The coronavirus has taken governments around the world to new unprecedented levels. One of those has been the new economic model rolled out by central banks to fund the economic downturn during this time of likely recession. This article looks at what Modern Money Theory (MMT) is and its advantages and disadvantages.
What is Modern Money Theory?
We are heading into a new economic crisis. Businesses are shutting down all over the world and people are turning to governments to support failing economies. Some Western central banks have announced huge stimulus packages to help prop up markets, involving governments taking a huge amount of new debt, (Investopia, September 2019).
Learn about these spending commitments in ‘Could COVID-19 Government Spending Lead to HyperInflation?’ here.
Debt has always been seen as bad news, limiting opportunity and standard of living. This is where MMT comes in, as it allows governments to embrace debt and use it to their advantage. It dictates that a far more prosperous economy could be made if policymakers truly understood their power to spend money to solve a problem, without debt being an issue. A limitless cashflow for unlimited prosperity, (Macrobusiness, April 2019).
This is a deep and complex subject but here is a very basic rundown…
Put simply, Modern Monetary Theory says that:
- Sovereign currency-issuing governments can print as much money as it likes
- Taxes are no longer needed to finance government spending
- Inflation is one of the main limitations of a government’s ability to finance itself
- The role of taxes is to drain money out of the economy after the government has spent it
MMT has been a model of economics that many progressive politicians have endorsed for a while but has been disregarded by many experts. There are massive advantages to this theory, but also deep limitations, and these are important to understand. Some of these are outlined below:
Advantages of MMT
One can only dream of the possibilities of ‘the magic money tree’. The advantages of this form of economics mean that governments can prioritise the prosperity that they want to see without needing to collect taxes first. Advantages include:
- Stabilise failing markets
- Boost public spending on all social services including; education, medical, increased police force, etc.
- Boost public spending on infrastructure
- Investment in under-developed communities
- Increased prosperity and standard of living
- Revolutionising the entire political economy
Disadvantages of MMT
One of MMT’s biggest disadvantages is that inflation needs to be kept below a certain level for it to work. This is a massive challenge and would be managed through policymaking.
Once the cash injection reaches more than the economy can supply, spending would have to be cut back to avoid wage-price declines and taxation increases.
Smaller economies could not implement MMT without seeing negative repercussions on their own currency. Their deficits would have to be covered with foreign borrowing, and the more MMT currency they used, the more their currency would weaken. Not a great approach for everyone.
Other disadvantages include:
- Increasing market volatility
- Destroying functioning bond markets
- A potential decline in wages
- A potential increase in taxation
- Corruption potential with governments choosing who they want to give money to
With a large part of the world still in lockdown, risks of market failure and recession are definitely in the air. Central banks have prepared us by printing money. MMT has been embraced by global governments without question to keep markets afloat during this time, but whether this will stand the question of time, is still to be seen.
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