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Modern Monetary Theory – Is this the cure for the worlds ills? No not even close

Modern Monetary Theory has popped up (again) as a solution to the world wide problem of lower economic growth and inequality of outcomes.

Many on the Left of US politics (including a few Presidential hopefuls) have been pushing it as a solution to the inequality that exists in much of US society.  The recent Green New Deal is a perfect example – spend up big and get what we all want and don’t worry about how we will pay for it. 

So what is Modern Monetary Theory ?

Well there is no agreed definition amongst MMT adherents but the basic theory revolves around the role of money in a modern economy. 

In most western democracies money is “created” by an independent central bank (think the RBA in Australia or the Federal Reserve in the US) that controls the amount of money in the economy by its relationship with the banking system – where loans are written and credit supplied to the economy.  

MMT argues instead of a central bank controlling the money supply that the government itself should control the currency.

A government that does this is in effect in full control because if it issues its own money it can never not meet it obligations.  

Why? Well because it can print its own money and pay its obligations with that money  

That’s right MMT proscribes that governments can simply print money and pay for everything their populations want!

And what about inflation when the government actually issues too much money into the economy and the value of that money decreases due to inflation?  

Well MMT says the government can use its ability to levy taxes to curb the money supply and curb any inflationary impacts.  Presently this role is assumed by central banks via their movement in official interest rates to either stimulate or contract the economy due to too much or too little inflation.   

Various theories similar to MMT has been around for over 100 years but of late they are getting rehashed – particularly in the US.  

The scenario where a government can simply print money to pay for everything they ever wanted to give there people appeals at present in the US where the federal budget deficit is running at $US1 trillion per annum.  Accumulated US debt is over $US20 Trillion     

The US economy is going gangbuster presently growing at close to 3 % and unemployment is at decades lows – and yet the government cannot balance the books.  

So MMT adherents says; “ don’t worry simply print more money and pay for everything your people want”.

The problem is that the finite constraints in an economy will catch up with you and whilst you can perhaps control the money supply via taxation you cannot  control the actual level of goods and services in an economy.  

You end up having too much money chasing too few goods / services 

A good example has been provided in relation to medical services.  

Say the government decided tomorrow that we should have universal free dental services in Australia.  Now there would not be many people who would say this is a bad idea.  It would be good for general health and well being given research linking poor dental care to poor health outcomes etc

However if dental services was suddenly free the demand would overwhelm the supply of dentists offering those services.

You cannot suddenly create thousands of new Dentists and so inevitably the price of dental services – for those willing (or desperate) to pay to get to see a dentist sooner than those who will have the government pay for it – would lead to inflation in the price of the services

This is true of other limited supply goods and services. 

So why is this current interest in MMT important for investors?

Any uptake of this sort of economic policy to cure the ills of society will lead to massive economic upheaval and would impac t severely on the investment markets if it was ever implemented 

It may well be causing a stir in the US but how long until these “cures” are exported around the    world ? 

At a time when economic stimulus from monetary policy (ie lower official interest rates) appears to have reached its limit the only lever (according to MMT adherents) available to governments would be via fiscal policy (i.e. massive injections of money via budget deficits) funded by the printing presses.  

If governments don’t have to worry about how they pay it back then they will likely decide to open the floodgates. 

Welcome to Venezuela !    

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