Modern Monetary Theory (MMT)

Modern Monetary Theory (MMT) is an economic theory according to which government can create more money since it is the issuer of that money. The underlying fact of this theory is that deficits and national debts do not matter as much as per the perception of the general public. According to this theory, the government should not rely on tax revenue or borrowing for federal government spending, instead, it can print more money. This theory is a big shift from previous economic theories and is now widely being adopted as debt and government spending is being carried out on a national level.

Understanding the Modern Monetary Theory

The term Modern Monetary Theory was coined by Bill Mitchell, an Australian economist and has now become a mainstream concept. The idea of Modern Monetary Theory revolves around the concept that since a sovereign state can borrow its own currency it can easily do that by printing more money when there is a need to pay all the debts. Just that the central bank has to keep its interest rates as low as it can.

Modern Monetary Theory is a paradigm shift in the arena of economic theory and is a relatively modern concept when it comes to governments with fiat currencies. Fiat currencies that are being issued by government authorities is not backed up by a particular commodity such as gold.  Countries such as the US, Japan, the UK and Canada that use fiat currencies are not solely dependent on tax revenues for government spending and are able to sustain budget deficits. This is because the central banks of such countries have a monopoly over the supply of money.

Major aspects of Modern Monetary Theory

Government deficits are not bad;

The supporters of Modern Monetary Theory are of the view that government deficits are not necessarily bad as they are generally considered to be. According to the Modern Monetary Theory, deficits do not matter as much as we think they do and are not always a sign of a weak economy. The solution to the problem lies in simply printing more money in order to fix government deficits. This aspect is one of the most controversial viewpoints of this theory.

Governments can create more money without worrying about economic collapse;

This theory advocates the fact that government spending is not constrained by any means. It does not have to conform to any standards since it is the creator of money so it can create more money in case any need arises.

A federal job currency program is possible;

Since Modern Monetary Theory supporters firmly believe that government is self-sufficient, they argue that a federal job guarantee can stabilize the economy and investment in human capital can reap many benefits.

The federal interest rate should be at 0 per cent at all times.

Modern Monetary Theory favours the belief that the natural rate of interest is zero and there should not be any bond sales. Moreover, Modern Monetary Theory supporters believe that interest rates fluctuations are not relevant with regards to growth and long-term business decisions.

Concerns over Modern Monetary Theory

Superficially, Modern Monetary Theory would seem to be an idealistic approach to mitigating growing economic problems. Although the theory is gaining increased popularity, however, there are some valid concerns of the opponents of Modern Monetary Theory. The main concerns over this theory are as follows:

Increased inflation;

One of the major concerns of Modern Monetary Theory theory opponents is widespread inflation. Although Modern Monetary Theory supporters consider it as a financial crisis that results in increased government spending rather than inflation. Having said that this theory should not be considered as a reason for inflation because all other underlying factors of this theory are not the same.

More deficits;

If Modern Monetary Theory is implemented it could lead to higher deficits. The staunch believers of the Modern Monetary Theory do not consider this to be of much importance. The Modern Monetary Theory opponents do believe that it will lead to compromising lending and interest rates which in turn would cause inflation.

Implementation has shown potential downsides, destruction and hyperinflation.

As per historic examples of adoption of Modern Monetary Theory theory creating more money has always led to hyperinflation and political unrest.

Modern Monetary Theory and investing

Modern Monetary Theory can have implications on investment as well. This is because it could potentially cause inflation to further rise which will impact investments and their overall value of it. It could also lead to higher stock prices which means it will become more difficult to get into market especially for those who have limited resources.

Modern Monetary Theory related policies have also resulted in a drastic increase in the growth of cryptocurrency trading as well. This is because the policy favours many cryptocurrencies trading programs. Apart from this Modern Monetary Theory is also affecting private investments as well. This is because Modern Monetary Theory causes government spending and debt to rise which crowds out private investment. Although Modern Monetary Theory can be used to fund wide-reaching beneficial projects for the public, the citizens will have to pay for these either through high taxes or inflation.

Modern Monetary Theory and banking system

The theory of Modern Monetary Theory contradicts the opinion that banks act as intermediaries. It supports the notion that banks only lend money to creditworthy customers which means that it does not have to borrow from the central banks.

Modern Monetary Theory and Central Bank

Supporters of the Modern Monetary Theory see the treasury and central bank as one. They argue that it is the responsibility of the Central Bank to print the money needed by the government. While it is the responsibility of the treasury to collect taxes and allocate funds to the different departments according to the budgeting needs of departments, anything required beyond can be simply printed to make up the shortfall.

Conclusion

Modern Monetary Theory could still be a developing theory given the notions of the modern economic era. Slowly and gradually this theory is becoming mainstream reality along with its growing number of proponents and opponents. But it is important for the economy and investors to understand its consequences fully before applying it.