The deeper I delve into Modern Monetary Theory (MMT) for financial advisors, the more I am convinced that, for me, there is only one certainty about Modern Monetary Theory (MMT):
Attempting to embrace the MMT concept forces me to set aside everything I thought I knew, learn something completely different, and stop believing in what I set aside.
Why has MMT surfaced recently?
In the 19 months leading to the 2020 election, there is likely going to be a lively debate between traditional candidates and candidates who believe the government should be more active in providing for the needs of its citizens. Issues debated could be concepts like Medicare for all, government paid college, guaranteed income and jobs, and the Green New Deal.
Touting price tags as high as $93 trillion for 10 years for the Green New Deal alone, opponents ask the question, “Where the money will come from?” Proponents may point to MMT as a possible solution.
What is MMT?
At its simplest core, MMT proposes that if a country has its own currency, the amount of debt it accumulates is generally not a concern because it can always print more money to pay its debt.
MMT maintains that as long as there is full employment and economic growth to meet growing demand without igniting inflation, the government can spend as much as they need. MMT could be seen as a way to achieve social programs, full employment, or climate and environmental change.
Main Points of MMT
1 – One of MMT’s foundations is John Maynard Keynes’, Paradox of Thrift. In essence, it says that, while a household in financial trouble can recover by cutting spending when their income falls, an economy cannot. One household’s spending is another household’s income. If in lean times everyone cuts back, no one is paid, and that could result in a severe recession.
Keynes argues that the only way out of this kind of financial trouble is through government intervention. Unlike the private sector, a government can spend freely, putting money back into each household and getting the economy back on track.
2 – Historically, the issuance of government debt and taxation has been the preferred way of funding government programs. MMT suggests that neither more debt nor taxation is required to fund government programs, as the government can simply issue new money. In fact, MMT views taxation as a means of preventing inflation by draining just enough money from consumers and businesses to avoid excess spending, not as a way of funding government programs.
3 - MMT believes the imposition of taxes should not be a reaction after inflation occurs. In fact, MMT argues that from the outset of the budget process, not allowing Congress to spend money without paying attention to inflation and taxes needed to control inflation.
4 - However, taxation is only one part of the equation to control inflation. There are other factors, like tightening of financial and credit regulations to reduce bank lending and market finance, or the issuance of bonds to remove money from the private sector.
5 – Contrary to what I read from opponents of MMT, I have yet to read a MMT proponent who argues that the government can print money and afford any social program they want. They recognize the need for resources, as without resources, no amount of money would matter. There also seems to be an understanding that of out of control deficits are ultimately detrimental and could cause excessive inflation.
6 – Traditionalists believe it is the job of the Fed to achieve both maximum employment and stable prices. Alternatively, MMT believes that creating money to insure jobs will not only result in full employment but also the creation of money increases supply of bank reserves, which may drive down interest rates to near zero. They argue that as long as economic growth through full employment is higher than interest rates, this satisfies the dual mandates of maximum employment and stable prices.
I am not suggesting that MMT is the next big thing or a road to disaster. Instead, consider this laying out my thoughts to help you grasp the issues and understand the debates that are likely ahead of us as we slide closer to November 2020.
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