At a time when some market observers are increasingly of the opinion that America may be heading toward a recession, a fringe financial theory is starting to make its way around Washington DC. Pushed by bipartisan support from prominent politicians like Alexandria Ocasio-Cortez and – some would argue Donald Trump himself – Modern Monetary Theory (MMT), which has hitherto been regarded as a borderline lunatic idea is making a serious comeback into the political and economic conversation.
CCN.com recently reported that Berkshire Hathaway chairman Warren Buffet issued a stinging dismissal of MMT, referring to it as a “danger zone,” following supportive comments from Ocasio-Cortez. Speaking in his Bloomberg column, Director of Economic Policy Studies at the American Enterprise Institute Michael Strain describes MMT as “lunacy,” and “fully deserving of its place on the fringe.” What exactly is MMT and why does it generate such strong reactions?
Under the conventional American monetary system which is emulated across the capitalist world, the central bank is the only institution empowered to issue national fiat currencies. It is an independent institution which is not directly controlled by the government because the consensus is that placing the ability to manage money supply in the hands of politicians will only lead to terrible results, a la Venezuela.
MMT however, turns this paradigm on its head, stating that a government should be able to create and issue its own money. The basic idea behind MMT is that a government that issues its own money can never fail to meet its obligations because no matter what said obligations are – increased military spending, universal healthcare and so on – it can simply print some money to pay its bills.
If that sounds suspiciously like Quantitative Easing, that is because it is exactly that – government-controlled QE on steroids ad-infinitum. According to the theory, MMT can avoid the expected inflationary pressure of QE because the government can use taxation to restrict or loosen money supply (which is currently controlled by central bank interest rates). What MMT does not account for, however, is the scenario where too much money chases too few goods causing inflation, and then the only way to suppress inflationary pressure is to raise taxes on already impoverished taxpayers.
One would expect that such a utopian-sounding theory would be the exclusive preserve of the Left, and true to form, Alexandria Ocasio-Cortez has expressed her support for the possible implementation of MMT. The political Right, however, is also in on the act because like the Left, it sees an opportunity within MMT to carry out its preferred policy of tax cuts without harming its ability to fund the government budget or increasing the deficit.
Ocasio-Cortez no doubt sees MMT as a chance to boost the economy by ramping up social investment and government spending according to Liberal economic theory. In other words, both halves of the political paradigm see MMT as a financial get out of jail free card, enabling them to reduce taxes or spend recklessly without the pesky central bank coming by with a deficit tab to deal with later.
President Donald Trump may well turn out to be MMT’s most important – albeit most surprising – ally because he has repeatedly demonstrated that the size of America’s deficit is the least of his worries. Indeed, Trump is already practicing a form of MMT by swelling the deficit and effectively daring any lender to take a position against the “too big to fail” U.S. economy.
Overall, the important thing to know about MMT is that it has never been successfully trialed anywhere. Recession or not, it would be unwise for political expediency to start promoting Venezuela economics, regardless of how rewarding it may seem in the short term.
Last modified: July 2, 2020 7:32 PM UTC