274 Reading: Modern Monetary Theory
What Is Modern Monetary Theory?
Modern monetary theory (MMT) is a heterodox macroeconomic supposition that asserts that monetarily sovereign countries (such as the U.S., U.K., Japan, and Canada) which spend, tax, and borrow in a fiat currency that they fully control, are not operationally constrained by revenues when it comes to federal government spending.
Put simply, modern monetary theory decrees that such governments do not rely on taxes or borrowing for spending since they can print as much money as they need and are the monopoly issuers of the currency. Since their budgets aren’t like a regular household’s, their policies should not be shaped by fears of a rising national debt..
Several other differences also exist between mainstream monetary theory and modern monetary theory, the most important being the sequence of events that emerges from loans and deposits, and from government spending and taxes.
Can we buy everything we want, or will we cause an inflationary nightmare? This is what Modern Monetary Theory explores.
The key part of this argument is that money in the 21st century is digital and not currency.The key part of this argument is that money in the 21st century is digital and not currency. The central idea of modern monetary theory is that governments with a fiat currency system under their control can and should print (or create with a few keystrokes in today’s digital age) as much money as they need to spend because they cannot go broke or be insolvent unless a political decision to do so is taken. Can the government afford this? Can we afford to build 1,000 new bridges – could we fill all the potholes in Littleton, Colorado? Or will this cause inflation? Does not apply to all countries that has its own currency? (so no euro-currency countries), or those in debt in another currency.
Some say such spending would be fiscally irresponsible, as the debt would balloon and inflation would skyrocket. But according to MMT:
- Large government debt isn’t the precursor to collapse that we have been led to believe it is;
- Countries like the U.S. can sustain much greater deficits without cause for concern; and
- A small deficit or surplus can be extremely harmful and cause a recession since deficit spending is what builds people’s savings.
MMT theorists explain that debt is simply money that the government put into the economy and didn’t tax back. They also argue that comparing a government’s budgets to that of an average household is a mistake.
While supporters of modern monetary theory acknowledge that inflation is theoretically a possible outcome from such spending, they say it is highly unlikely and can be fought with policy decisions in the future if required. They often cite the example of Japan, which has much higher public debt than the U.S.
Government Money Creation
According to modern monetary theory, the only limit that the government has when it comes to spending is the availability of real resources, like workers, construction supplies, etc. When government spending is too great with respect to the resources available, inflation can surge if decision-makers are not careful.
Taxes create an ongoing demand for currency and are a tool to take money out of an economy that is getting overheated, says MMT. This goes against the conventional idea that taxes are primarily meant to provide the government with money to spend to build infrastructure, fund social welfare programs, etc.
“[W]hat happens if you were to go to your local IRS office to pay your taxes with actual cash?” wrote MMT pioneer and American economist Warren Mosler in his book “The 7 Deadly Innocent Frauds of Economic Policy.” “First, you would hand over your pile of currency to the person on duty as payment. Next, they’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the taxpayer, left the room, they’d take that hard-earned cash you just forked over and throw it in a shredder.”
Modern monetary theory says that a government doesn’t need to sell bonds to borrow money, since that is the money it can create on its own. The government sells bonds to drain excess reserves and hit its overnight interest rate target. Thus the existence of bonds, which Mosler calls “savings accounts at the Fed,” is not a requirement for the government but a policy choice.
Unemployment is the result of governments spending too little while collecting taxes, according to MMT. It says those looking for work and unable to find a job in the private sector should be given minimum-wage transition jobs funded by the government and managed by the local community. This labor would act as a buffer stock to help the government control inflation in the economy.
There are many critics of this theory from many main-stream economists because the question becomes – will the government make the right decisions to investment in? Will they spend too much into the economy that can’t be supported by their assets, so uncontrolled inflation.
