Introduction to Modern Monetary Theory

What is MMT?

Modern monetary theory is a heterodox (non-mainstream) macroeconomic theory based on post-Keynesianism that has begun to take shape in the last three decades. Nowadays, it’s attracting more and more attention. Its main idea is that the state’s economy will manage a high deficit because it cannot default on its own currency. It means that the national economy cannot go bankrupt in any possible scenario when it issues its own currency (however, it is applicable to a supranational currency like Euro as well). The government indirectly controls the aggregate demand (through taxes) and it sets the fiscal policy. Central banks then run monetary policy. According to the modern monetary theory, the limiting factor for the volume of state expenditures is the lack of real resources, full employment and inflation. Money is de facto unlimited.

Main principles

• The government is able to pay for goods, services and financial assets without having to collect money in the form of taxes or by issuing debt before these purchases.
• The government cannot actually go bankrupt, so it can never be forced to pay its debt (unlike individuals). Difficulties in repaying its own debt are solved by issuing a larger debt and thus depreciating the currency.
• The government is limited in the issuance of bonds (i.e. transferred by printing money) only by inflation, which increases as soon as economic resources (labor, capital and natural resources) are used in full employment.
• The government can control demand inflation through taxes that remove excess money from circulation.
• By issuing bonds, the government will not compete with the private sector for scarce resources.

These five principles question the view of the mainstream economy that government spending is financed by taxes and bonds.

Does it actually work?

I can’t tell you that. But I believe the latest fiscal policy enacted in the US can suggest that president Biden is not concerned with the national debt and the lack of money. If we accept MMT, national debt and debt/GDP ratio is just informative parameter. We should pay attention to inflation and unemployment. Is that the right paradigm? I have no idea. It is still an unexplored territory. But I believe we will see…

What do you think about this theory?