Econ Bro: Ludwig von Mises vs Modern Monetary Theory

Modern Monetary Theory, championed locally by Duma Gqubule and Buddy Wells, holds that a government issuing its own currency can simply create the money it needs. Econ Bro, a Nigerian economist and Mises Institute apprentice, argues the idea is far from harmless. Drawing on Ludwig von Mises's business cycle theory, he warns that artificially cheap money pushes the state into projects the country's savings can't support, citing SA's underused World Cup stadiums and stalled housing developments. Worse, holding interest rates down to fund deficits would blunt the SARB's key warning signal on the rand and leave pensioners and savers carrying the cost..By Econ Bro*.MMT and the ABCTThanks to the evangelism of Duma Gqubule and Buddy Wells, Modern Monetary Theory (MMT) has started to gain attention in South Africa. MMT claims that a government which issues its own currency isn’t limited by how much tax it collects or how much it borrows, because it can simply create the money it needs to spend. What limits government spending is the economy’s real capacity – its resources and labour – and the risk of inflation if spending goes too far. On this view, taxes and other fiscal tools aren’t mainly used to pay for government spending; instead, they’re used to control demand, manage inflation, adjust who has more or less wealth, and shape people’s behaviour.As innocent as this sounds, it’s incredibly destructive. Money created eventually reaches credit markets, pushing interest rates below what real savings would justify. What happens to an economy’s structure when interest rates stop reflecting real scarcity, and money becomes artificially easy to come by? Ludwig von Mises argued that this is where booms turn into busts, and where ordinary savers quietly get shafted.Building the wrong things, at the wrong timeMises’s theory of the business cycle argues that artificially cheap money doesn’t just raise prices in general. It distorts the structure of production, encouraging entrepreneurs and the state alike to commit to long, capital-intensive projects that the economy’s actual pool of savings can’t support.SA has lived through versions of this more than once. Think of the buildup to the 2010 World Cup, when stadiums went up in cities that, in some cases, have struggled ever since to fill or maintain them at anything like the intended scale. Or consider the wave of municipal borrowing that financed housing and infrastructure projects that stalled halfway, leaving half-built developments scattered across provinces, monuments to capital committed on the assumption that funding would keep flowing. MMT’s promise that deficit-financed spending is essentially free, so long as unused capacity exists, invites exactly this kind of overreach. If the state can spend without first securing willing savers or taxpayers, there’s no natural check on how many long-term projects get greenlit at once, or whether the skilled labour, cement, and steel to complete them exist. When the shortages show up, halfway through construction, the result isn’t stable growth. It’s the stadium nobody can fill, the housing project stuck at foundation level, and workers laid off from a project that should never have started at the scale it did.Interest rates are supposed to tell you somethingThis connects to a major point about what interest rates are for. In the Misesian view, prices, including the price of borrowed money, aren’t random numbers a committee can set by decree. They emerge from the sum of the choices of savers and borrowers, and they carry real information about how much genuine saving is available to fund investment, and how urgently.MMT’s usual prescription is for the central bank to hold interest rates low, so the government never has to compete with anyone else for savers’ money. Now picture that in South Africa, where the SARB has always had to balance the cost of domestic borrowing against the risk of money leaving the country and a rand that has already lost a lot of value. If the central bank sets its main interest rate to make government spending easy, rather than to reflect how much savers actually have to lend and how willing investors are to hold rand debt, the price stops giving an accurate signal. The government can keep borrowing without ever being told that it is asking for more than savers are willing to give. It would be like removing the only warning that tells you borrowing has gone too far, and carrying on until the system fails.The person who loses is the one who savedIf interest rates are held artificially low to make government deficits cheap to finance, someone bears the cost of that suppression, and it’s rarely the government itself..Read more:.Curbing tender corruption: Separating economy and state – Martin van Staden.Picture a retired teacher or Post Office pensioner who depends on a fixed annuity, or a worker with a modest retirement annuity who is close to retiring and expected their savings to grow slowly but steadily over a working lifetime. When interest rates are held below what real market conditions would set, these savers earn less on their money after inflation and sometimes lose buying power altogether. Meanwhile, money flows to whoever can get cheap loans first, usually larger and better-connected borrowers rather than the retiree who lives on interest income. This is Mises’s point about building wealth: an economy’s future living standards depend on people being willing and able to save, and on that saving earning a genuine return. If that reward is artificially suppressed to make borrowing cheap for the state, the damage goes well beyond moving income from one group to another. It weakens the very thing that allows a country to build up its future productive capacity, the equipment, training and infrastructure that raise real wages over time..Econ Bro (@EconBreau and @EconBreau2 on Twitter/X) is a Nigerian Austrolibertarian economist and an apprentice at the Mises Institute. Under the organisation name “The Freedom Institute” he teaches individual liberty, personal responsibility, private property rights, free markets, and sound money to mostly young people across Nigeria. Econ Bro is an Associate of the Free Market Foundation..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox every morning on weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here.

Econ Bro: Ludwig von Mises vs Modern Monetary Theory

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