MMT Failing Miserably in Brazil

The "we owe it to ourselves" MMT nonsense failed in Japan and Venezuela. Brazil is an excellent case to watch.

Modern Monetary Theory (MMT) proposes that government spending and deficits do not matter because the government can always print more money.

Anyone who has studied or lived through hyperinflation knows the theory is ridiculous at best, yet it prevails. Venezuela is in hyperinflation right now, but the MMTers reject that as corruption.

Japan remains mired in slow growth after wasting trillions of dollars, but at least Japan has not wrecked its currency, yet.

Brazil may be a better test case, because its government has done just what many of the MMTers want, pass out free money with no tax revenues to pay for it.

Pensions take 43% of Brazilian government revenues and MMTers tend to believe in absurd constructs like living wages.

Dire Consequences

I side with a Wall Street Journal report that states Dire Consequences in Brazil.

Mariuza da Conceição Aparecida taught math and science at public schools for 27 years, enough to retire on a full pension in her late 50s.

Last year, more than two decades later, the 80-year-old was forced to wait in line at food banks. Swelling retirement obligations have nearly bankrupted the Rio de Janeiro state government, leaving Ms. Aparecida without her pension checks for as long as four months at a time.

Nationally, more than half of sewage goes untreated. The average adult has just eight years of formal schooling. Retirement outlays already eat up 43% of Brazil’s national budget, and health care about 7%, while two expenditures that are critical to economic development—education and infrastructure—claim only about 3% each.

The social security system’s revenue shortfall widens each year as the worker-to-pensioner ratio shrinks. The United Nations projects that by 2050, the number of potential workers per retiree in upper-middle-income developing countries such as Brazil will tumble from the 2015 figure of seven to just 2.5.

Only Japan has ever faced a shift of this scale in a similarly short period, and it now has one of the world’s most indebted governments.

Credit-rating firms are getting anxious. Standard & Poors estimates that unless there are major changes to publicly funded pension and health-care systems, population aging will help drive net government debt in the biggest emerging economies to extraordinary levels—307% of gross domestic product in Brazil, 274% in China, 262% in Russia and 341% in Saudi Arabia by 2050.

Their sovereign bonds would be rated junk in that scenario, said an S&P analyst, Marko Mrsnik.

Authorities wrestle with a gut-wrenching decision: whether or not to cover aging citizens who didn’t contribute enough to social security.

Such benefits were financially fanciful in that era of raging inflation, but they were increasingly granted under the leftist Workers’ Party government that took over in 2003. Fueled by a commodity boom, it granted pensions to millions of peasants and informal workers who hadn’t paid in. It also nearly doubled the minimum monthly wage, which the constitution set as the floor for retirement checks.

The upshot: Rural workers paid about $3 billion in social-security taxes for the 12 months through September 2017, while rural retirees drew about $36 billion in benefits.

Schools and universities periodically close. Public hospitals are perpetually short on supplies. At one point late last year, scarce funds to maintain police patrol cars kept half of them off the streets.

Investment spending by the state government has ground to a halt. That has left dozens of public works incomplete and decaying in the tropical climate, including sewage-treatment plants, roads and a cleanup of foul-smelling lagoons around Olympic facilities. An unfinished maternity hospital in the poor suburb of São Gonçalo is occupied by squatters.

​In the MMT world, government deficits and free money do not matter.

And with all those people struggling in Brazil, MMT theory suggests that government should give away more money.

MMT is absurd.

Mike "Mish" Shedlock

MMT’s insight that governments with unconstrained license to print fiat can’t go bankrupt, isn’t wrong in the technical sense. It’s just irrelevant. Simply because money is ultimately irrelevant to economics.

Money is, fundamentally, just a shorthand coordination mechanism for barter transactions. Not something of value in and of itself. Instead of personally searching out exactly who wants how many eggs and who happens to have exactly the goods he himself wants in exchange for said number of eggs, which quickly becomes practically uncomputable, a chicken farmer can accept, then spend money. Relying on the indirection of money to simplify the coordination function between what he needs., and what he must provide in return for it. But neither the money he accepts, nor what kind of moneys he accepts, has any bearing on economic value nor output in and off themselves.

Printing money, as in putting Washington’s head on paper pieces or adding zeros to some balance number on a computer, doesn’t create one lick of economic value nor output. All it does, is mess with the above resource coordination. Redistributing who does what for whom. Hijacking the barter coordination provided by sound money, where each bartering participant must put something of economic value into the pot to be able to take some out; in favor of allowing those with fiat printing privilege to freely outbid anyone for, hence command, whatever economic resources are available, without having to, themselves, providing anything at all in return.

So yes, a sovereign doesn’t have to go bankrupt. But by printing money, all he does is lay claim to an ever-greater share of an economy’s productive capacity. In return for nothing. In the process, diverting resources from productive uses, to pointless government aggrandizing and sustaining ones. Until there no longer are any resources left for production of anything. Such that all the money in the world, still can’t buy a loaf of bread. Which is the inevitable end point of all fiat systems. Past, current and future. The sovereign can nominally pay down any possible debt, hence avoid technical bankruptcy, by simply circling the earth with zeros added to his currency notes. Which is about as relevant as any non-sovereign being able to do the same, by paying in monopoly money.

The key insight is simply that money is genuinely irrelevant. It has no intrinsic value, nor does it produce any value. The only things that matter economically, are real productive resources, and how they are utilized. The rest is just about how those resources are employed, and how that employment is coordinated.

Whether a sovereign steals resources by taxing or by printing, doesn’t matter one lick. The only, as in really the only, way the two differ, is wrt who gets robbed, and who gets handed the loot. If you could design a taxing scheme who transferred resources to and from actors in exactly the same proportion as printing does, the two mechanisms would be literally equivalent from an economic POV.

The only reason the printing way is preferred by most governments, is that it allows a thing veneer of obfuscation over the fact that the theft function provided by printing, is from the many who have little, to the few who have more. Which makes it easier for the government to pretend that they are needed to “protect” the poor from the “rich.” Rather than, as is always and everywhere without a single exception ever their real purpose, to rob the poor and peripheral, for the benefit of the rich and connected.

It is an invention by German monetary crank Georg Friedrich Knapp, who wrote "Die Staatstheorie des Geldes" or "The State Theory of Money" - which used to be known as Chartalism. The first important central bank that followed Knapp's theory was the German Reichsbank under Rudolf von Havenstein in the post-WW1 era until 1923, when the paper mark finally gave up the ghost and ceased to be a viable medium of exchange.

Hi Stuki, I completely agree, except I would probably not say that money "doesn't matter", since its power to disrupt economic calculation and coordination obviously does matter. I would also point out, there is in fact a slight difference in the way in which money printing and deficit spending disrupt the capital structure, but it is essentially technical. In the former case, the dis-coordination is inter-temporal in nature (i.e., there is an imbalance in the allocation of resources across time, as usually too many resources are allocated to the higher stages), while it is intra-temporal in the case of government spending. The end result in both cases is the emergence of a production structure that is not in harmony with actual consumer preferences, so in that sense I guess it does not really make a difference. In any case, you make very important points: money printing cannot create an iota of real capital; in fact, its net effects will lead to capital consumption rather than capital accumulation - and all production is ultimately funded by real goods, not "money", which is merely a medium of exchange. One must also be careful though not to get carried away too much with the notion of the underlying barter economy. Money prices are ultimately ontologically bound up with real goods, as a modern rational economy with an extensive division of labor would not be possible without monetary calculation.

Most discussion here centers around the evils of debt, not spending. If the debt is a problem then why not eliminate the debt? It is the result of an outdated gold standard restriction of Congress that was intended to defend a now non-existent gold reserve by drawing down reserves to cover any spending that would increase the money supply in excess of the gold reserve. It was never a source of revenue for a government that issues its own currency and needs no revenue. By simply dropping the value of the gold reserve from the formula used to determine deficit that definition changed to include all currency left in the private sector after taxes. Is $21 Trillion too much currency to leave in circulation? One would think the economy would be in much better shape and private sector bank debt much lower if that were the case.