The illusion of unlimited state funding and its social consequences

The current economic policy debate is increasingly shaped by ideas that promise a seemingly simple solution to government financing problems. In this context, a school of thought that presents the traditional rules of household management as outdated is gaining attention. This current suggests that a sovereign state can limit its spending indefinitely through its ownMoney creation. Such theses sound tempting to many people in times of scarce funds, but completely ignore the real economic context.

The myth of direct money creation by the state

The proponents of this modern monetary theory often use a historical picture in which a sovereign simply puts new money into circulation. They transfer this ancient concept to the present day and pretend that the government can instruct the central bank to grant loans directly. In this way, new money would be created to settle bills due. Alternatively,describes an indirect way in which the state issues securities and has them paid for by the central bank with freshly created money.

The Legal Barriers of Government Funding

It is precisely these direct ways of state financing by the central bank that are strictly prohibited in our economic system. These prohibitions exist for very good reasons, because they protect the currency from safe expiry. If a government wants to spend more money than it receives through taxes, it must borrow this capital on the free market. It can lend toCommercial banks, which then, as with any other borrower, also calculate the risks and interest.

The state as a normal borrower

The state thus loses the privilege of simply producing its own money and submits to the rules of the market. In contrast to the central bank, a government can become insolvent because it lacks the instrument of its own money production. The interest to be paid serves to cover the costs of money production, with risk provisioning and inflation compensation being the largestInstead of direct loans, the government could also issue securities and sell them on the capital market.

The role of commercial banks in money creation

There, for example, these securities could be purchased by commercial banks. If the government maintains an account with this purchasing bank, the credit institution can also purchase the government securities for newly created money. The bank credits the government account with the purchase amount and in return books the securities as assets. Thus, in return for the issuing government bond,create new book money in the commercial bank.

The risks to the private banking sector

However, the bank is taking considerable risks, which it must carefully weigh up. One risk is that the state may become insolvent, because here, too, the prohibition of its own money production applies. Another risk lies in the possible devaluation of money, whereby the loan is repaid with less valuable funds than originally borrowed. In the case of a bond, you can see theEffect of this effect directly, because the market price falls when the market interest rate rises.

The relationship between interest rates and inflation

The market interest rate always includes the expectation of a future monetary depreciation. This economic relationship means that the nominal interest rate is made up of the real interest rate and the expected inflation rate. This indirect way of state financing is prescribed for a simple reason. Any new money shall be subject to review by an independent body.

The important testing function of the market

This independent body is the commercial banks and the capital market, which are sufficiently motivated by their own risks. You need to pay close attention to whether the newly created money is valuable. This connection is a fundamental principle of our monetary system today. It is dangerous enough that the major central banks, in the course of buying up government bonds on theSecondary market.

The danger of centralised purchase programmes

The secondary market means that the central bank does not buy the securities directly from the government, but from banks that had previously purchased them. If the banks can rely on being able to immediately pass on the securities to the central bank, their verification function is undermined. Although this is not formally a circumvention of the ban on direct state financing, it isThis is definitely economically unsound. Such measures unduly alter the prices of government bonds and thus interest rates.

The reasons for the ban on direct financing

The prohibition of direct state financing by the central bank exists for two compelling reasons. The money should remain valuable and not lose its value as a medium of exchange. The state should not be able to secretly dispose of further resources beyond the socially agreed level. In business, there is a simple basic rule that says there is no freeLunch.

The lack of financial perpetual motion

Anyone who uses real funds must get them from someone, no matter how well you camouflage them. The naive idea that you can pursue any state financing with impunity is fundamentally wrong. It is the result of a misinterpretation of money production in today’s monetary system. Modern monetary theory merely uses a rhetorical trick to conceal this fact.

The denial of private money

She consistently argues in a world of princely money, but pretends to treat the current financial system. It completely ignores the endogenous nature of money, where private banks create money and test its recoverability. Instead, it pretends that only government debt is real money. The theory completely denies that private debt is valuable and overlooksand that this private money is based on individual commitment.

The difference between public and private money

Government debt, on the other hand, does not provide any incentive for productive behaviour. Money of private origin will therefore be much more valuable than money of state origin. The Treaties of the European Union expressly prohibit the direct financing of states by the central bank. Likewise, the independence of the central bank from political instructions is strictly protected.

The False Foundations of Modern Monetary Theory

This theory is the opposite of modern, because it is based on the prince’s money. It camouflages this by claiming a money creation process in which today’s governments have a full reach into money production. This is factually incorrect, as it completely ignores the current context of money production. It refuses to acknowledge the importance of the private sectorand in particular its role in the production of valuable money.

The core theses and their logical errors

The theory makes two key statements that are immediately noticeable when you take a closer look. Money only receives a value through the taxes levied by the state, and this value is maintained even if money is created beyond taxes. The private sector is allegedly prepared to provide real goods in a largely unlimited amount for this surplus money. You can make a simpleRecognition that any government use of real values must be based on the fact that the same funds cannot be used elsewhere.

The displacement of private use

If the state carries out any projects, this must always be at the expense of other uses. This can be private consumption, private leisure or private investment. There may be cases where this is good or bad for the common good, but it cannot come through nothing. Therefore, such use must be made explicit and, above all, a democraticSubject to control.

Bypassing democratic control

The whole theory aims to circumvent this democratic control. Therefore, it claims the logical impossibility that the state can create real values out of nothing. The true intention only becomes clear when you take a look at the scattered details. The theory builds on false premises by pretending that the state can simply issue money.

Disregarding historical red flags

In developed economies, a legal separation between the central bank and the government was deliberately brought about because the consequences of an inflationary monetary policy are sufficiently well known. The repeated attempt to undermine these regulations does not mean that the rules no longer apply. The theory ignores the experiences with past monetary devaluations andtries to distract from the well-known facts by telling a story. The recommended approach to money printing has repeatedly led to inflation or hyperinflation.

The suppression of non-state forms of money

It is also ignored that historically there have just as well been non-state forms of money in order to be able to subordinate everything to the alleged omnipotence of state money. One’s own story, which is told in a positive way, is also the story of a mechanism of oppression. As a result, subjugated peoples were exploited during the colonial period. Why should this be a method thatGovernment against its own population remains completely open.

The Dwindling Purchasing Power of Money

The conclusions are doubtful even within the narrated story. It remains implausible why citizens should be permanently willing to work for extra money if this goes beyond the taxes levied. The theory ignores the fact that the purchasing power of money even in one’s own mindset is approaching zero. This happens when taxesa smaller and smaller part of the money supply.

The elimination of the private inspection body

Although the theory repeatedly tells how government debt is converted into money in the central bank, it ignores the role of private banks. The private banking system is the entity that is incentivized by taking its own risks to check every new money issued for recoverability. This also applies to government-issued money. The theory wants this test instanceand pretend they don’t exist.

The weakening of the private sector

The policy recommendations amount to increasing the government quota and weakening the private sector. Here, too, theory ignores all experiences with the socialist systems of the past. It is empirically well known and theoretically convincingly derivable that bureaucrats cannot use the labour of other people productively. If this happens, nomeaningful economic added value.