What is Modern Monetary Theory (MMT)?

expand icon99risesexpand iconexpand icon04 MAR 2022
A flawed, illogical macroeconomic theory.
TABLE OF CONTENTS

Gold Standard Fallout

Put simply ...

Advantages of MMT

Disadvantages of MMT

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MMT proposes that a nation with its own fiat currency, such as the U.S., doesn’t have to worry about accumulating too much debt because it can always print more money to pay interest. Reeks of a Ponzi scheme. So, the only constraint on spending is inflation. As long as there are enough resources to meet growing demand without igniting inflation, the government can spend whatever it needs to maintain employment and achieve goals such as funding the army or halting climate change.

Gold Standard Fallout

Modern Monetary Theory says that the demise of the gold standard in 1971, when President Richard Nixon declared that the dollar was no longer convertible into gold has meant that in the modern era of “fiat” currency, the U.S. and other big economies no longer need to worry about having enough gold to back their paper currency, so they’re free to print however much they need.

Proponents of MMT believe that natural interest rates in a world of fiat money is zero and that tweaking interest rates is ineffectual because businesses make investment decisions based on prospects for growth, not the cost of money.

Put simply ...

MMT says that:

  • Sovereign currency-issuing governments can print as much money as it likes
  • Taxes are no longer needed to finance government spending
  • Inflation is one of the main limitations of a government’s ability to finance itself
  • The role of taxes is to drain money out of the economy after the government has spent it

Advantages of MMT

The advantages of this form of economics mean that governments can prioritize the prosperity that they want to see without needing to collect taxes first. Here are some advantages:

  • Buttress credit
  • Stabilize failing markets
  • Boost public spending
  • Increased prosperity and standard of living

Disadvantages of MMT

One of MMT’s biggest disadvantages is that inflation needs to be kept below a certain level for it to work. Once the money supply and cash injection exceed what the economy can withstand, spending would have to be cut back to avoid wage and productivity declines, and taxation increases - or stagflation.

It is obvious that smaller economies could not implement MMT without seeing negative repercussions on their own currency. Their fiscal deficits would have to be covered with foreign borrowing, and the more MMT currency they use, the more their currency would depreciate resulting in a loss of purchasing power, poverty and an economic death spiral. Other disadvantages of MMT are:

  • Large tax increases
  • Unsustainable market volatility
  • Bond market oblivion
  • Wage declines
  • Corruption potential with governments choosing who they want to give money to
Our take: Central banks printed trillions. MMT has been embraced by global governments without question to keep markets afloat during this time, but whether this will stand the question of time, is still to be seen. It is clear that the rich have gotten richer as the printing has created enormous asset bubbles. But as the noose gets tightened to control inflation, the bubble will burst.

Stay safe, stay nimble, stay humble!

99rises

99rises

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