Modern Monetary Theory

Modern Monetary Theory (MMT) allows government to print moment without gold backing.  Proponents think it can counter economic problems, but opponents fear inflation and increased deficits. This article will attempt to debate the pros and cons of the MMT.

21 October 2021 | CCCA (Image: Linus Nilsson)

MMT by Mosler is best explained in an article by Deborah D’Souza.  After reading the article, I find that the only advantage of MMT supporting money printing is only available to rich and developed countries like US, UK and Japan which exploits poorer and developing countries by giving worthless paper for goods and services 

The concept of MMT is not well understood despite claims that it is becoming mainstream.  May be this sentiment only applies to the US and no other developed country relies on printing money to shore up their deficits.  This article will examine global responses to US money printing. 

My understanding of paper money backed by precious metals is derived mainly from Chinese practice of money printing and their backing by gold or silver for the last 2,000 years.  In discarding the barter system, Chinese invention of money serves as a convenience for merchants and traders not to carry this precious metal on their bodies when travelling to distant places to trade.   Copper cash is the general terms of Chinese ancient currency made of copper which turned up in the Qin Dynasty (221 BC–206 BC), 

Ordinary people do carry silver pieces or copper coins in their possession as “spending money”,.  Where large sums of money are transacted, the Chinese invented the “silver receipt? (银票) where the real silver or gold is deposited in some private banks (錢莊) and the equivalent amount of paper money is issued under a quasi “denominations” system, similar to modern banknotes.  Copper coins backed by silver, are minted by the Imperium and any attempt to mint them privately attracts the death penalty. 

Large amount of gold or silver is transported from one place to another under armed escort. 鏢局’and usually these armed agencies were used to transport large sums such as army payrolls and humanitarian relieve funds due to fire or floods.

The cooper coins issued by Imperium has value when it can be exchanged for silver.  Modern copper coins has no such guarantee and they can become worthless.  There were also counterfeit receipts. 

The Chinese system seems to be a workable system for China and perhaps, in the beginning the US dollar was also pegged to the gold reserves held at Fort Knox (147,3 million ounces) 

It is interesting to note that the Qing government, losing the Opium war to the west has to pay reparation in 60,000 Pounds in silver..

With bit of dark humour, and by analogy, one would remember in the 1950s that in the Ching Ming festival, one would burn “Hell Bank Notes” (HBN) to dearly departed relatives.  The top value of the HBN was 10,000.  Today, the top value has increased to 9 zeros.  The usual joke was that in Hell, like on earth, has inflationary pressure otherwise the highest denomination of the notes printed would have remained static.

Returning to our understanding of the effect of US printing more money, the current observation is that those country who prints money without gold or silver backing, usually suffer inflationary pressures and go bankrupt.   

The US printing money saga is now in the main discussion point of most mainstream media and was amplified by the last saga of US deficit/debt in the trillions and the decision taken by US Congress to print more money $1.9 trillion) to pay their overspending on all fronts including the military.  The US is extremely concerned about another government shutdown as it is running out of money to pay for social welfare services and military salaries. 

The global effect of US printing money was explained by a former head of the Bank of China the South China Morning Post in an article “ US money printing to fund deficit poses major risk for 2021, says ex-China central bank official” 

  • Zhou Xiaochuan, who led the People’s Bank of China between 2002-18, says modern monetary theory will have ‘side effects’ 
  • Global inflation, asset bubbles and the consequences of quantitative easing will be major issues next year, the economist says

The expected consequence of continued money printing will eventually depreciate the US dollar and those who hold US cash or US treasury bonds will lose money.  US as the world trading and reserve currency will lose its place as the world trading currency.  Those countries hold assets in US currency lose and the use of devalued US dollars to  

buy goods and services (is a form of exploitation) will stop as other countries would not deal with the inflated US dollars. 

The world has been alerted to US rising debt as far back as 2016 when the Sun Daily published the article “War and Debt driving US to Ruin” by Eric Margolis where he concluded that US is on the decline, with this opening statement “AMERICA is falling apart. Anyone who travels in this great land knows it. New York City is crumbling. I’m scared to take the underwater tunnels to Long Island or New Jersey. Our local airport, LaGuardia, should be in Zimbabwe.” 

The burning question is: What is the effect of US printing more money on China’s well-being?  A contraindication from an unexpected source, the Korea Herald which discusses the impact of US printing money on China. 

Just within this month, the US has issued an additional $1.9 Trillion and the EU and Japan also printed a large amount of money. 

Printing banknotes for economic stimulus – as the country’s inventory is running extremely low and scare, banknotes become cheap as toilet paper, similar to copper coins. 

It has been suggested that printing and use of US dollar as an international currency is akin to plundering the materials, labour and services of other producing countries.  

The Euro, British pound and Swiss franc belongs to the same family as the US dollar and they will become worthless paper. On this assumption, should China not exchange physical goods for the overvalued US dollar? 

The US only spent ten cents to print a one-hundred-dollar bill to buy a real $100 worth of goods.  This is exploitation. 

One comment from a leader of the Chinese Australian community: The truth of matters is US and the rest is using worthless currency to purchase goods made in China, while the raw materials of those goods come from the west , which it purchases need real Chinese Yen to exchange for useless US dollars. That is tragedy for China, purchasing overpriced overseas raw materials and sell them in cheap price to the west and wasting our valuable resources. China is totally exploited.  

In conclusion, the MMT is conveniently used to back up US money printing and this action taken by the US Federal reserve is helpful for US to solve her deficit due to overconsumption from domestic and military spending.  Unfortunately, it will have adverse impact on the economy of poorer and developing counties. 

Principal authors, Tony Pun and Dr Ka Sing Chua. This commentary is supplied by the Chinese Community Council of Australia Incorporated: Founding President, Dr Anthony Pun OAM, President, Mr Kingsley Liu. The views expressed in this article are those of the authors.

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