Modern Monetary theory

[meierlde]

The principles of it are (from the Wikipedia Article below)
"
MMT's main tenets are that a government that issues its own fiat money:

1. Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;
2. Cannot be forced to default on debt denominated in its own currency;
3. Is only limited in its money creation and purchases by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment;
4. Can control demand-pull inflation[13] by taxation which remove excess money from circulation (although the political will to do so may not always exist);
5. Does not compete with the private sector for scarce savings by issuing bonds.

These tenets challenge the mainstream economics view that government spending is funded by taxes and debt issuance.[14][15][12] The first four MMT tenets do not conflict with mainstream economics understanding of how money creation and inflation works. For example, as former Chair of the Federal Reserve Alan Greenspan said, "The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default."[16] However, MMT economists disagree with mainstream economics about the fifth tenet, on the impact of government deficits on interest rates.[17][18][19][20][21]



The only disagreement between this and mainstream economics is the question of if government borrowing pushes up interest rates. With this theory defict spending is ok. Another line is " Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government's deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government's activities by itself. " This theory does completly away with the idea of budget balancing being a goal in and of itself. " As the article says it turns the idea of austerity on its head.











https://en.wikipedia.org/wiki/Modern_Monetary_Theory

 

[Montecfo]

A government's budget is not like our household budgets (where balance is essential) for the reasons you state.

MMT has some merit, especially as large deficit become more commonplace without a blow-up.

Having said that, at some point confidence in the currency collapses and then you do have rampant inflation, reduction in living standards and possible economic collapse. And the timing cannot be predicted.

 

[Ian S]

Having said that, at some point confidence in the currency collapses and then you do have rampant inflation, reduction in living standards and possible economic collapse. And the timing cannot be predicted.

As long as the Federal Government has the authority to tax and requires payment of said tax in $US, the currency must retain value. Furthermore, taxing is one of the tools the government retains to actually curb inflation before it gets out of control. Under MMT, taxes are in effect money taken out of circulation and therefore anti-inflationary.

 

[aleabo]

it is theoretically works in the socialist system where everything belong to government.
In this case government just pays you how much it wants and provide free services (Medical, education, etc.). This is how it worked in Soviet Union. Do you remember how it ended?
In normal economy printing money - increasing government spending always will lead to inflation and possible economic collapse.

 

[RobLJ]

This is just a modernization of Keynesian economics, although in the US, we stimulate when the economy is not in recession/depression.
And I would point out that the current administration has pretty much relied on MMT, despite all the rhetoric--just look at the deficit for the last 4 years. It's all gone to corporate taxcuts, defense, and farmer bailouts; I suppose one could cavil about the beneficiaries as not exactly top priorities.

The notion that either party could claim to be fiscally responsible is a bit of a joke, at least under classical economics. Socialism has nothing to do with it.

And by the way, what is inflation? This economy for 25 years is eerily reminiscent of the Depression only with MMT spending to avert a complete collapse (under both parties.)

Socialism's got nuttin to do with it.

it is theoretically works in the socialist system where everything belong to government.
In this case government just pays you how much it wants and provide free services (Medical, education, etc.). This is how it worked in Soviet Union. Do you remember how it ended?
In normal economy printing money - increasing government spending always will lead to inflation and possible economic collapse.

 

[Montecfo]

As long as the Federal Government has the authority to tax and requires payment of said tax in $US, the currency must retain value. Furthermore, taxing is one of the tools the government retains to actually curb inflation before it gets out of control. Under MMT, taxes are in effect money taken out of circulation and therefore anti-inflationary.

I think you are suggesting that the dollar will retain some value as long as the federal government retains the power to tax and requires payment on US dollars.

That is true, but it does not suggest that value will not change over time based on currency flows and confidence, which was my point.

 

[Koolau]

I recall sitting in a 100 level course in econ CA. 1966 or so. We learned about money creation and destruction by the FED (or whomever had a central bank.) At that point I decided it was all smoke and mirrors. I remember thinking "Yeah, that will work - until it doesn't." Nothing in my thinking has changed since then. It's the only game in town so I just hope I'm gone before the emperor hears the little boy giving him (and everyone else) the bad news. YMMV

 

[donheff]

I think we have been testing MMT since the 2008 recession. A number of commentators say Japan has been testing it for 30 years. So far, so good. (Of course, that is what the jumper said as he passed the 50th floor.)

I just wish we would do something helpful with some of the money, like infrastructure or better general health insurance.

 

[RenoJay]

MMT reminds me of housing. In the lead up to the housing bubble the common refrain was “home prices have never dropped on a national basis.” Pretty soon, that factoid (which I doubt was true....I think home prices did drop nationally during Great Depression) was twisted to infer that home prices “couldn’t” drop, and this twisted logic was used to justify giving 103% negative amortization loans to cab drivers to purchase their fifth vacant investment property. Generally, soon after a rule of economics is “discovered” it stops working because people’s behavior changes. With MMT, I see this being used to justify crazy deficit spending and bond issuance. I don’t know how it’ll end, but I do believe the US is losing credit worthiness with foreign countries and that at some point our neighbors will question the value of the paper in their wallets when it’s created out of thin air by the trillions. Long story short: I think MMT is a fairy tale.

 

[RonBoyd]

(Sometimes it takes me a minute to catch up.)

The Fisher Equation and Marginal Revenue Product (MRP) of Debt

Falling real yields and inflationary expectations, via the Fisher equation, force government (risk-free) bond yields lower. But full application of the law of diminishing returns is also at work. Diminishing returns occur when a factor of production, such as debt capital is overused. This observation is confirmed by the decline in the marginal revenue product of debt. Economic theory demonstrates than when the MRP of a factor declines, the price received for that factor also declines. If, for example, labor is overused to the extent that its MRP declines, so do wages, the price of labor. Thus, the decrease in MRP of debt due to its overuse, indicates that interest rates, the price of debt, should fall. This is exactly what is happening in all the major economies of the world that are suffering from a debt overhang. Thus, considering decreasing interest rates as an inducement for governments to spend more borrowed funds will add to the severity of the debt spiral. If policy makers are incentivized to borrow more because interest rates are low, then the MRP of debt will fall, leading to even weaker growth. Moreover, interest rates are lowered indirectly by poorer growth and inflation, and by a further fall of the MRP of debt. Thus, the whole premise of Modern Monetary Theory is flawed at the core. The low interest rates are not a potential benefit for the economy, they are a result of the overuse of debt.

https://hoisingtonmgt.com/

 

[meierlde]

MMT reminds me of housing. In the lead up to the housing bubble the common refrain was “home prices have never dropped on a national basis.” Pretty soon, that factoid (which I doubt was true....I think home prices did drop nationally during Great Depression) was twisted to infer that home prices “couldn’t” drop, and this twisted logic was used to justify giving 103% negative amortization loans to cab drivers to purchase their fifth vacant investment property. Generally, soon after a rule of economics is “discovered” it stops working because people’s behavior changes. With MMT, I see this being used to justify crazy deficit spending and bond issuance. I don’t know how it’ll end, but I do believe the US is losing credit worthiness with foreign countries and that at some point our neighbors will question the value of the paper in their wallets when it’s created out of thin air by the trillions. Long story short: I think MMT is a fairy tale.

The only issue here is most governments are doing it at the same time. Even Germany has gone for deficits. It may be a race to the bottom, but inflation has been expected to run rampant for the last 10 years and with the yoy infation at 1.3% it is currently no where to be found.

 

[Starsky]

Mainstream economics is the model that politicians use when they are making a political argument. MMT is what policymakers accept as the way our system is actually set up to work.

Understanding the difference is crucial to understanding why there appears to be such a disconnect between political debate and actual monetary policy. It's dangerous because we push our government to take actions based on the wrong economic reality; and they deny us things we really need in an effort to keep us from wanting too much. Simple things like mental health programs and food for the hungry are somehow controversial for being too expensive; and kayfabe about fictional 'welfare queens' is legion. Funny how when the poor steal to survive we punish all poor people; and when the rich steal for greed we use the theft to prop up their contrite peers to show how unnecessary any other rules might be thanks to all the good things they do. But I digress.

The key element in maintaining MMT at full employment is productivity gains. If we become less productive, then the debt becomes unsustainable. That is why productivity gains are so important, and ultimately what is required to keep the balls in the air in a well-functioning economy. If we start to look like we are unreliable debtors who don't have the ability to grow our own economy, then the problems will really start.