Commentary

Don’t worry about trillions in national debt, say “Modern Monetary” theorists

by Bruce Shields

As the United States uses deficit spending to stimulate our economy, supporters of unprecedented borrowing refer to a relatively unknown economic doctrine called Modern Monetary Theory [MMT].  Here’s how it works – or, at least, how they say it works.

“In classic or Friedman monetary theory when government creates money it simultaneously incurs a measurable liability which must be repaid. But MMT insists that such new money is an asset which creates jobs, greater economic activity and therefore new liability-free revenue to government….

“The political Left admires MMT because it argues that countries may  borrow as much as they desire in their own currency and need not prioritize spending because injecting funds into the economy will create new taxable wealth.” – Bruce Shields, Hyde Park

In the conventional monetary theory most Americans know, Government spending beyond income from taxes must be financed by selling debt, via notes which must be repaid.  This may be called the Friedman consensus: government spending beyond income can only be accomplished by borrowing from the private economy.  Not only must debt be paid back, the promissory notes themselves become a negotiable form of currency.  And so a government which borrows too much either depresses the economy or else triggers inflation if the repayment is financed by further borrowing.

The Friedman mechanisms for the economy are very well studied and are used by the such institutions as International Monetary Fund advising struggling economies all around the world.   MMT argues that none of these rules of money apply where an issuer of money is a sovereign nation.  Government budget deficits (they argue) do not matter for countries which borrow in their own sovereign currency.   The economy and inflation can be managed through fiscal policy (acts of Congress), not monetary policy so that government can put their own people to work

Proponents of MMT tout the method as a bloodless and painless method of injecting funds into a hurting economy without requiring austerity. Especially they argue that MMT directs funds to people in the lowest income bracket because MMT uses not banking techniques but instead fiscal and taxing authority.  Because both the credit and debit are in a currency controlled by the government there is no negative overdraft requiring repayment; in effect government spending is merely a ledger entry which later disappears as tax recoveries rise.

Beyond this description MMT becomes almost impossible to characterize briefly.  Its basis is a prediction of how an economy reacts when governments inject money.   In classic or Friedman monetary theory when government creates money it simultaneously incurs a measurable liability which must be repaid.   But MMT insists that such new money is an asset which creates jobs, greater economic activity and therefore new liability-free revenue to government.

Classical objections to MMT are numerous and based on very long observation.  MMT is an upgraded revival of Keynesian 1930’s doctrine demanding counter cyclical government spending.  An influential group of political theorists are eager to apply MMT to our present economic situation.  The experiment is apparently in process as federal debt has exploded by more than $6 trillion in the past half dozen years.  Puzzling both sides, inflation has not appeared.  

So far in the short term MMT is prevailing in federal handling of the COVID-19 economy.  The political Left admires MMT because it argues that countries may  borrow as much as they desire in their own currency and need not prioritize spending because injecting funds into the economy will create new taxable wealth.  This polarity defines a struggle pending in Congress for the next two years.

The author is an Eden tree farmer, Harvard University graduate, retired college educator, former president of the Ethan Allen Institute, and frequent co-host on Common Sense Radio with Vermont Daily editor Guy Page.

4 replies »

  1. Anybody remember Mad Magazine ? How about Alfred E. Newman ? To quote Al, “What, me worry ?”

  2. Re: “MMT argues that none of these rules of money apply where an issuer of money is a sovereign nation.”

    Draconian as this appears to be, it’s a truism. Incurred intra-national debt is paid as the debt is created by the people who accept the newly printed money in exchange for goods and services provided. They are the ones who ultimately pay back the debt because their billions of dollars in accumulated wealth is really nothing more than ‘funny money’. Jeff Bezos may be the wealthiest man in the world, but so what? His wealth is so far from the fiscal reality of the average person, he might as well be the richest man on the Moon, or on Mars.

    However, when it comes to exchanges between ‘sovereign nations’, exchanges for natural resources in particular, with inter-national monetary policy, as opposed to intra-national policy, the wicket gets stickier.

    This concept is what motivates the New World Order folks (the WEF, World Bank, IMF, and so forth). They theorize that eliminating sovereignty is the way to go. Furthermore, when countries have borrowed more than they can ever pay back, so called ‘debt traps’, become more manageable. But it’s the unintended consequence of their hubris that will tell the final tale.

    The loser in all this, in the short term at least, will be the individual (at least a bunch of them). The winner is the collective (those left standing anyway). Inevitably, intrinsic motivation, innovation and productivity will continue to decline (at least over the short term) as will our standard of living. Unless, of course, the world’s population flattens and begins to decline too. A purge, if you will – fewer frivolous people (i.e. old, poor and untrained), is easier to manage.

    And how do these NWO folks do all this? You know, the usual ‘conspiracy theories’. Aside from old age turn-over, abortion rights, perhaps, the promotion of certain pansexual behaviors (depopulating), or maybe a pandemic or two, will do the trick.

    It is, indeed, a ‘brave new world’. And as Betty Davis opined years ago; ‘Getting old ain’t for sissies’.

  3. Sounds like 1928. ” Rock on this boom can never burst!! ”

    Borrow all you can and buy these stocks.

    Maybe they can just borrow enough to just pay off our national Debt ;< {
    which is near our Gross National Product.

  4. A good way to gain insight into a theory is to reduce it to the ridiculous – in this case to suggest that MMT proponents, in positions of power, expand the money supply by a factor of 10. According the their theory, this should result in an extremely robust economy which if fact, it will, for a few (relatively speaking) moments.
    This model will eventually lead to a type of result where people are going shopping with a wheelbarrow full of money because inflation has humbled our MMT economists along with a compliant, albeit temporarily wealthy, population.
    This MMT insanity is a good reason to buy gold, silver and land.

Leave a Reply to mrfisher77 Cancel reply