Revitalize Finance

Modern Monetary Theory is the economic thought which presents the idea that the state can print as much money as it wants. It promotes the idea that the state, which owns the currency, cannot default on it and essentially can buy as much goods and services as it wants. This means there are no constraints on the government for spending. They don’t need to issue any bonds or charge any taxes to raise the money that they need to spend. This means that the private sector and the households can keep their hard earned money with them which means people can now have more money than they had ever before and spend it unjudiciously.

All of this sounds really rosy. Economics as a subject is based on the idea that the resources are scare in nature. If you suddenly take out the scare elment from the equation, people will become unwise in how they spend money. Scarcity is the root cause of all economic problems. People become wise and innovative when they have constraints. US, UK, Japan and other developed countries rely on debt to fund their current consumption. This puts a ceiling in how much you can spend. Let us take a normal household, any household is not much different from the government in terms of money matters, only the size and needs differ. If you want to buy a car(luxury need) which is way above your pay grade, you have to take up too much debt and that causes you to sacrifice somewhere else to compensate for the interest and principal payment to even out your receipts and expenses. However, MMT says that you don’t need to worry about that debt and you can go on buying whatever you want without sacrificing on your lifestyle. Imagine if a country goes on such a spending spree without collecting any taxes or issuing bonds, the money in the economy will multiply manifold and cause too much demand which can result into hyperinflation. Although, MMT argues it can issue bonds or charge taxes, it can cause wild fluctuations in the economy. Right now we are constrained by how much we can spend, which is again dictated by our borrowing capacity and income that we earn. We pay taxes out of our incomes which reduces our spending as we need to save for future as well. With MMT, you will be way better off at an individual level. You will earn more in real terms(in simple layman term, more goods and services for you).

My analysis and views on MMT

In my view, everything has a trade off. You want to get better at something? You need to shell out more time for it. You are constrained by your time. Same way current economics constraints you to put resources in projects which are meaningful and productive. Earth has a limited productive capacity, only innovation and scientific discoveries can cause the productive curve to move upwards. MMT’s only visible advantage appears to be that everyone will be better off. Government could spend freely which will create jobs for the unemployed. It will allow people to accumulate more wealth and spend more than required. More number of people will live in luxury than possible today. Financial crisis of 2008 was a result of free money due to very low interest rate offered by the Fed after the dotcom bubble. Even low level of regulations in financial markets were a reason for the crisis.

Anyways, this free money created too much optimism and speculation in the economy and caused a recession at a level which had not been seen since the Great Depression in 1929. Same way, MMT will cause free money to flow into the economy and cause speculation. Asset prices, credit and inflation all of them will spike. Basic tools of investment like NPV, payback period, etc will lose their relevance. Balance sheets will inflate and government bailout could become a norm and risk will no longer matter. MMT could cause government to dole out unnecessary incentives to people who are not contributing much to the economy. Capitlism stands on the idea that the best survivies in the market. This will be a direct violation of the principles of welfare captialism. People only innovate when they feel there is a need to change, this need comes from the idea that something is not upto expectations or could be done in a better way. In MMT, it won’t matter if something can be done in a better way or not because you got infinite resources which is not true when it comes to physical real resources present in nature. Nations need to innovate to stay competitive. This competition causes human civilization to move forward. Wealth creation will become a problem because you have no interest rate to evaluate risk of a business and also the wealth you accumulate will lose its value way faster as more money will be present in the economy. Bad managment of companies could become a new normal. Exchange rates will fall as more money is available. Those supporting the idea of MMT have to understand money was created to make exchange of goods and services easier. It was created to store wealth. With MMT, money will lose its importance. It was not created to spend on unproductive ventures. What do you think about this theory? Leave your thoughts below in the comments.