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The Economics of Modern Monetary Theory

Published on 1 June 2021 at 13:34


MMT (Modern Monetary Theory) is a recent theory in economics within the macroeconomic thinking that aims for public policy to understand the strength of their currency and use the money to the full advantage of their economy. 

 

MMT fundamentally understands the origin of money differently to traditional thought, MMT sees Chartalism as the creation of money. Where the state is the reason for currency as the state directs economic activity rather than spontaneous actions because of the barter system or tokenized debt.

 

Hopefully, the boom-bust cycle will be a thing of the past, and it shares similar hopes to Keynesian thinking because it is itself, a form of Post-Keynesian economic thinking. 

 

President Biden’s spending plans mirror the potential implementation of MMT. 

 

Before exploring such an interesting Macroeconomic topic, it is worth noting that countries like Ireland cannot experiment with MMT due to being a Euro currency user. The ECB has strict currency controls, and every user of the Euro gives up their ability to engage in monetary policy. 

 

Additionally, we use Fiat currency, and Fiat means ''Let it be done'', arguing that money has the value it has because we say so. Money is also defined as three things: a medium of exchange, a store of wealth and a unit of account (common measure).  

 

It is far from useless in its intrinsic value because our day to day lives revolve around it. There is a constant demand for currency that motivates actors in the economy. Utilities, leisure, taxes and so on can only be paid in currency (cash) and therefore require individuals to acquire said currency. This creates value for it. 

 

MMT sees money creation in more modern terms and recognises that most economic thinking, in theory, is outdated or no longer fits into current economies. Whereas Econ 101 would have covered all bases, MMT asserts that economics is an ever-moving process, and that concepts of money creation and fractional reserve banking are incorrect in the modern-day application. 

 

Banks no longer need a near equal amount to lend out; in fact, they only need a certain requirement. Most of the loans issued to accounts are digits on a screen that is entered into an account through a backend.

 

This, in some regards, can be seen as the quantitative easing performed by the ECB following the Euro Crisis where the money supply was increased in M3, (hence no inflation) in the shape of bonds and debt for businesses and banks.

 

In the end, money printers were not printing, but instead, numbers were entered in a computer, and an account somewhere received that amount. 

 

This leads to MMTs biggest idea and the most controversial one at that; Governments can just print money to spend it. Arguing that money creation does not lead to devaluation outright or inflation for that matter and that economic chaos is the result of another symptom. 

 

The focus is releasing that during every boom-bust cycle, the rate of debt to GDP ever increases during these cycles. Furthermore, Debt to GDP becomes ever more irrelevant when a nation can exercise monetary policy over its debt. Austerity and turning the taps of Government spending hurts the economy and loses opportunities along the way. 

 

In 2005 during testimony to the US House Committee on the Budget, Fed chairman at the time, Alan Greenspan, said, "I wouldn't say pay-as-you-go benefits are insecure in the sense that there's nothing to prevent the federal government creating as much money as it wants in payment to somebody."

 

Mr Greenspan also explained in his statement that the real issue is if there will be enough assets or resources to support the extra money in existence. So, in short, whether there will be enough supply for the demand.

 

In the US alone during the 2008 crisis, the $1 trillion bailouts for the banks were not taxpayer-funded, it was ''printed''. As explained earlier, what the Federal Reserve (central bank) did here was simply to use a computer to add money to banks bank accounts. 

 

But many are aware of money printing disasters such as Zimbabwe and post-war Germany. Or why does Japan, which has a deficit of 240% of GDP little to no inflation? Raising very pointed questions to our assumptions about currency and debt in macroeconomics. 

 

MMT asserts that money creation does not cause inflation and that it is the product of something else. For Zimbabwe, it was money creation following a drop in productivity and a fall in the production of goods.

 

Where there was nothing to back up the money creation. The same goes for post-was Germany; little infrastructure and labour was the cause for inflation, not the creation of money itself. As stated earlier, there was not enough demand for the supply of currency.

 

Unlike QE done for banks and financial institutions in the recession, MMT argues that right now, money should be injected into the M1 money supply. MMT would like to see governments print money for direct spending on grants for businesses, more infrastructure, and more education spending.

 

 While classical economists would say such actions would create inflation and hurt the free market, MMT supporters counter by pointing out areas that the free market does not care for or is incapable of. Mainly infrastructure which MMT would focus on. 

 

However, MMT, like Keynes, talks about money creation, but the subject of wealth and value creation are lacking. In short when all available recourse is in use-additional money supply will result in inflation. MMT also believes that inflation on prices and so forth occurs when the Government and the private sector begin a bidding war. In a competition for idle resources. 

 

Tax, in the end, would serve as the anti-inflation tool. Whereby tax acts as a destroyer of money, as the actual tax does not fund real government spending. During periods of inflation during the 1970s and 1980s, one remedy to lower inflation was to increase taxes to drain the money supply. 

 

In short, Governments should be seen as not as households but as a bank because Governments can create their own money. (monopolistic power over currencies) Money is created to be spent, taxes add value to money and governments don't balance accounts as a household would.  

 

When a government is running a deficit, it is the private sector that holds the surplus, and the deficit is only the difference between what was spent and taxed from the same money supply. MMT puts deficits down as backwards thinking that hurts economies rather than help them.

 

In the case of Ireland, EU stability rules and monetary controls mean Ireland cannot deficit spend to fight against economic downturns or print away some of the debt it owes (lowering interest rates).

 

When it comes to bonds and the foreign exchange with MMT, it is a all about how money markets might perceive and, in turn, act upon outcomes of monetary policy. In the ideal scenario, a government would not need to sell bonds to generate money but rather to drain it.

 

As it stands currently, if a government wishes to spend more, it issues a bond which it buys from itself,( Central bank purchases) which in turn is then spent into the economy. 

 

MMT has a long way to go, and it is up to its proponents to defend it. With the likes of Bernie Sanders, AOC and Irish Economist David McWilliams liking the idea, it is proving popular in macroeconomic thought, and it remains to be seen whether we will see widespread implementation of such a macroeconomic policy.


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