What Is MMT?
A modified version of an early 20th century theory of money has captured strong support from progressive economists and politicians, as well as gaining several enemies along the way.
It’s called Modern Monetary Theory (MMT).
MMT means a lot of different things right now to a lot of different people. But at the core of MMT is a simple observation:
Currencies are government monopolies.
The U.S. dollar, for instance, is a monopoly held by the United States government. No one else is legally allowed to create U.S. dollars.
When you or I need to buy something or pay bills, we need to come up with the money. And the same thing is true with the U.S. government. But here's the difference: The government can just create money out of thin air.
What that means is the federal government can never run out of money. It can never go broke.
The government can’t go broke because that would mean it ran out of dollars to pay creditors. But the government can’t run out of dollars because it always has the ability to create new dollars.
MMT flies in the face of the standard narrative that the government must issue taxes in order to generate revenue for spending.
It doesn’t need to.
Now, you might be thinking to yourself, “Wait, so the government doesn't have to tax me?”
Well, no, not technically.
But there are good reasons for taxes aside from revenue generation.
The fact of the matter is, however, that those reasons are very politically unpopular to both sides. And the narrative that the government has to tax you because it needs money is an easier pill to swallow. But that's a whole other topic all together. (And if you’re interested in learning more about the true reasons for taxation, check out a recent article I wrote on the subject here.)
But at its core, that's the idea of MMT: The government can never run out of money because it owns the printing press.
Now, proponents of MMT want to use the idea to implement specific policies. However, those policies are what could be done with MMT; they’re not part of the theory itself.
The idea has gained steam in progressive politics. Politicians like Alexandria Ocasio-Cortez and Bernie Sanders are interested in MMT to answer the question: “How are we going to pay for that?”
For example, Senator Sanders' plan for free college is estimated to cost around $50 billion. How would the government pay for that? Well, you just print $50 billion.
AOC's Green New Deal is estimated between about $50 and $100 trillion. How would the government pay for that? Just create the money out of thin air.
Now, I'm sure you’re thinking, “Wait, what about inflation?”
Well, that's where the taxes come in.
And again, this flies in the face of the standard story that the government must issue taxes in order to generate revenue for spending. But taxes are, MMT proponents concede, sometimes necessary to combat inflation.
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But MMT isn’t intrinsically a liberal or conservative idea.
There are certainly conservative applications for MMT. Liberals questioned Trump on how he was going to pay for his wall. MMT could have been the answer.
The reason MMT is associated with the left today has a lot to do with its developers.
They include economists Warren Mosler, L. Randall Wray, and Bill Mitchell, all of who are left-leaning.
But I'd say the one person who has had the biggest effect in effectively connecting MMT to liberal parties is Stephanie Kelton. Kelton was economic advisor for Bernie Sanders during his 2016 campaign and is a leading figure of current liberal propositions such as a federal jobs guarantee.
I personally believe making the connection between MMT and liberal policies never should have happened. If an economic theory is a good idea, that idea should be able to stand on its own.
But it did happen. And regardless of how I feel, that connection is probably going to help MMT out in the long run.
I want you to know before I make this statement that I really don’t take sides in politics. Choosing between today’s conservative and liberal parties is the equivalent of choosing between a bullshit sandwich and a horseshit sandwich. I really don’t want to take a bite of either.
But I do believe the next President of the United States will be a self-identified Democratic Socialist. And whether that will take place in 2020 or 2024, I'm not sure.
But I'd bet dollars to doughnuts that a Democratic Socialist POTUS would at least be heavily involved in the MMT discussion
So I would advise investors to just pay attention to MMT for now. It may create investment opportunities down the road.
Until next time,
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
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