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BFI Perspectives 

  • Dirk Steinhoff

MMT Madness – Limitless Debt Forever?!

A growing number of so-called experts – economists, politicians, investment professionals – are joining the hordes of Modern Monetary Theory (MMT) believers. Questioning the validity of MMT, like having the gall of second-guessing other modern-day doctrines such as political correctness, climate change or institutional racism, is increasingly considered a matter of blasphemy. And yet, when a theory is so spectacularly wrong, and when the implications of its wide adoption are so dangerous, rational people must stand up and point out the obvious, even if that goes against the grain.


Many "experts" make it sound like MMT is the latest evolutionary step in human progress, possibly even a kind of progressive silver bullet. They promise that this theory will solve all our troubles, and not just the economic ones. It will fix social problems, political issues and generally pave the way to a utopian state.


It all sounds great, until you take a moment to read what MMT is actually based on, what it presupposes, and what it demands. Then, you can clearly see this is no roadmap to Shangri-La, but the surest way to tank an economy, disrupt a society, and poison any Western democracy.

But first, what is MMT and what are its core principles?


MMT was developed by American economist Warren Mosler and carries inspiration from older schools of thought like Functional Finance. In 1993, he published a seminal essay called "Soft Currency Economics" and shared it on a Post-Keynesian Listserv.


Web search interest in Modern Monetary Theory”

Source: Google Trends, Reuters Graphics


Support for MMT grew in large part thanks to the internet, where economists explained the theory on popular personal and group blogs. Political leaders like Alexandria Ocasio-Cortez and Bernie Sanders have espoused and openly endorsed MMT. Google search interest in the term spiked in May and July of 2019 and again in mid-2020 amid the coronavirus pandemic.


its popularity surged after Stefanie Kelton, professor of economics and public policy at Stony Brook University and former chief economist on the U.S. Senate Budget Committee, attempted to present it as a product of serious and legitimate academic research in her book "The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy". Rather than enhancing the credibility of MMT, it calls into question, at least to me, the credibility of the U.S. Senate Budget Committee and Stony Brook University.


If one had to summarize MMT’s core arguments, they would go something like this:

  1. Sovereign currency-issuing governments are financially unconstrained.

  2. Taxes are not needed to finance government spending.

  3. The role of taxes is to drain money out of the economy after the government has spent it, to manage aggregate demand, and to keep it in line with the available supply of resources.

In short, MMT says that a government can finance any budget deficit by de facto monetization and hence have no monetary limits.

In essence, this comes down to the proverbial “free lunch” for the government. And quite predictably, the politicians love it. They no longer need to be concerned with the ramifications of out-of-whack budgets: they can just keep spending and keep accumulating debt.


If they want to finance a gigantic and popular “green deal”, the money for that is created by the central bank. If it seems opportune to promise a universal basic income for everyone, the central bank will take care of that too. If the government wants maternity leave for 6 months, combined with perhaps another 3 months for fathers, let's do it...


It's all paid for, no problem! In other words, MMT really stands for “More Money TODAY!”


You get the picture. And yet, as wonderfully utopian as this all sounds, we must temper it with a reality check and call out some important facts about MMT:

  1. MMT is not modern: Monetization of the fiscal deficit via coin debasement goes back to the ancient Greeks and the Bible, which are replete with references to it.

  2. MMT is not just monetary: It involves money creation, but it is closely tied to fiscal matters and it is about power (recall the adage: “money is power”).

  3. MMT is not a theory: It has been tried for real, and the results have not been particularly positive:

  • Weimar Germany –hyper-inflation (a case study that most contemporary economists are still well aware of)

  • Argentina – hyper-inflation

  • Brazil – hyper-inflation

  • Zimbabwe – and hyper-inflation

  • Venezuela – hyper-inflation

Are there no success stories of MMT then? There is one example that MMT proponents keep talking about, and that is Japan. Japan’s debt stands at 250% of GDP (currently, the highest among developed economies) but there is no sign of fiscal distress or inflation.


However, if we take a closer look, it becomes clear that Japan is no MMT poster child. For one thing, the country may have been liberal with its fiscal policy, but at least officially it’s not following MMT. Also, a core assertion of MMT is that government debt can be increased until inflation materializes. Japan has not followed that path. In fact, the government is trying to lower its debt. It is also going ahead with a scheduled sales tax hike to 10 % from 8 % to meet rising social welfare costs of a rapidly aging population. This runs afoul of one of MMT’s central tenets, the idea that taxes are not needed to finance government spending.


Where do things stand currently with MMT?


The COVID-induced crisis has caused a natural increase in base money (bank reserve and banknote) demand, which in turn led to a heightened amount of new spending, with deficits now along the order of 20% of GDP in the U.S. — close to wartime levels. Debt Projection Exceeds Economic Output

Source: Bloomberg


However, unlike wartime, the kind of fortitude that made Britain and the U.S. world leaders is nowhere in sight today. That discipline was the reason that led Britain and the U.S. to return to the gold standard, dramatically reducing spending, and running budget surpluses after the war.


Today, the US has a Secretary of the Treasury who is a firm believer in labor economics and full employment. Even if the lower-educated 10% of the population are unqualified for work, Janet Yellen wants full employment anyway. And this, in combination with a targeted increase in the federal minimum wage from $7.25 to $15 an hour. She also publicly stated that the US under the current administration will push for a worldwide minimum corporate tax of 21%, which would eliminate competition, the essence of a capitalist or market-based economy.

The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default. ~ Alan Greenspan

The Future of MMT


As the economic contraction dents tax revenue, while at the same time long-unresolved issues like entitlement expenses or state finances become acute, structural deficits of the order of 5% of GDP loom as far as the eye can see. On top of that, we have a persistently weak economy, plus the launch of multiple stimulus packages that will likely result in deficits greater than 10% of GDP for several years.


The MMT model, if followed, can lead to serious financial indiscipline, and it will inevitably increase the US debt burden dramatically. It will also severely weaken the country’s trade and impact its current account, as these policies support and foster overconsumption.


At some point in such a long-term process, bond yields will rise, and the central bank will then try to intervene and keep them lower than they would otherwise be. Known as “yield curve control”, this policy maneuver attempts to take the free market out of the equation and set the yield curve where the central bank wants it. This will result in an even weaker US dollar and even higher inflation. Eventually, however, markets will prevail over the central banks, because they will be supported by further deteriorating fundamentals.


Thus, MMT and yield curve control can only prevent painful adjustments for a limited period. What would happen after that would be disastrous and to avoid it, we need to dismiss and reject the folly that is MMT and return to the fundamental and basic macroeconomic realities.

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