Modern Monetary Theory

Modern Monetary Theory

almost 5 years ago1 min

Governments fund their spending with taxes – but they also borrow via government bonds.. Just how much is the controversial claim behind Modern Monetary Theory (MMT)...

Depending on who you ask, MMT is either a way to fund environmental change and kickstart economic growth – or dangerous “Santa Claus” nonsense 🎅

MMT states that any country printing its own currency can always print more to repay its debts. That’s hardly controversial: the US is currently $22 trillion in debt, with a $1 trillion deficit likely this year. But MMT proponents say that this could – and should – be much higher.

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So long as inflation – and correspondingly the interest rate the government pays on its debt – remains low, more spending on things like infrastructure should boost economic growth by more than enough to manage the extra debt 👩‍🎓

That MMT’s a recipe for reckless spending and Venezuela-style price rises. Borrowing more money only leads to more economic activity if it’s put to productive use; otherwise, extra cash chasing the same goods could spark inflation.

The price of a cup of coffee in Caracas rose 285,614% last year
The price of a cup of coffee in Caracas rose 285,614% last year

There’s another potential negative outcome. Japan’s national debt is now 250% of annual GDP, compared to the US’s 105%. But Japanese interest rates are hovering around zero, and inflation is still too weak.

Japan’s central bank owns over 50% of the country’s government bonds, controlling their yields
Japan’s central bank owns over 50% of the country’s government bonds, controlling their yields

Japan spent big while keeping its economy hooked on exports and a weak currency – leaving it particularly vulnerable to the effects of the current trade war ☹️

While Americans debate MMT as a way to fund the Green New Deal, Europeans sick of traditional economic policy inflating investment prices while doing little to boost economic growth may soon join them. Watch this space...

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