eli5 What is Modern Monetary Theory?



eli5 What is Modern Monetary Theory?

In: Economics

It’s a theory that governments should, essentially, print money to finance spending and then raise taxes to rein in inflation.

Most economists do not take it seriously. In general, it will shift spending away from the private and toward the public sector and you would likely end up in a situation with low private spending and high savings rates which then get eroded away by inflation which finances public sector spending. In other words, people don’t spend much because of high tax rates and then lose value on the money they have saved to finances government spending.

If you believe that the state, generally, does a better job of directing spending than individuals in most situations, then you might not have a problem with this. However, let’s just say that that is not a common belief held among economists.

MMT posits that a nation that prints it own money, (i.e. a monetary sovereign) can not go broke. They also say that the sovereign deficit is not the indicator to watch but price inflation. The sovereign can pump endless amounts of money into the system as long as inflation stays at tolerable levels (roughly 2%)

I don’t know if I buy it completely but it makes some interesting points.

When trying to understand the Macro Economics of a nation that can print it’s own bills, you’ll go crazy trying to make all the numbers add up. Normal principles of economics simply don’t apply to you as they would a closed economy that has to literally balance it’s budget to the penny.

It’s best to consider every dollar given to the US Treasury/Federal Government (taxes, etc) is immediately taken out back and burned, removing it from the economy (Deflation). Consider every dollar spent by the Federal Government (for roads, grants, stimulus checks, incentives, etc) as one that is freshly printed (inflation).

This is why the US Congress doesn’t have to actually balance their budget to zero expenses vs income. They literally print an infinite amount of new bills to pay for every program, and balance it with an estimate of what will be burned out back each year in taxes/fines/literal fires. Very smart people analyze every program and advise Congress how much a new program will inflate or deflate the dollar.

So, something like the COVID Stimulus prints a shitload of money, inflating the dollar, but giving us a short-term boost that helps people not starve. The theory is that we’ll recoup it with taxes or not losing 20% of our working class to starvation and disease, who can then spend the next years making a taxable income.

Other bills will stimulate some new industry that directly competes (and wins) with another country like China or Mexico, forcing them to lower their prices, and giving our economy some kind of competitive edge.

It’s extremely debatable what bills are better or worse, but that’s Congress’ job, and I’m sure nobody would re-elect someone that consistently votes to pass bad monetary policy…