Ponzi Monetary Theory

Abstract
MMT suggests that money printing is an answer to consumption collapse, in which there exist a free-lunch, where the printed money can be spent without causing inflation. This conclusion is so counter-intuitive that some have termed it "a theory so stupid that only a modern academic would accept it". However, MMT seems to be the only explanation for current empirical evidence. In this post, a non-economist proposes an alternative, theoretical explanation for current events that models the current financial system as a Ponzi scheme which rapidly absorbs wealth from the economy around it. This scheme can be kept going through the constant printing of money for it to absorb. Further, there is no apparently inflation, as the Ponzi scheme is absorbing the new money. We explain that while apparently attractive, such a scheme will lead to decreasing efficiency and market dysfunction, with inflation re-appearing as an end game scenario. Our theory concludes that there is no free-lunch. Further, the current policy of printing money until stopped by inflation is dangerous, as inflation may only occur when the economy is in terminal decline.

 

We model the current financial system as a variant of the classic Ponzi scheme. For the uninitiated, a Ponzi scheme is a fraudulent investing scam that generates returns for earlier investors with money taken from later investor.

We begin, by dividing wealth into two pools, which we term wall-street and main-street respectively:

• Wall-street wealth is used for passive investment (stocks, bonds, purchase of real-estate, emergency funds for investment, cash components of balanced portfolios, purchase of Ponzi schemes etc);
•  Main-street wealth is used for consumption or real-investment  (buying of food, actual emergency funds, building of roads, paying of workers).

Under a capitalistic system, wall-street wealth will can earn a return that is proportional to the amount invested. This means that, if we start with a fixed amount of wall-street wealth, it will grow exponentially. Note that this growth is passive.

Marxism argues that this exponential growth means that overtime, all wealth will concentrate in the hands of a single person;  the person being the one, who started off with the largest pool of wall-street wealth.

Capitalism argues that if wall-street  performs wealth allocation. If this service allows overall wealth to grow, we would all be made better off. Thus, it is good to allow the capitalist to make a return for their wealth allocation role.

Capitalism has proven very effective. However, a problem emerges when wall-street fails to allocate capital appropriately; or the capital allocation exercise, does not generate enough real-wealth to compensate for the passive incomes claimed by wall-street.  An example, would be the sub-prime crisis of 207.

In this a scenario, the passive income of wall-street comes at the expense of main-street. This causes wall-street to morph into a giant Ponzi scheme, that acts like a vacuum cleaner which progressively sucks wealth from main-street.

Wall-street assets are valuable because of their ability to generate passive income (unlike gold or diamonds, a stock certificate is not generally considered to posses intrinsic aesthetic value). If main-street runs out of wealth for wall-street assets to vacuum up, the value of wall-street assets will decline, precipitating a market crash where the average price of stuff goes down (deflation).

MMT argues that such deflation can be countered through money printing. This introduces new wealth to be vacuumed up, thus propping up the price of financial-assets. 

As the printed money expands the pool of wall-street wealth, it also strengthens the vacuum effect (recall that this is proportional to the amount of wall-street wealth). Vacuum strength is further increased by the Ponzi effect. If ludicrous investments are highly successful, everyone will want to join (just as in a Ponzi scheme). This channels yet more wealth from main-street to wall-street.

The vacuum effect means inflation remains low, since there is little wealth left on main-street. The result is magical: We avoid both inflation and a market crash; this is termed "the free-lunch".

Indeed, it is possible to, not just to maintain, but increase wall-street wealth. This can be achieved by ensuring the combined dividends and capital gains are sufficient to justify ever higher valuations, which can  in turn be maintained by printing (or promising to print) an ever increasing amount of money. Since this also strengthens the vacuum effect, inflation can simultaneously remain low.

(Note: We are ignoring worker bargaining power. We estimate that on average, U.S. workers are 10 times as expensive as an equivalent in a developing country and often 3 to 4 times less (real) production. Such workers have effectively zero bargaining power. )

From this perspective, MMT seems to be arguing that it is possible to maintain a permanent, government supported Ponzi scheme, with no inflationary side-effects.

In the strictest sense of the word, MMT is correct. However, one should note that MMT relies on an ever stronger vacuum effect to remove injected money. Thus, there will be less and less "natural" money on main-street, with what remains coming from the money printer. This will in turn weaken free-market forces, with profits and losses not being decided by quality of idea or product but by the direction in which the government points the printed money.

By making the government (and Ponzi) the principle sources of reward, energies that would be directed towards free-market enterprise, would now be directed towards control and manipulation of the government, or refining wall-street cash grabs. The result would be politicization and financialization of many spheres. 

In the extreme case, this would result in an economy wholly dedicated to consumption, with everyone becoming a “government employee” that earns a passive income (interestingly, UBI is a proposal that is currently being debated). In another alternative reality, everyone might become a real-estate agent and sell houses to each other, while creating fictitious (Ponzi) wealth.

We term our refinement of MMT,  PMT (Ponzi Monetary Theory). Unlike MMT, PMT suggests there is a trade-off for printing money. This trade-off is not inflation but the weakening of market forces, leading to lower productivity and capital miss-allocation. Taken to the extreme, PMT creates inflation when the system cannot satisfy basic needs and lacks the means to compel others to satisfy it for them. At this stage, the economy may already in terminal decline.

According to PMT, the current monetary policy of pursing money printing until an inflationary stop-sign is extremely dangerous, as the occurrence of inflation may be an indicator that it is already too late.

This is written by chicken, an avid follower of the Hell blog and is an attempt to formalize Hell's intuitions.

http://suddendebt.blogspot.com/