MMT Sounds Great In Theory... But

If you haven’t heard about Modern Monetary Theory, or “MMT” for short, by now, you will soon. It is highly likely that MMT will be increasingly touted by economists and politicians from both sides of the aisle, as the economic prescription, even panacea, to cure our economic ills. Regardless of your view, MMT will have large effects on all asset classes, so we urge you to read this article, and others, describing this economic theory.

Kevin Muir recently penned an article Everything You Wanted To Know About MMT which delves into what MMT proposes to be. To wit:

“Modern Monetary Theory is a macroeconomic theory that contends that a country that operates with a sovereign currency has a degree of freedom in their fiscal and monetary policy which means government spending is never revenue constrained, but rather only limited by inflation.”

Kevin goes on to summarize the basic policy implications of MMT:

“Sure, the government owes dollars, but they have a monopoly of creating those dollars, and not only that, the creation of more and more dollars is essential to the functioning of the economy.

Here are the policy implications of accepting MMT:

  • governments cannot go bankrupt as long as it doesn’t borrow in another currency (sovereign currency issuer) 
  • it can issue more dollars through a simple keystroke in the ledger (much like the Fed did in the Great Financial Crisis)
  • it can always make all payments (can print money to pay debts)
  • the government can always afford to buy anything for sale
  • the government can always afford to get people jobs and pay wages
  • government only faces two different kinds of limitations; political restraint and full employment (which causes inflation)

The government can keep spending until they begin to crowd out the private sector and compete for resources.”

So, there you have it.

Debts and deficits do not really matter as long as the Government can print the money it needs to pay for what it wants to pay for.

In other words:

Deficits are self-financing, deficits push rates down, deficits raise private savings.” – Stephanie Kelton

That is the “you can have your cake and eat it too” theory in a nutshell.

It Sounds Great…But

Since 1980, the Government has already been running a “quasi-MMT” program from which we can actually see how effective it has been.

The Inflation Conundrum

As Ms. Kelton suggests in her theory, the only constraint on MMT is inflation. That constraint would come as, the theory purports, full employment which would cause inflationary pressures to rise. Obviously, at that point, the government could/would reduce its support as the economy would be theoretically self-sustaining.

This is why a “Job Guarantee” program, which aims to keep the unemployment rate a hair above the rate at which inflation picks up, is an essential part of the theory which supposedly solves the problem of full employment and price stability.

However, this leads to a couple of questions.

How exactly does MMT define full employment? Is this not it?


But, even with the unemployment rate approaching the lowest levels in history, there has been scant evidence of inflation. Wages have ticked up recently, but overall the broadest measures of inflation remain suppressed which gives MMT the cover it needs to issue more currency.

But, exactly how should MMT measure inflation?

Prior to 1998, inflation was measured on a basket of goods. However, during the Clinton Administration, the Boskin Commission was brought in to recalculate how inflation was measured. Their objective was simple – lower the rate of inflation to reduce the amount of money being paid out in Social Security.

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Gary Anderson 7 months ago Contributor's comment

Social security as self funding. It cannot be included in these numbers. This sort of thing needs to stop. As for the ultimate result of MMT, the reduction of the dollar is a risk. Isn't the real danger of MMT the possible damage to the bond market? And MMT will allow massive speculation. Cheney believed in it for continual war.