.   By fusing Greek culture with native Egyptian customs, the Ptolemies created the most successful and enduring of Alexander's successor states.

Ptolemy I's empire lasted longer than any other major Hellenistic kingdom, only meeting its end in 30 BC after its infamous queen, the cunning seductress Cleopatra, was defeated at the great battle of Actium in the Ionian Sea.  Rather than enduring a humiliating surrender to Rome's first emperor, Augustus Caesar, Cleopatra instead chose to commit suicide via the poisonous bite of a deadly asp.

Ancient Ptolemaic bronze coins usually display the laureate, ram-horned head of the god Zeus-Ammon on the obverse and a noble eagle (or twin eagles) on the reverse.  Zeus-Ammon was the Hellenistic synthesis of Zeus, the Greek king of the gods, and his horned Egyptian counterpart Ammon.  This merger of Greek and Egyptian culture reflected Ptolemaic policies promoting themselves as the new Pharaohs of Egypt.

There are remarkably few ancient and medieval bronze coins that can be considered investment worthy.  I am of the opinion that only Imperial Roman bronze coinage joins its Ptolemaic peers in meriting serious investment consideration.  Being low denomination pieces, pre-modern bronze coinage was often carelessly minted via sloppy striking with crude dies.  This resulted in poor quality coins that collectors tend to pass up in favor of gold or silver coins.

Fortunately, ancient Ptolemaic bronze coins were a notable exception to this rule.  Dies engraved in the finest Greek style were used to meticulously strike these numismatic masterpieces in magnificently high relief.  In addition, Ptolemaic bronze coins can be enormous, reaching up to 50 millimeters (2 inches) in diameter and 100 grams (3.5 ounces) in weight.

Interestingly, most examples have a small, depressed dimple on the center of both faces of the coin.  This is a commonplace byproduct of the ancient manufacturing process.

When purchasing these marvelous ancient coins it is important to look for examples that are well-centered, well-struck and have a pleasing patina.  Patina is a thin layer of attractive oxidation that accumulates on a bronze coin over the course of centuries.  Although green or brown patinas are most commonly encountered, a myriad of other colors is also possible, including black, red and even blue!

 

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A fine patina not only materially increases the beauty and value of a bronze coin, but also protects it against harmful corrosion as well. This is one of the reasons ancient or medieval bronze coinage should never be cleaned.

Bronze coins were the workhorse denominations of the ancient Mediterranean world, regularly used to purchase life's necessities like bread, olive oil and wine.  Consequently, surviving specimens tend to be heavily worn.  Therefore, it is imperative to only consider coins with light to moderate wear.

Ancient bronze coins could also circulate for immense lengths of times, causing some pieces to be worn down to little more than smooth metal slugs.  In one anecdotal story, an ancient Imperial Roman bronze coin was found counterstruck with a revaluation mark from 16th century Spain, implying that the piece circulated continuously for approximately 1500 years!

Another key attribute to consider when collecting Egyptian Ptolemaic bronze coins is size.  A bronze coin's size is expressed in conjunction the abbreviation "AE" - which stands for bronze - followed by a number that reflects the coin's diameter in millimeters.  As an example, "AE30" would be a bronze coin with a diameter of 30 millimeters.

I consider investment quality Ptolemaic bronze coinage to start at 27 or 28 millimeters in diameter, with specimens over 30 millimeters being preferable.  As you can probably guess, the larger a coin is, the higher its price.  This is understandable, as larger Egyptian Ptolemaic bronze coins were struck in such high relief as to border on being ancient sculpture, rather than merely coins!

An Egyptian Ptolemaic bronze coin portraying the ram-horned god Zeus-Ammon with his wild, windswept hair is the epitome of ancient Greek Hellenistic art.  And yet these timeless coins are still grossly underappreciated in today's art market.  Investment grade examples start at around $100 and go up to about $500 in price.  Truly magnificent, museum quality coins are uncommon, but will sometimes be offered for sale above $500.

As these coins become more widely acknowledged, prices are certain to rise.  After all, a massive, high-relief bronze coin that captures the ancient cultural amalgamation of Hellenistic Greece and Pharaonic Egypt is a work of art to be coveted.

 

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World War II and the Bankruptcy of the British Empire

World War II and the Bankruptcy of the British Empire
Photo Credit (CC 2.0 license): Smabs Sputzer

World War II is one of most interesting periods in financial history, particularly because the sweeping conflict caused the bankruptcy of the British Empire to unfold with stunning speed.  It took barely more than 10 years for the British pound sterling to go from a respected global reserve currency to a second-class credit.

Between the World Wars, from 1919 to 1938, the British Empire ostensibly reached the zenith of its power.  It achieved its greatest geographical extent in the early 1920s, when it controlled almost 1/4 of the world's surface area and nearly the same proportion of the earth's population.  Unfortunately for the British, this façade of colonial dominance was largely an illusion.

But it was a very powerful illusion all the same.  Throughout the 1930s, Great Britain was viewed as one of an elite group of superpower nations that included France and the United States, as well as upstarts Germany and Japan.

And Britain's currency, the pound sterling, supported this mainstream narrative.  Until 1931, the pound had been the world's reserve currency, with each pound equal to a British gold sovereign containing 0.2354 troy ounces (7.32 grams) of pure gold.  Even after the Great Depression forced Great Britain off the gold standard, the pound still traded for around $5 on the FX markets during the mid to late 1930s.  This was actually a slightly stronger rate than when both the U.S. and the U.K. had been on the classical gold standard before the early 1930s.

But the outbreak of World War II shattered this fantasy and quickly ushered in the bankruptcy of the British Empire.  The first inkling of the disaster to come occurred when the pound plummeted from $4.61 to $3.99 in the harrowing month of September 1939, after it became apparent that Nazi Germany wasn't backing down in its quest for European hegemony.

 

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Because the United Kingdom was ill-prepared for the outbreak of hostilities, it naturally sought to procure additional supplies and materials from abroad - most notably from the United States.  But the U.S. was keen to preserve its neutrality in the European conflict.

As a result, the U.S. government adopted a "cash and carry" approach to selling goods in November of 1939.  This allowed any combatant nation to purchase materials from the United States, provided they pay in hard money (gold, U.S. dollars or U.S. securities) and find a way to transport the material themselves.

Great Britain found itself in an excellent position to take advantage of the United State's cash and carry policy.  The British Empire was primarily a maritime power and still maintained a tenuous control over the all-important North Atlantic shipping lanes, despite attempts by Nazi U-boats to disrupt those routes.  So the U.K. transported massive amounts of gold bullion, U.S. dollars and U.S. securities to the United States in exchange for desperately needed supplies.

But as Hitler's Wehrmacht steamrolled through Continental Europe, Britain's prospects dimmed considerably.  The surrender of France in June 1940 was a particularly devastating blow to the U.K.'s war effort.  In the summer of 1940, as the Battle of Britain raged over English air space, Winston Churchill and his cabinet began to come to the realization that the bankruptcy of the British Empire was quickly approaching if drastic action wasn't taken.

First Britain resorted to some creative financing.  The U.S. had previously expressed interest in leasing airfields in certain British possessions for military purposes.  Although Churchill had initially rebuffed the proposal, the exigencies of total war soon forced him to reconsider.

On September 2, 1940, the U.S. and Great Britain formalized their Destroyers for Bases Agreement.  In exchange for 50 obsolete U.S. Navy destroyers, Britain agreed to give the U.S. 99-year, rent-free leases on naval and air bases in various locations in Newfoundland and some Caribbean islands.

Around the same time, Churchill approved a vitally important secret mission that is commonly known as the Tizard Mission today.  Named after its leader, British scientist Henry Tizard, it was the wholesale transfer of cutting-edge British technologies to the United States in September 1940.  This was done in the hope that the U.S. could perfect and mass produce these inventions in time to have a significant impact on the outcome of the war.

These top-secret technologies included microwave radar via the cavity magnetron, the proximity fuse, schematics for a prototype jet engine and the Frisch-Peierls memorandum on the viability of a nuclear bomb, among others.

The technology passed to the Americans during the Tizard Mission was theoretically a gift, with no explicit, reciprocal payment demanded.  However, it is reasonable to assume that Churchill secretly hoped such a generous gesture would obligate the Americans to continue supplying the British war effort, even if the teetering Empire was not able to meet the strict guidelines of the United State's cash and carry philosophy.

 

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By late 1940, the British Empire's bankruptcy was imminent.  On December 8, 1940, Prime Minister Churchill wrote a letter to this effect to President Roosevelt.  In it Churchill stated:

 

The more rapid and abundant the flow of munitions and ships which you are able to send us, the sooner will our dollar credits be exhausted.  They are already, as you know, very heavily drawn upon by the payments we have made to date.  Indeed, as you know the orders already placed or under negotiation…many times exceed the total exchange resources remaining at the disposal of Great Britain.  The moment approaches when we shall no longer be able to pay cash for shipping and other supplies.

 

Consequently, President Roosevelt pushed the U.S. Congress for the passage of the Lend-Lease Act.  This legislation would drop the pretense of American neutrality by authorizing the shipment of weapons, ammunition and other war materials to the Allied countries (primarily Britain, Free France and China) in exchange for the leasing of military bases in Allied territory during the war.  No money would change hands; instead this would effectively be a U.S. donation to the Allied cause.

But as a prerequisite for the passage of the Lend-Lease Act, the United States demanded that Great Britain open its books, thus revealing the intimate details of its financial insolvency to the U.S. Secretary of the Treasury, Henry Morgenthau.

In addition, the Roosevelt administration insisted that an important British-owned, U.S.-domiciled company be sold in order to confirm that they had definitively run out of liquid U.S. dollar assets.  The British duly complied, announcing the March 1941 fire-sale of the American Viscose Corporation - a manufacturer of synthetic textiles and the largest U.K. holding left in the U.S.  The company only realized a fraction of its appraised value.

The Lend Lease Act was finally passed on March 11, 1941.  U.S. weapons and supplies soon flowed into the bereft British Empire in massive quantities.

To compound difficulties for the British, it soon became apparent that the crown jewel of their empire, India, would not remain under British rule for long once the war was over.  This political development made it impossible for the British to attempt to partially recover the cost of the war from India.  And to make the British Empire's grave financial situation even worse, it was clear that many of its other colonies would also demand their independence once the war concluded.

When World War II finally ended, the pound-dollar exchange rate was $4.03, the level it had been pegged at by the Bank of England at the beginning of the conflict in 1939.  But the British Empire's fiscal situation had deteriorated massively during the intervening years, leaving its currency extremely overvalued.

 

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As part of its war-time negotiations with the United States, Great Britain had agreed to open up its consumer markets to U.S.-made goods after the war.  This severely undercut post-war profits for British businesses.  In addition, by 1945 the British economy had completely converted to a war-footing and was slow to retool to meet domestic consumer demand.

Like all warring nations, Great Britain had borrowed heavily to help fund its war effort.  In 1945, Britain's aggregate debt (much of it held by foreign interests) was a staggering £21 billion, which was equivalent to over 75,000 metric tons of gold at then current exchange rates.  This was more than 2.5 times the combined national gold reserves of every country on earth at the time!

In other words, it was a sum that could never be paid back without resorting to currency devaluation.

Britain's initial emergency move was to remove all silver from her circulating coinage.  From 1920 until 1946, every British denomination from the tiny 3-pence to the massive crown (5-shilling coin) had been struck from 50% fine silver.   Starting in 1947, the British Royal Mint changed over to a base-metal, cupro-nickel alloy, allowing the government to save money on coinage costs.  In addition, the British Royal Mint could "mine" the existing circulating coinage for its silver content, gradually replacing it with less expensive base-metal coins.

But the coup de grace came on September 19, 1949 when the British Chancellor of the Exchequer, Stafford Cripps, was finally forced to devalue the once prestigious pound sterling from $4.03 to $2.80 - an overnight 30% loss of purchasing power.  With this stunning act, the British pound definitively lost its global reserve currency status.  The bankruptcy of the British Empire was complete.

 

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The 1902 Sears Roebuck Catalogue – An Inflationary Retrospective

The 1902 Sears Roebuck Catalogue - An Inflationary Retrospective

With the impending bankruptcy of Sears, I felt that now would be a good time to talk about the 1902 Sears Roebuck Catalogue.  This 1200 page monster was the Amazon website of its day, allowing people from even the remotest corner of the country to purchase the latest goods and fashions from a trusted retailer at competitive prices.

Of course, one of the most notable aspects of the 1902 Sears Roebuck Catalogue is the startling difference between modern prices and the 1902 prices advertised in the catalogue.  These dramatic price changes are attributable to inflation, which has been surreptitiously doing its wicked work on the U.S. dollar for a full century now.

My introduction to the 1902 Sears Roebuck Catalogue came as a child when I used to visit my grandmother's house to mow her lawn.  My grandmother had a reprint of the old book, which I always perused after finishing my lawn-mowing duties.

 

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The thing that always fascinated me about the 1902 Sears Roebuck Catalogue was its inflationary implications - the staggering amount of purchasing power the U.S. dollar had lost between 1902 and the present day.

For example, a men's solid 14K gold pocket watch with a 17-jewel, Waltham movement (which would have been state of the art at the time) cost between about $30 and $50, depending on the case options chosen (hunting cases were more expensive than open-faced cases).

A quick scan on eBay reveals that similar gold pocket watches in good condition are selling for anywhere from $400 to maybe $2,500 today (in 2018).  Of course, if pocket watches were still produced today, you can bet that retailers would sell them for higher prices than secondhand ones fetch on eBay.

 

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Or maybe instead of a gold pocket watch, you are interested in a breech-loading, double barrel shotgun with a solid walnut stock.  The 1902 Sears Roebuck Catalogue had a full 11 pages of double barrel shotguns to choose from.  Yes, these hunting guns could be anonymously ordered through the mail in 1902 - no identification necessary!

And their prices were almost unbelievably low by today's standards.  The cheapest examples cost around $8 or $9, while the very finest Remington shotgun with a Damascus steel barrel and an English walnut stock rung up at only $50.  These same shotguns today run from just a few hundred dollars to several thousand dollars, depending on condition, rarity and a myriad of other factors.

Another interesting find in the 1902 Sears Roebuck Catalogue is the selection of concrete-filled steel fire safes for sale.  These robust safes had stepped, 5-flange doors (in order to better resist explosives), applied-gold exterior decoration and built-in interior cabinets.  Prices started at only $6.25 for a cut-down model and rose to a princely $32.25 for the largest size - a 1,150 pound behemoth with an inner steel security door.

In contrast, today it is tough to find a good burglary-fire safe for anything less than about $700.  And prices can easily rise to $5,000 or more for high-security models.  Yes, there are cheaper safes out there, but they are usually sub-par import safes straight off the container ship from China.  If security is important to you, these low-quality, imported safes should be avoided at all costs.

 

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As you can see, regardless of the product category, inflation has decimated the purchasing power of the U.S. dollar over the past 116 years.  According to the Bureau of Labor Statistic's CPI inflation calculator, the U.S. dollar has lost about 96% of its purchasing power between 1913 (when records were first kept) and 2018.

This means that every dollar in 1913 is equivalent to over $25 today.  However, the BLS calculations use some questionable methodologies, including hedonic adjustments and substitution effects.  Looking at actual prices paints a bleaker picture of inflation, with $1 of goods from the 1902 Sears Roebuck Catalogue equal to something closer to $50 or $100 of goods today - a stunning 98% to 99% loss of purchasing power.

In case you were wondering, the dollar suffered almost no inflation before 1933 because the U.S. was still on the gold standard at the time.

But we have come a long way from the days of the gold standard, and not in a good way.  The fact is that the U.S. dollar has been progressively and systematically destroyed by its supposed protector, the U.S. Federal Reserve.  This disturbing trend is even more blatantly obvious when one examines the secret history of 20th century U.S. currency.

This is why I recommend that investors position themselves in antiques, bullion, fine art and other hard assets over the coming years.  The day is coming when the dollar's slow motion collapse will transform into a terrifying plunge.  I don't know about you, but I want to own tangible assets that cannot be arbitrarily printed by a central bank when that time finally arrives.

 

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