Modern Monetary Theory?

Modern monetary theory or MMT as it’s popularly called has invited widespread debate amongst various circles. MMT has also resulted in one of the few times where debate in the political circles has led to a contentious debate breaking out amongst economic circles (See the green new deal) and not vice versa. More often that not ideologues in the economic circle light a fire that leads to a debate amongst their disciples in the political sphere. But before I go further, I’m sure a lot of you are probably wondering what the heck is MMT in the first place. The simplest explanation I could find, apart from what it’s proponents tout (:p) is this: “MMT proposes that a country with its own currency, such as the U.S., doesn’t have to worry about accumulating too much debt because it can always print more money to pay interest. So the only constraint on spending is inflation, which can break out if the public and private sectors spend too much at the same time. As long as there are enough workers and equipment to meet growing demand without igniting inflation, the government can spend what it needs to maintain employment and achieve goals such as halting climate change.” 

Now the shortest retort and honestly, the most deserving would be, it doesn’t work. But I wish the world was as simple as the proponents/followers of MMT make it out to be, so here’s the long spiel: It doesn’t work. It doesn’t work. It doesn’t work. It doesn’t work. It doesn’t work. No, seriously, it doesn’t. 

Here’s why: While the concept of a country printing more money to pay off its debt makes sense on paper it ignores the simple fact that very rarely do investors buy debt that has a zero percent coupon rate. It’s a simple economic fallacy that the proponents claim they’ve considered, but have they really? They claim that MMT would result in the natural rate of interest being zero percent and investors would tweak expectations hence disregarding money as a stock completely. For most MMT’ers money is a secondary consideration, if a consideration at all. Now as somebody who grew up idolizing Milton Friedman, that claim to me sounds preposterous. The concept that nations can print their way out of a deficit is to run contrary to the basic notion of how money works. MMT argues that fiscal policy would have greater control over the direction of a country’s economy than money in this scenario. But here’s the thing, money has been part of human history much much longer than fiscal policy ever has, actually money has been part of human history longer than even nation-states. From MOU’s, brickbats to cash. It’s something that I wrote about a while ago here-

To summarize, a country cannot spend its way out of a deficit because investors will always ask for greater interest as the deficit increases. MMT proponent’s also argue that the Fed keep crediting the treasury’s balance sheet to fund expenditures and hence resulting in becoming the treasury’s biggest debt holder, it would lead to a scenario plagued with inefficiency, rent seeking and unnecessary spending at a scale that’s unprecedented. In a capitalist system, private debt holders and investors form an important clog in the balance & check of powers. Something that would cease to exist in a post MMT America. It would also lead to a scenario where government reins supreme and we’re on a path to totalitarianism (It’s as if Hayek’s Road to serfdom never existed). All in all, MMT is not a solution to the issues that plagues capitalism in the US right now. The lack of any positive solutions on the horizon shouldn’t lead us to one that results in a situation worse than the one we’re currently in. 

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