What is Modern Monetary Theory?

in economics •  2 months ago 

There has been information circulating the internet that tells us that the way the economy works and the way the news or politicians usually portray it are two very different things. MMT (Modern Monetary Theory), summarized in a seven-minute video at modernmoneybasics.com, approaches the economy in a way that sounds entirely foreign to most of our ears, telling us the national debt and deficit are not problems at all, and that the US can afford anything it wants as a government. In a nearly seven-minute video, ModernMoneyBasics dispels a few scary and looming "myths" that keep many Americans up at night because of our seemingly unpayable national debt.

What is MMT and why is it so different to anything most of us have heard about the economy? Looking at MMT closely, it is merely a way to justify the amount of government intervention in our current system. MMT is a way to make people feel at ease about our current system, which is not working. What continues to propel MMT forward is the hope it gives that the debt and constraints on government spending are needless and harmful barriers to economic growth. MMT asserts that the only reason we cannot recover from an economic downturn and have a thriving and healthy economy is that we fail to see how modern money and banking operates.

If MMT takes hold, it could lead to a dangerous path for the nation. One of the fundamental positions of MMT is that the currency-issuing state can never go broke and can always create enough money for their debts. Taxation in MMT isn't because the government needs our money, but merely to regulate demand. Also, deficits are insignificant when the government can issue more currency.

An Explanation of Austrian Economics

While MMT stresses government intervention as the only solution to our problems, Austrian economics takes an entirely different approach. This school of thought, originating in Vienna in the late nineteenth century, leads to the conclusion that the economy performs best with the least government intervention. Libertarian or laissez-faire economics also take the free-market position. Austrian economics focuses on the concept of opportunity cost and how money begins in the market. In Austrian economics, the best deployment of resources is by private owners in the private sector.

Hayek (1899-1929) was one of the staunchest defenders of Austrian economics and rejected any intervention in the economy by the state. He taught that the economy operates best when the market has easy access to information, prices controlled by the free market, and no barriers to entry.

The issue that Austrian economics addresses is not inflation but over-investment because of too much money or too low of interest rates. Over-inflation merely is the result of these two things. Over-inflation happens when the growth of the money supply is much higher than the growth of goods and services in the economy. Thus there is a right or 'natural rate of interest' that is essential to prevent a crisis because it will attract enough investment to lead to full employment without inflation. Likewise, the founders of the theory predicted a succession of low-interest rates, too much debt, investment bubbles, and a crisis, which came true in the global financial crisis of 2008.

What is Modern Monetary Theory?

Libertarians Ron Paul and Chris Rossini both condone Austrian economics and condemn modern monetary theory as an intellectual justification for a greedy system. "All we're dealing with is politicians who want to take what isn't theirs to take and spend what isn't theirs to spend, but they need some kind of intellectual backup, some justification," Chris Rossini, Ron Paul's co-host on The Liberty Report, said. "If you're in the ivory tower and you can somehow justify with all your charts and statistics why theft is good and why government should take what you have and give it to somebody else or vice versa, it doesn't have to be true; it just has to be believable and sold. You could hit the jackpot if your idea sells. That's where the intellectual backup comes for these crazy government programs."

To Ron Paul and Chris Rossini, MMT is just a way to intellectualize a flawed and greedy system. It's just a way to try to reassure the people and tell them, "Don't worry, we can handle this. We can help you pay your taxes and give you what you want." It puts people at ease to believe deficits aren't harmful and if there's any unemployment, the government can generate more money. It's the same as our current system, but MMT provides a way for people to feel better about it. They say the deficit isn't a problem, and the government can print more money so people can pay their taxes to pay off the debt.

The problem with this is that it's not the truth. Money doesn't originate with the government. Money originates in the marketplace, and it's a commodity. According to MMT, the origination of money is in the state and is a monopoly, which contradicts the whole notion of liberty and the free market. Austrian economists wanted us to move away from this and let the marketplace completely control the money, but the government does not want to be bothered by any restrictions. MMT, Paul says, supports authoritarianism, central banking, and all the things that contradict the principles of liberty.

Likewise, MMT'ers will stop inflation by raising taxes on people. "When you print money, the people who receive that money first are the beneficiaries," Chris Rossini said. "If you print money and everybody got an equal amount there would be no point to doing it. The people who receive the money first can go into the marketplace and bid up prices, and everyone else suffers because these people are marching into the economy with this new money and bidding up prices. So now you're getting hit twice. First with the inflation tax and then the government is going to come in and tax you more to tame the inflation."

Ron Paul said, "It's a strange one, but frankly I don't find much new in it because it's justifying the very system that we have. They've just changed the names a little bit, but they want to be a monopoly, and they want to monetize debt. They worry about the fact that the people may not have enough money to pay their taxes, so this is designed so the people will have more money so the people can pay their taxes. It will provide enough money for savings so people can spend. [This will] generate a way to pay for the debt because it's being recognized that the debt is extreme and there has to be something done about it, but the balance is not to be dealt with from the slightest notion that you have to cut anything."

MMT postulates national debt is currency accrued through trade with other countries, which gets saved meaning the US debt is a savings account, and so is the debt of any other nation that is a currency issuer. The US saves money from other countries that it has already spent, which makes up the national debt, a record of all the savings of US dollars since the nation began that it has not yet taxed back. In MMT, the deficit is the reasonable and necessary process of a currency-issuing country spending more money than it takes out of the economy through taxation. The point of MMT is that "Debt ceilings" and "balancing the budget" are senseless limitations keeping the government from doing what it needs to keep the economy thriving and healthy.

So how does the government help in our capitalistic economy that is dependent on sales growth? It just blasts money straight back into the economy. So the more money the government spends, the more it has to remove through taxation for our economy to stay at full employment and avoid inflation. The role of a currency issuer, in other words, is to manage the currency to balance the economy. That's the role of Congress, to be an unlimited spender that can do whatever it wants and spend as much as it wants.

So is this true? Is the national debt more like a giant savings account than the debt incurred by currency users, or is this just a way for politicians to justify out of control spending?

A Defense of Austrian Economics

Ph.D. Senior Economist with the Institute for Energy Research and author Robert Murphy shows that MMT is the latter and that the debt is, in fact, the result of out of control spending that the country will have to pay for sooner or later. The debt is real debt, money the state has spent that must be paid back at some point.

Murphy gives a defense of Austrian economics and explains its framework in his debate with Warren Moser, an early developer of MMT: "The Austrians stand for economic explanation being centered on the individual," he says. "They don't normally look at things in terms of aggregates but try to look at things in terms of micro-economics and tend to be very free-market in terms of their policy recommendations."

Murphy goes on to say that if the government wants a reduction in poverty, to avoid the business cycle and crippling inflation, it must not interfere with freely set market prices, or change interest rates. If the interest rate is supposed to be 7% and the federal reserve comes along and somehow makes it 0.5%, it's going to screw things up, Murphy says. If interest rates are artificially low, it causes an unsustainable boom. "Prices are an incentive, and if you lower the price, that's going to cause people to buy more than they really ought to be doing," Murphy says. "If the price of oil is supposed to be $100 barrel and the government somehow makes it $40, that's going to screw things up causing dislocations in supply and demand."

The Results of Justifying the Current System

Moser himself said Congress sets the rules and Congress appropriates the spending and is constrained only by themselves. Congress' checks will not bounce unless they decide to bounce their check themselves. When Congress has a monopoly on the market, this interferes with the principles of liberty that should govern our country's economics.

The federal government has a habit of printing money to bail out rich investment bankers who make bad investment decisions, reducing interest rates and interfering with freely set market prices. Such an approach from the feds, says Murphy, does not cause genuine prosperity. Bernanke, for example, changed interest rates after 9/11, which, in Murphy's view, only postponed a recession and made it much worse in 2007-2008.

The federal reserve has not learned and is doing the same thing again. The federal reserve is willing to be a backstop for banks and buy them out when they are about to go broke and pay them above market prices. By lowering interest rates again, they are setting us up for another boom and bust. To do this with a trillion dollar deficit would be dangerous in a healthy economy, but it was much worse to do at the beginning of 2009. It is just a matter of time before we see this next bust in our economy as the result of the federal government's choices.

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so true. the whole world is trapped in this system. it is possible to get out. just need the power of education and people need to open their eyes. however this will be a slow process. with much opposition. perhaps in our lifetime. we might see positive change

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Thanks for telling me the more knowledge the better

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Enlightened by your thorough explanation of MMT. I thought I had a decent idea of MMT until I read your post.

I’m interested in knowing where does your inclination lie?

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I support the austrian school of economics as the most well thought out and reasoned 'policy'. The economy is highly complex and central planning will always lead to sub-optimal outcomes. See: economic calculation problem - Mises and Hayek

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I had extensively studied Mises and Hayek for my masters. Found their thoughts interesting.

Although personally, I wouldn’t agree on your thoughts in the Austrian School, inspire of the flaws of the current system. There’s so much the Austrian school doesn’t take into consideration IMO.

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MMT
....when postmodernist logic tries to be applied to the real world

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