by The interest in Modern Monetary Theory has grown as the limitations of ‘mainstream’ economic theories have become ever plainer to see since the financial crisis.Modern Monetary Theory (MMT) is a theory, initially emanating from left-wing US economists, that argues that since governments, and in particular the US government, issues its own currency, it can never run out of funding.The corollary is that it is possible for the government to spend more to push the economy towards its full growth potential and full employment. The theory argues those limits on spending have not been reached in the US yet, so there is room (and even a need) to cut interest rates to zero and inject more money into the system.The theory invites a change in viewpoint, especially with regards to government
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Thomas Costerg considers the following as important: Federal Reserve, Macroview, Modern Monetary Theory, monetary policies
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The interest in Modern Monetary Theory has grown as the limitations of ‘mainstream’ economic theories have become ever plainer to see since the financial crisis.
Modern Monetary Theory (MMT) is a theory, initially emanating from left-wing US economists, that argues that since governments, and in particular the US government, issues its own currency, it can never run out of funding.
The corollary is that it is possible for the government to spend more to push the economy towards its full growth potential and full employment. The theory argues those limits on spending have not been reached in the US yet, so there is room (and even a need) to cut interest rates to zero and inject more money into the system.
The theory invites a change in viewpoint, especially with regards to government deficits: it is not taxes that fund the government, according to MMT: the government creates money with its spending, and thus also creates the currency with which citizens pay their taxes. The theory implicitly argues for combining the functions of central banks and financial ministries.
The theory still sees potential constraints to expansive spending and monetary policies from rising inflation if capacity utilisation reaches its limits, but the theory remains vague about when precisely such constraints would kick in. MMT argues that the government can hike taxes to remove money in circulation if needs be. But critics voice doubts over the political feasibility of such tax hikes.
Critics also wonder about the wisdom of merging the functions of a finance ministry with those of the central bank, which would lose its independence and its claim to be the guardian of ‘sound money’. Supporters of MMT retort that continuing with current monetary policies risks pushing economies into deflation and Japan-ification; economic policy should be bolder.
MMT is rejected by the Federal Reserve and mainstream economists. Still, it is stealthily gaining traction in Washington DC as the Federal Reserve moves to cut rates again and Congress continues to spend abundantly, pushing the budget deficit and federal debt higher.