February 24, 2020

Our Ancient Monetary Theory

“With the presidential campaign under way, expect to hear a lot more about a shiny new toy of progressive economic thinking, “modern monetary theory.” It seems to be the only intellectual contortion that might allow candidates to promise virtually unlimited government spending without any deleterious effects on America’s currency, standard of living or liberty.

MMT rests on four basic assumptions:

• Because the government has monopoly power over its currency, it doesn’t face the same constraints that households and businesses do.

• Thus the traditional belief that governments must tax and borrow before deciding how much to spend is flawed. Governments can and should spend first to guarantee full employment. They can then decide how much they should tax or borrow, if at all. The central bank can simply enter money into accounts to make up any difference.

• In this sense a government deficit is the equivalent of a private-sector surplus. Greater government spending produces greater personal prosperity.

• Taxes, not interest rates, are the means by which the government would, if necessary, control inflation.

At its core, MMT seems to rely on the concept that peace and prosperity are the natural order of things. One could be forgiven for believing that it is a short leap between current U.S. fiscal policy and full-blown MMT. Few leading politicians, Republican or Democratic, care much about budget deficits. With little evidence of inflation resulting from extraordinary monetary accommodation of the world’s central banks over the past 10 years, why would they?”

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