#MMT was born out of the…

Tim Bouma — Wed, 18 Dec 2024 12:51:15 GMT

#MMT was born out of the insight that if you issue debt in your own currency, you have no worries about paying it off, because you simply issue more currency. Of course you need to worry about inflation (the capacity of your real economy to absorb this newly-issued currency) or how your currency will be priced in relation to other currencies (easily mitigated by capital controls). But the upshot, you as a currency issuer will never default on your debts. Billions were made on this insight, or hack, who viewed debt on self-issued currency as a risk and mispriced accordingly. The spread was as much as 2%, meaning you could make 2% risk-free.

Now the next hack is buying Bitcoin with self-issued currency. Of course, the USD as the reserve currency of choice needs to be worried about real-world valuation, but the lesser currencies, need not worry. Just look at the CAD - it is at its lowest level against the USD in 20 years. This means selling CAD for USD/Bitcoin is a no-brainer. That would include the government (they’ll never admit). If you have a weak self-issued currency like many countries, there’s really no reason not to fire up the printer and buy as much Bitcoin as you can.

I know a lot of people…

Tim Bouma — Thu, 21 Nov 2024 18:01:17 GMT

I know a lot of people dunk on Modern Monetary Theory (#MMT), but it’s actually quite good and illuminating (as opposed to its application).

The theory came about in the early 90s when Warren Mosler was trying to understand central bank monetary operations, during a time when fully fiat currencies were still relatively new (since 1971). He discovered that no one really understood what was going on, much less the implications.

Mosler was looking to purchase Italian government bonds that had a higher interest rate yield than what the Italian loan rate was (pre-Euro, lira). It was about a 2% spread, reflecting the fear that the Italian Government would default on its bonds. So he decided to pay a visit to discuss the issue with the Italian Treasury Secretary. He asked the question of the Secretary, what if you can’t pay for the bonds? He Treasurer said, ‘we just credit the account, that’s it’. They both realized that if you issue your own currency, there is zero risk of default, because you just issue more. So the market, fearing a default put a 2% risk premium on the bonds. Mosler borrowed what he could from the banks, bought all the bonds, and made 100s of millions over the years on the 2% risk premium that was no risk at all.

The moral of the story - if you are a currency issuer (like the US) you have lots of power and are immune to certain risks. It’s not unlimited though, I’ll explain that in a subsequent post.

#MMT