OPINION - Being a victim of the consequences of Modern Monetary Theory (MMT), I find it impressive that South Africa shut down (hopefully permanently) the debate around the independence of the South African Reserve Bank (SARB). 

As a foreigner, I don’t know enough of the debate to know how its proponents justified their position, but as an economist, I know that undermining or removing the independence of a reserve- or central-bank is an important step towards implementing MMT.

What is MMT?

MMT is a monetary framework that proposes that the state funds its deficits by issuing (printing) currency. 

Modern Monetary Theorists (MMTers) use lots of technical jargon to conceal the asininity of their proposal which, when broken down in simple terms, means that when the government runs out of tax money and doesn’t wish to borrow, it literally just prints the currency (or in types it into existence using a computer), and spends the printed money on whatever it desires. 

That’s it; that’s MMT.

At first, this proposal sounds reasonable. One might think; “Since the government owns the currency, why doesn’t it just print more and not bother us with taxes? Why don’t they print more and provide free health care, education and everything else?” Who wouldn’t jump at the offer to get free education, health care, infrastructure and other services, without having to pay taxes?

Price inflation; the fruit of MMT

Maybe MMT could work if the immutable laws of demand and supply didn’t exist, but they do. The problem with printing new currency is that it doesn’t create real resources or goods. New currency isn’t going to make labour, land and capital goods spontaneously appear.

If the demand for commodities increases – an inevitable consequence of the introduction of the new money – and the supply of commodities remains the same – which is the case, seeing as new money doesn’t create new resources – then the result is a rise in the prices of goods and services; this is also known as price inflation.

How does printing money cause inflation?

To understand how increasing the money supply increases cause prices to rise, one must first know that all fixed commodities are used by consumers and producers. Food is eaten, clothes wear and tear – as do houses, vehicles, and manufacturing equipment, etc. Money, however, isn’t used up when it is employed in the purchase of commodities. 

If I buy a bottle of Witblits at R500 it is used up after I drink it, but the R500 is still in the hands of the vendor who sold it to me. 

That vendor might take the R500 and buy dinner at a restaurant. As in the case with the Witblits, the food has also been used up, but the R500 is in the hands of yet another person, who can use it to purchase and use up another commodity, and so on. The same R500 uses up commodities, while it remains.

Introducing more money causes this depletion of commodities to happen faster, creating a relative scarcity of commodities, and as everyone knows (perhaps intuitively), scarcity of commodities causes price increases. This is how printing more money causes price inflation; this phenomenon is incontrovertible.

Many argue that prices won’t increase if the new money is used to produce new commodities. 

This objection ignores the fact that new commodities require the employment of old commodities in their production, and whether the new money is spent on commodities for consumption, or to produce new goods, the goods are used up nevertheless, and the inflationary process described above still occurs.

Some argue that the data doesn’t bear this out, that there are examples of money supply increases without inflation. Such objections fail to consider the following.

The general upward price trend 

Since the introduction of fiat currencies (and the inevitable increases in their supply), prices have been on a steady increase. MMTers and other inflationists love to present charts that purportedly show where money supply increases didn’t lead to price increase.

Chart 1 shows the value of one US Dollar over the period 1800 to 2022.

The trend is generally upwards, and there’s a significant spike around the 1970s, when the US completely abandoned the gold standard and began to print money recklessly.

What MMTers do is isolate a couple of years and present that to the audience. The above is a more accurate representation of the effects of money printing. What cost a dollar in 1800 costs about $25 in 2022. This is the real effect of money printing.

Productivity can outpace money growth

They fail to consider the very real possibility that productivity growth can outpace the rise in prices, thereby giving the illusion that prices weren't affected by the money supply increase. In reality, although prices didn't rise, they could've fallen, leading to lower living costs and higher living standards.

Productivity can increase due to several factors such as technological advancements, tax and regulatory cuts, discoveries of new resource rich lands, etc. If any of these lead to great increases in productivity and the money supply increase is relatively small, then prices won’t rise.

High demand for currency

In countries like United States, MMTers ignore the fact that they haven't fallen to Zimbabwe levels of inflation because there's a high demand for the USD (US Dollar), which prevents it from being worthless. If the world abandons the USD as the global reserve currency, the US will experience Zimbabwe levels of inflation overnight, because the demand for their currency will fall, leaving all those trillions of dollars scattered across the world to demand only US goods.

Conclusion

Unless they want to plunge the country into a serious economic and cultural crisis South Africa can’t afford to give in to the Modern Monetary Theorists. If the Weimar Republic and Zimbabwe are insufficient to serve as cautionary tales, look to the on-going example of a variant of MMT in Nigeria. Although the government manipulates inflation statistics to reflect a 34% inflation rate, the reality tells a different and more horrifying tale. In reality, most prices have risen by over 400%.

If a South African wants to buy a bottle of Witblits at R2,000 in a few short years from now, then MMT is the way to go.

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