Sunday, March 31, 2019

MMT is not a Theory

In this discussion, “currency” is used in a collective sense, that is, paper money, reserves, electronic credits, etc.

MMT, Modern Monetary Theory is not a theory. It’s just an explanation of the way things work in a country that issues a currency that is not backed by a valuable physical asset, enacts taxes that are payable only in that currency, and doesn’t incur debt in another currency. This is the way our federal system operates now.

Unlike individuals, states, and countries that don’t conform to these principles, the US can never go bankrupt. It can issue new currency for any purpose that requires it. It doesn’t need to issue government debt because its needs its own currency. It does so because people holding the currency want a secure place to earn interest on the currency they hold and a way of removing spending power from the private sector when the economy is overheating. Interest rates set by the federal reserve are used to keep the system in balance.

Currency issuance increases demand, so it will stimulate the economy. If the demand for goods and services exceed the ability of the economy to provide them, due to shortages of labor, materials, or infrastructure, prices for these means of production will increase (inflation), so demand must be curtained, until supply can keep up with demand. This is where taxation and federal debt come in, to reduce demand until supply catches up.

The best way to increase demand is to put money in the hands of people who spend it, not into the hands of people who use it to buy up assets beyond what is needed for production of goods and services, increasing the price of assets. When people spend money it creates more demand for goods and services, more profits for corporations, higher wages for employees, etc (demand pull). I makes no sense to keep a substantial portion of the population in poverty, burdened by worrying about their health or survival, depriving them of the education, transportation, or other tools they need to maximize their productivity. The more people that are healthy, motivated, and are producing in the economy, the less likely it will be that shortages and inflation will develop, limiting the growth of the economy.

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