Modern Monetary Theory

Taught macroeconomics for decades to help business students understand the state of the economy. Maynard Keynes taught how to use government controlled money, obtained from taxes and bond sales, to maintain a stable economy. In Keynesian economics debt and deficits are bad except in an emergency, gradual expansion of money supply to keep up with population growth and balanced budgets are good.

Modern Monetary Theory (MMT), implies the government can use pixels on a screen to create an infinite amount of money without consequences,

Modern Monetary Theory (MMT) describes currency as a public monopoly and unemployment as evidence a currency monopolist is overly restricting the supply money needed to pay taxes and satisfy savings desires. Advocates of MMT argue governments can use fiscal policy to create unlimited amounts of new money.

MMT's main tenets are that a government that issues its own money:

  1. Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;
  2. Cannot be forced to default on debt denominated in its own currency;
  3. Is only limited in its money creation and purchases by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment;
  4. Can control demand-pull inflation by taxation which remove excess money from circulation (although the political will to do so may not always exist);
  5. Can do all the above as long as it does not compete with the private sector for scarce savings by issuing bonds.

These tenets challenge the mainstream economics view that government spending is funded by taxes collected from persons and businesses and by government borrowing in the form of selling bonds to people, nations and businesses who buy them because they make money over time when the amount they initially paid for the bonds, plus interest are paid back.

Has MMT failed? The past few months have seen inflation skyrocket to 40-year highs. In response to the Pandemic Fed policy created an 82% increase in the monetary base was an experiment to see what we could get away with. Increasing the monetary base has created almost double digit inflation so there is clearly a problem.

Even so, a growing number of economists support MMT and view the recent historical record as proof of its success.

In answering the question ‘has MMT failed?’, “The answer is an unequivocal no,” according to Stephanie Kelton, professor of economics and public policy at Stony Brook University and one of the leading experts on modern monetary theory. “The point is, you can’t blame “MMT” for stoking inflation any more than you can blame an optometrist if her patient runs off the road while driving without wearing their prescription lenses,” she wrote. “MMT doesn’t tell us that the world is an open road, free of hazards or the need for caution. It doesn’t reject fiscal responsibility, it redefines it so that our eyes stay focused on the real limits on spending.”

According to proponents MMT tenets do not conflict with mainstream economunderstanding of how money creation and inflation works. For example, as former Fed Chair Alan Greenspan said, "The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default."