At some point toward the end of the 1960s, I had saved enough money to stop working and attend college full time, taking the prerequisite courses for my major that were given only during the day.
Whereas money was of concern
to me, preoccupying me much of the time as I worried about how long I can last
before having to return to work and resume my studies in night classes, my
situation coincided with an ongoing public debate about the Canadian economy.
As it happened, the debate was centered on what would be an appropriate level
for interest rates.
I cannot retrace the train of
thoughts that led me to a novel theory in financing, but I still remember the
content of the theory. I wrote it down at the time, and showed it to a couple
of professors, one of whom had extensive interactions with the media. I got
praise for it from those who read it, but nothing happened after that, and I
never thought of it again until now.
What brought that event to
mind, is an article that came under the title: “The MMT Myth,” written by Otmar
Issing, and published on November 3, 2020 in the online publication, Project
Syndicate. What follows is the blurb that's offered as subtitle, summarizing
what the article is about:
“In today's environment of
ultra-low interest rates and massive monetized fiscal deficits, the dangerously
naive policy prescriptions offered by Modern Monetary Theory [MMT] are being
realized more or less by default. Whether central banks will be able to regain
control after the current crisis is an open question”.
And here is the content of my
theory:
There is an economy when money
circulates in a financial circuit the way that water circulates in a circuit
made of pipes. It comes out of a source, which is the water utility, and goes
to the places where it does useful work. This can range from cooking meals in
the homes of citizens, to generating electricity in a hydro utility.
Eventually, the water ends up in the drain from where it goes back to nature.
As to the money, it comes out the central bank, goes through the banking
circuitry, and branches out to the enterprises that produce the goods and
services that make up the GDP and then … yes, and then what?
This is where the existing system
gets complicated, and the reason is that there is no “drain” to which money is
sent to be destroyed or recycled. This deficiency of the system causes excess
money to go into inflating the price of goods and services. It also creates
bubbles, increases the money supply and causes hikes in the interest rates.
Worst of all, it swells the bank accounts of those who need money the least.
All of these things hamper the
growth of the economy because they slow down the velocity of the money in the
financial circuitry. But if you’ll have a drain at the end of the circuit,
money can be lent out at low interest rates, thus be available to more
entrepreneurs who might have great ideas whose development cries out for
financing. The money will circulate as fast as it needs to in the circuit, thus
help speed up the production of goods and services, lower the prices and
accelerate the growth of the economy.
So far so good. But how do we
redesign and rebuild the financial circuitry to give it a drain that will
prevent all those problems from recurring? Actually, creating a drain to do
away with the money that ran its course, is the easy part. The hard part is
creating the pump that will suck the money running in the circuit, thus cause
it to move at the appropriate velocity, and brought to the drain for
disposition.
The government will play the
role of the drain to where the money will be sucked before remittance to the
central bank for destruction or recycling. As to the pump that will suck the
money in the direction of the government, it will be a variable system of
taxation that will be plugged into the economy to sense its performance. It
will continually receive data in real time, and will be calibrated each week to
make it suck the right amount of money out of the system, thus regulate its
velocity throughout the economy’s circuitry.
How does that compare with the
MMT system?
Otmar Issing cites several
problems with the MMT system, one of which being that the government and the
central bank will be forced at times, to work at cross-purposes, thus negate
the advantages which MTT may bring to the economy. This unfortunate
circumstance will materialize says Issing, because the government is run by
politicians motivated by an agenda that's different from that of the central
bank.
On the other hand, when applied properly, my theory will avoid that kind of problems because it will require that the government and the central bank work together as a team to serve society by maintaining a system of economics that demands constant vigilance by both. Cooperation will be the order of the day everyday.