Hey!
I just have been seeing a lot about Modern Monetary Theory (MMT), and I just don’t understand it. I’ve taken an economics class so I know what inflation is and everything, but I don’t know what it is or how it works or doesn’t work. Help is appreciated. Thank you!
In: Economics
It’s a frame work for analyzing the money system. The basic idea is that you can look at currency as a thing that is created at a source (a currency issuer) by spending. The money does some amount of circulation in the economy, and flows to a currency sink (taxes) which removes excess currency from circulation.
The non-crazy version is that governments could borrow a lot more money before triggering runaway inflation than most economists think. So politicians could spend a lot of money on [whatever] without worrying about how to raise the revenues to pay for it, and be retired before the chickens came home to roost, leaving their successors to deal with the consequences.
So, if you’re a policy planner, the way that government programs are funded is actually kind of hilariously convoluted;
1) A central bank prints money and loans it out to smaller banks.
2) Those smaller banks loan it out again to other banks, financial institutions, businesses, people, and so on.
3) That money cycles around in the economy for a while until it’s recouped as tax revenue.
4) That tax revenue can then be spent by the government.
This means it’s a relatively long and slow process, which can be problematic if you’re wanting to increase or change government spending extremely quickly (e.g. Wartime economics). The alternative, under the idea of MMT, is that the government should basically just print money for it’s projects and spend it directly; from the economy’s perspective it doesn’t change that much. However, this changes the incentives behind taxation; under MMT, you no longer care about revenue, but instead you tax in order to remove money from the economy as a way to directly combat inflation.
On paper, it actually works out, but in practice you end up having to worry about capital flight as there’s a real risk that your currency becomes worthless because you’re printing too much of it; you have to stop them from dumping your currency in favor of something else. Thus, there’s only two ways for MMT to work;
1) You have extreme capital controls that essentially prevent money from leaving the country under any circumstances.
2) You have such an insanely valuable currency and economy that people are never going to want to not hold onto that currency.
Option 1 is, in effect, what China has been doing for the past 20 years, and is a major part of why they’ve been able to kinda-sorta stay out of recession. However, it remains to be seen whether or not it’s sustainable, and there are quite a few signs that the Chinese economy is not nearly as healthy as it’s being presented as.
Option 2 is something the United States could, on paper, do, entirely because of the sheer weight of the US Dollar on global finances (e.g. something like 95% of global transactions are denominated in dollars, with Euros and Yuan being a very distant second and third place), and the fact that there just isn’t an alternative global reserve currency in place that is simultaneously trustworthy enough and issued in a high enough volume to liquidate the entire global economy.
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