I seem to keep seeing this in many monetary circles – theorists saying things that “prove” their thinking even though they’re wildly illegal. The Market Monetarists do it at times when they say the Fed could just “buy up everything” and the MMT people do it sometimes when they claim the government has created “self imposed constraints”. This is misleading in my opinion.
The thing is, the monetary system is designed with very specific institutional arrangements that define the rules of the game. If the rules change, like, if the Fed could really just “buy up everything”, then that totally changes the way the Fed operates and completely changes what the Fed actually is (as previously described). It’s like watching American Football and saying that offensive linemen are also wide receivers because the ineligible man down field rule is a “self imposed” constraint that doesn’t really mean offensive lineman aren’t receivers. That’s ridiculous. The rules exist for a purpose and they clearly define the difference between offensive linemen and wide receivers. The monetary system is constructed with the same basic thinking.
Laws define the rules of the game and specifically define how certain entities can and can’t operate. Using examples where the current laws don’t apply is the creation of an alternative universe and renders your thinking largely void of value. It might be useful for theoretical purposes, but that’s about it. Until the rules change, offensive linemen are offensive linemen and wide receivers are wide receivers. If we’re going to have a realistic and useful conversation about the monetary system then we should operate within the rules of the current game and not the rules you wish existed.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.