Modern Monetary Theory (MMT) – Basics

Off late I have been hearing a lot on the subject.

The concept first gained traction post 2008 financial crises and then again gained focus post Covid led hit to the global economy.

In both instances, governments globally let their purses loose (to revive economic growth) without bothering much about the fiscal discipline.

Expectedly, the traditional economists shouted the Mayday and how this will screw up the global financial discipline.

MMT proponents on the contrary went euphoric as this is exactly what they have been supporting for long.

So what is MMT and how is it different from the Classic Monetary Theory (CMT)?

(Please note: CMT has been coined for ease of reference in this post for classic economics principles )

CMT focuses on fiscal discipline i.e., government’s total spending should match it’s total revenues (from taxes). Any excess spending would mean fiscal deficit, that needs to be funded through borrowings and increased government borrowings imply poor economic strength.

MMT instead supports as much government spending as required to spur the economic growth without really bothering about whether taxes are sufficient to fund that growth. The deficit can be funded through printing more money or through debt (debt levels is not a concern as again government can print money to service any level of debt).

So, whereas CMT prioritises fiscal prudence over economic growth, MMT prioritises economic growth over fiscal prudence.

MMT implies that fiscal prudence at a country level is not as important as in case of a household. Whereas a household can only spend out of what it earns, a country has an added advantage of printing it’s own currency.

How can there be an uncontrolled printing of money? What about inflation?

I agree that’s the way we have been taught and it actually seems a logical concern.

MMT supporters however suggest control of inflation by increasing taxes. That would suck out the floating money in people’s hand and hence would help control the inflation.

Logically, it does seem a viable approach except that the government policies would become extremely unpredictable.

But doesn’t that mean government can go berserk and spend on politically motivated items (vote bank) without any real economic benefit?

Yes, that’s a valid concern and one of the biggest risk with MMT.

It’s sort of giving an uncontrolled power in the hands of the politicians.

Is it really a practical approach then?

Opinions are divided.

Given how US has been following this approach since 2008 (i.e., 15 long years) without any real meltdown is cheering MMT supporters.

During Covid also many governments (including ours) used it in measured doses to support the economy.

Personally, I believe this can only be used as a need based temporary measure and can not become a long term approach for any country. Fiscal prudence in my personal view can be the only sustainable approach.

Reason – Continued MMT approach can lead to many non- controlled, unpredictable policy decisions that can result in chaos in any economy. World is interlinked and any economy can not be perceived unpredictable for long.

Above was to highlight the key points related to MMT in the most simplified manner.

For anyone more interested in the subject, please start with the following links –

Modern Monetary Theory (MMT): Definition, History, and Principles

What is Modern Monetary Theory?

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