Integral money: Does the deficit matter?

The Deficit Myth, argues it doesn’t - The New York Times best seller by @Stephanie Kelton has got the economic and financial world buzzing.  The political world is trembling with excitement at (what they may misinterpret as) the prospect of being able to offer voters a free lunch. 

This well written book is a true but partial perspective, and its carefully crafted assumptions and exclusions make it appear at first sight to be a very attractive and compelling narrative.  Unfortunately for this to be true, as the book asserts in chapter one, you must have monetary sovereignty with a system of fiat currency. 

But if you measure things nominally in an ever-changing system of measurement (i.e. fiat currency), does anything you conclude from it actually matter?  If the measure you are using doesn’t matter (i.e. isn’t consistent or trusted), does it matter what you measure with it?  

Take for example the true but partial “their red ink is our black ink” theory of chapter 4.  Here the book argues, that increasing money supply through government deficits does not crowd out private investment and make us poorer, but instead increases our wealth and collective savings. 

The book argues that increasing money supply increases private wealth and that reducing fiat money supply reduces it.   It may be true in a nominal sense, but it is very partial as it ignores the effect on a real relative wealth basis.  Increasing fiat money supply creates the illusion of greater wealth and through the Cantillon effect impacts the redistribution of real wealth and increases real wealth inequality.

At any moment in time, the amount of real assets in the world is the same, changing the number of measuring units in existence doesn’t change the amount of real-world wealth.

As one of my wise banking clients once told me, “You can’t fatten the pig by weighing it”.  If you corrupt the measure by adding more units it doesn’t make the pig bigger in the real world, nor can you shrink the pig by reducing the actual amount of measuring units.  

The pig is the pig and it’s worth is perspectival.  How you assess and compare it’s worth is the real challenge.  That is a critical point that appears to be missed.  It’s not just what we measure but also how we measure that needs to be resolved.  

Am I really taller? If there are less inches in a foot and shorter if there are more?  A trusted measurement system may be one step toward helping us unlock the wicked problem of resolving how best to manage an economy.  Maybe a better myth to explore is the myth of value measurement in the world of fiat money?

Imagine flying a plane through cloud with an altimeter whose units of measurement are adjusted up and down mid-flight how would you avoid the mountains in the real-world terrain below?

If we don’t have a system of measurement that we can consistently trust, how can we make sensible capital allocation decisions without crashing the economy, our business or our families into a mountain?

I fear the attractive narrative of this book will lead people and politicians to overlook its careful assumptions and exclusions and take up the Modern Monetary Theory #MMT rhetoric with longer term disastrous unintended consequences.  The unintended consequences of MMT may include the potential for uncontrolled inflation and the widespread real wealth destruction, increased wealth inequality and suffering that flows from it.  

I welcome this book as it has deepened my understanding of MMT and its limitations.  I encourage you to read it and think critically and carefully and also seek alternate frameworks and perspectives too.  In my view it doesn’t ask and fully explore some of the most critical questions and therefore could have added even more to the debate or been more open about its limitations. In apparently avoiding those questions I feel it may add confusion and obfuscation and encourage the arguably more dangerously attractive aspects of MMT, that may represent the downside of the orange meme in a very attractive green wrapper (see https://www.linkedin.com/pulse/evolution-global-monetary-system-what-we-need-next-peter-dawson).  

How do we effectively manage the economy with sub optimal information and feedback systems?  What is the system of measurement, the monetary system, that we really need?  This is truly a wicked problem, and this is the critical question in my view, not how to manipulate the existing broken fiat system we are in.

We need to look at this wicked problem from multiple perspectives, that reflects, all quadrants, all levels, all lines and types AQAL.  We need a new system of Integral Money. (See https://www.linkedin.com/pulse/integral-money-evolution-global-monetary-system-what-we-peter-dawson)

What is your view? Please help me and others identify what is true but partial in our own views. Please add your voice as the debate continues and let’s work together to create a more whole less partial answer, to help sustainably manage our global economy for the benefit of all.

Thank you. 🙏