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Place of Virtual Assets in the Contemporary Monetary Theory

Author: Ertan Tibet

As all art was once contemporary, all economic theories were probably once considered contemporary. The contemporary monetary theory, also known as “modern monetary theory” is a very exciting and different economic theory. The main difference from the neoclassical economic theory is that it describes the currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. Obviously, MMT (modern monetary theory) is not a very popular theory among the traditional value investors and before the COVID-19 outbreak, MMT was seen as a very far-off idea. Because of the disruption caused by the pandemic, it is now gaining a lot of traction worldwide but especially in the United States. Progressive politicians around the world are seriously considering it as an alternative and most wealthy countries are adopting monetary policies that resemble MMT.

As its name might make us think that MMT is a very new idea, it’s origins date back to the early 20th century. Back then, the concept of virtual nor the idea of a currency that is decentralized and not monetized by an organization did not exist. First time in our history, we now actually have an alternative to state-controlled currencies and assets. Decentralized cryptocurrencies such as Bitcoin and Ether can have many advantages compared to traditional currencies, especially in a high uncertainty environment.

It is basic logic that in an environment where MMT is widely adopted by central banks, assets with limited supply (e.g. precious metals) will probably see a significant price increase, because of the rareness they offer. At this point, we might wonder: are their supplies truly limited? There is always a possibility that their total supply can change dramatically because of unpredictable events such as that of the discovery of new reserves or a breakthrough in the technologies that are used for extracting them. Cryptocurrencies with steady and truly known supply will offer a lot more trust and certainty to investors, compared to both fiat currencies and traditional assets such as gold, due to the predictable nature of their supply. For example, while the supply of money has increased dramatically during the COVID-19 crisis, the supply of bitcoin has remained as expected. Another huge advantage virtual assets would have over traditional stores of wealth assets, is that they can also be used as a medium of exchange and as a payment system. In an environment of capital uncertainty where Central banks print money whenever they feel like it, a lot of people would likely feel more comfortable storing their wealth in an asset with a truly predictable supply that can also double as a medium of exchange.

With the new fiscal policies that countries have adopted after the COVID-19 outbreak, it is obvious that assets like bitcoin can offer a lot more certainty than traditional fiat currencies which are monetized by the government. Why? Because the latter are highly unpredictable in their decision-making. 

To conclude, it is very hard to guess what the exact effect of MMT would be on the global economy because it’s a very different perspective. However, if widely adopted, I think it will create a very exciting environment for all virtual assets from which the society can only benefit from.

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