In the News: Modern Monetary Theory

- From Wikipedia. 

Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox[1] macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires.[2][3] MMT is opposed to the mainstream understanding of macroeconomic theory, and has been criticized by many mainstream economists.[4][5][6]

MMT says that governments create new money by using fiscal policy and that the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes to reduce the spending capacity of the private sector.[7] MMT is debated with active dialogues about its theoretical integrity,[8] the implications of the policy recommendations of its proponents, and the extent to which it is actually divergent from orthodox macroeconomics.[9]

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MMT's main tenets are that a government that issues its own fiat money:

Can pay for goods, services, and financial assets without a need to first collect money in the form of taxes or debt issuance in advance of such purchases;

Cannot be forced to default on debt denominated in its own currency;

Is limited in its money creation and purchases only by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment;

Recommends strengthening automatic stabilisers to control demand-pull inflation[10] rather than relying upon discretionary tax changes;

Bond issues are a monetary policy device, not a funding device.

The first four MMT tenets do not conflict with mainstream economics understanding of how money creation and inflation works. For example, as former Chair of the Federal Reserve Alan Greenspan said, "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."[11] However, MMT economists disagree with mainstream economics about the fifth tenet, on the impact of government deficits on interest rates.