Sta Hungry Stay Foolish

Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Modern Monetary Theory or MMT

Sometimes children will ask why a (central) bank does not print its own banknotes to cover for (government) budget deficits. It seems like a solution. However, in and of itself, banknotes are worthless apart from the value of the printing paper. They derive their value/worth from the gold stored at central bank vaults, following a mechanism called the gold standard.

Without underlying assets (eg, gold), the value of banknotes will often be eroded by hyperinflation which will make them worthless (eg, countries in Africa and South America). In general, printing banknotes for financing government budget deficits is a recipe for inflation and thus rising interest rates. Sometimes, this is intentional, like in Japan or Quantitative Easing (QE).

The additional printing of banknotes is usually called monetary inflation, as opposed to (price) inflation (of goods and services). Economists usually prefer (real-world) price inflation above (artificial) monetary inflation because (free) markets tend to optimize asset allocation, while government interventions often cause misallocation of assets.

Essentially, the Modern Monetary Theory is the very same as monetary inflation, albeit without its flaws, at least according to their advocates, like Alexandria Ocasio-Cortez, Bernie Sanders and Donald Trump (sic!). Nationalists remain nationalists, whether left or right.

Bloomberg, 11 March 2019: “The [Modern Monetary} theory’s headline argument is that governments with their own currencies have more room to spend than is generally supposed, and don’t have to finance it all with taxes. According to this view, there’s no risk of the U.S. being forced into default, because it can create the dollars it needs to meet any obligations.”

In the 1990’s, we heard a similar argument about the New Economy: the classic (“bricks“) business model of making profits would no longer be relevant in the age of Internet (“clicks“). Hence, the huge start-up losses of new internet companies were entirely “normal”. All internet startups would turn into gold, regardless of the sanity of the underlying business plans.

Wikipedia: “The dot-com bubble (also known as the dot-com boom, the tech bubble, and the Internet bubble) was a historic economic bubble and period of excessive speculation mainly in the United States that occurred roughly from 1995 to 2000, a period of extreme growth in the usage and adoption of the Internet. [] The burst of the bubble, known as the dot-com crash, lasted from March 11, 2000, to October 9, 2002.”

The Modern Monetary Theory is based on the assumption and/or belief that USA will redeem its debts. The decline in US hegemony following its choice for Nationalism – and the the decline of the role of petro-dollars – will slowly erode that assumption and/or belief. A stand-alone USA will once be viewed as the Emperor without clothes.

Money’s Too Tight (To Mention) (1985) by Simply Red

artists, lyrics, videoWiki-1, Wiki-2

Note: all markings (bolditalicunderlining) by LO unless stated otherwise

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