Modern Monetary Theory: Sense or Nonsense?

“Modern Monetary Theory” (MMT) is a new approach to monetary policy that advocates argue justifies government spending. But what is MMT, exactly? The core proposition of MMT is that a government that issues its own currency can always fund itself with its own currency. Hence, a government does not need to worry about accumulating large debts. The only potential downside is that government spending could lead to higher inflation. But is it really that simple? We will discuss the opinion of MMT's proponents and its critics.

Proponents of MMT are technically correct in that a government with its own currency can print money to pay its bills. Stephanie Kelton explains the basics of MMT in this 9 min video: https://www.cnbc.com/video/2019/03/01/stephanie-kelton-explains-modern-monetary-theory.html

MMT supporters claim that the Government:

-Cannot default on debt denominated in its own currency;
-Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;
-Is limited in its money creation and purchases by inflation, which accelerates once the economic resources (i.e., labor and capital) of the economy are utilized at full employment;
-Can control Demand-pull inflation by taxation and bond issuance, which remove excess money from circulation, although the political will to do so may not always exist;
-Does not need to compete with the private sector for scarce savings by issuing bonds.

Where MMT economists disagree with mainstream economics about the final tenet in terms of impact on interest rates. So let’s suppose the government decides to continuously run up massive amounts of debt. What could then happen? The costs associated to pay interest on the debt would then increase. But instead of raising taxes to pay the interest, the government could simply borrow more in order to cover those interest payments. The Federal Reserve could then lower interest rates to zero, thus eliminating interest costs. This is essentially what is currently going on in Japan.

Critics of this approach will argue that funding for federal debt will dry up, leaving the U.S. government with no one to finance its borrowing. That is no one except for itself of course. So at its most basic level is MMT a viable economic solution?

Sources that will assist with our discussion

Explaining Modern Monetary Theory – Stephanie Kelton
https://www.cnbc.com/video/2019/03/01/stephanie-kelton-explains-modern-monetary-theory.html

Modern Monetary Theory Makes Sense, Up to a Point – Robert Shiller
https://www.nytimes.com/2019/03/29/business/modern-monetary-theory-shiller.html

What is “Modern Monetary Theory”? - Austin Goolsby
https://www.youtube.com/watch?v=Wp2PRsHPeh0

Deficits and the Printing Press Somewhat Wonkish – Paul Krugman
https://krugman.blogs.nytimes.com/2011/03/25/deficits-and-the-printing-press-somewhat-wonkish/

Bank of Japan rejects idea of Japan as a model for Modern Monetary Theory
https://www.reuters.com/article/us-japan-economy-boj/boj-chief-rejects-idea-of-japan-as-modern-monetary-theory-model-idUSKCN1SF05A

Questions to Think About

What are some of the problems that MMT would solve?

Do deficits matter?

Is MMT even politically feasible?

Would MMT eliminate the Federal Reserve’s Independence?

What do think about the risk of inflation?

How does MMT impact politics – specifically how do you think it will impact the 2020 election?

Does either political party really care about debt anyway?

What would you add or change about MMT?

What are the risks of MMT?

Does fiscal https://en.wikipedia.org/wiki/Fiscal_policy responsibility matter when it comes to Government?