On Fiat and Law

3 min readJun 3, 2021

This is my third article on Modern Monetary Theory (MMT), Here are the prior ones. Hopefully this one will be better.

The parts of MMT which are common sense, I claim to understand. That inflation is a limit to our Federal spending, I am fully on board with. It is dead obvious that we should partially fund government with issuance of new currency (we already do, so…), and we should do more until reaching the inflation target.

Power of a Currency Issuer

I have finished The Deficit Myth, but do not have sufficient clarity to agree with part of the thesis — that the Federal debt is not a highly problematic obligation. Ultimately, the argument comes down to case studies, which perhaps no one truly understands.

In the US, the value (to a bank) of being a primary dealer factors into things. The set of privileges of participation hold real value, which government leverages to achieve policy objectives.

Something is still missing. Something on the tip of my tongue needs to be said which no one is saying. The unwillingness to say these things results in lack of understanding.

Power of Sovereign Law

Key takeaway — the true power of a currency issuer is the power of law. Power to enact laws allows for large-scale asset hair-cutting, and ultimately asset destruction.

Holders and even buyers of government bonds simply don’t have recourse if a policy change disadvantages them, because they are entities that must act as legitimate businesses, ultimately subservient to the political authority.

There is a breakthrough in thinking somewhere in there. For me, this only really comes clear considering China in the equation. No one else nakedly demonstrates the power of political over business authority as they do. Investors will make as much or as little money as the political authority sees fit.

Should there be a conflict in priority, the US may decide to screw debt-holders. Not overly, there are plenty of tricks to blunt and nullify the burden of the federal debt, and these tricks don’t necessary torpedo demand for subsequent bond auctions.

This sounds completely crazy. The reason is because, ultimately, government can ask whatever it wishes of the financial system. Participants are followers of the law, and rules of the game are written by government.

In some concrete terms:

There can be negative real returns on bonds for an extended period of time. The four-decade stretch from the 1940s through the 1970s saw negative real returns for bonds.

Without a doubt, this feels like the mechanism from The Deficit Myth staring me in the face. This is truly unbiased data, it was not given to argue in favor of MMT. Yet, it’s clear that post-war, government mucked with bond markets and got away with it. There were monetary policy shenanigans, wealth was transferred. This isn’t some form of evil, as conservatives would like you to believe. We are all better off for it.

There is still the suspicion that US government is in a severe state of industry capture. I don’t know how that plays in. It questions the narrative somewhat.

Nonetheless, doing this large-scale messing with the bond markets again may not be so simple. I do feel like a political ideology shift, at minimum, is necessary. But maybe that’s the whole point? I can’t say it won’t work because we won’t collectively agree to it, when arguing for that very thing was the reason the argument was made.




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