Why You Should Care About Modern Monetary Theory

By Harvey Investment Management on September 7, 2021

Most of us probably don’t spend much time thinking about economic policies and theories, but perhaps that should change. There is a relatively new political theory on the block called MMT, which stands for “Modern Monetary Theory.” It has various interpretations, but basically, MMT posits that nations who produce their currency can do so without worrying about a national deficit. All they need to do is print more money to solve their deficit problem. This theory continues to gain momentum in America as the pandemic endures and our national debt soars even higher.  As of May, our national debt was over $28 trillion, our spending over $6 trillion, and our annual budget deficit over $3 trillion. ¹

During economic hard times, the government has two choices: let the chips fall where they may or step in and take measures to help stimulate the economy. When it chooses to step in, the government has several levers it can use, like cutting taxes and lowering interest rates.  We’ve seen examples of the U.S. government stepping in to help the economy in the past. During the Great Depression, President Roosevelt created The New Deal, putting Americans back to work on infrastructure projects. In 2008-9, it chose to bail out banks by passing the Troubled Asset Relief Program (TARP), which enabled it to purchase bank assets of $700 billion. During the last year, it enacted the CARES Act to help decrease the impact of the pandemic.  Whether you agree with them or not, all of these actions contributed to our ever-increasing national debt. According to some, under MMT, the government doesn’t need to borrow money to pay off the deficit. Instead, it can just print more money.

Proponents of MMT argue that we shouldn’t treat governments that control their currency like households or businesses.  Since they can print their own money, they don’t need a budget and can begin massive spending.  Another argument is that the government can help stimulate the economy by funding social measures like universal health care and college tuition. That would help us create income equality so no one would live below the poverty line. Lastly, the argument goes, the government must spend money to receive tax revenue.

Opponents of MMT point out that the use of this theory has ended poorly in the past, and it is hubris to think it will be different this time. For example, after WWI, the German Weimar government printed more money to pay its bills. Hyperinflation set in, and people needed a lot more cash to buy the basic food supplies needed.  Other countries have tried MMT, including Venezuela, Japan, pre-war Italy, Greece, Mexico, and Zimbabwe. Each country saw increased inflation, monetary and social crisis and eventually returned to more conventional economic policies.  By creating an excess supply of money, each dollar is worth less than before. Opponents of MMT are also concerned about the underlying message of the theory: if the government decides to try and make all Americans equal by removing some barriers within the capitalist structure, what incentives do workers have to continue to be productive?  People value what they work for; they take pride in their contribution. Past examples show a decrease in productivity when these principles are applied. An analogy is giving your neighbor your credit card with no limit and agreeing to pay their bill.

In summary, the debate continues over whether MMT is a solid theory and helps or hinders the economy in the long term. The problem is older than our country. Effort and resources are required to produce something of value. People take pride in their work efforts, and it is not a good idea to take that away from them by providing government assistance for those who don’t need it. MMT has been around for several years in some shape or form, and to suddenly think this is the answer to paying off our national debt (or ignoring the deficit by printing more money) is akin to liking the emperor’s new clothes. There is no such thing as a genuinely free lunch – someone always has to pay the bill. If you would like to discuss MMT or other financial theories, give us a call. Our national debt affects all of us, both now and in the future.

¹ https://www.usdebtclock.org/

About Harvey Investment Management, Inc.

We strive to empower and support investors by encouraging a greater level of financial literacy. In addition to this blog, we also have a video library containing our “Ask the Advisor” series to answer your investing questions. Do you have a question you would like Brad to answer next? Send your questions and suggestions to Harvey@RIAgroups.com.

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