MODERN MONETARY THEORY
Updated: Sep 8
Today I want to talk about Modern Monetary Theory, which is a pretty fascinating theory and the math behind it is amazing. If you have a bias against Modern Monetary Theory as some people do based on misinformation or misunderstanding, just hold it for now because once you see how it actually works, you’ll find that it's not what some of the proposed socialist programs would make you think. The math is actually incredibly accurate and of course, how you use the theory is important as well, so we're going to walk through how it actually works.
The whole idea of Modern Monetary Theory is this: that governments shouldn't really care about their budget deficits. Taxation and spending isn't really relevant to a fiat currency issuer. If you have your own currency and you issue your own currency, you can actually go into a deficit and it doesn't really matter. Today we’ll talk about why and we’ll go over the math on all of that as well so you’ll see how it works.
Think about countries that were fiat currency issuers that stopped being fiat currency issuers and ran into problems, like Greece. Greece didn't have a problem until they became part of the EU. They lost control of their rights to issue currency and then they had big problems. Other countries that peg their dollars to other standards, like Argentina and Venezuela, have problems because they don't actually issue their own fiat currency. They're actually giving up their rights to have their own currency and tie into somebody else's currency, which doesn't work either. If you're like the United States, Japan, or China and you do have your own currency and you can just issue currency, then raising tax money to pay for spending isn't actually relevant. When have we ever as a country raised money and then brought that in and then spent that money? That just doesn't happen. That's a fiction. We actually spend the money and then we justify the spending through tax programs and tax programs work just like this spending. It's all about money supply and money demand.
So if you print new money, how do you optimize the economy? If you can grow the money supply or the deficit, if you will, equal to the rate of growth in GDP, then your ratio of debt to GDP stays constant. The idea is that you would pump money into the economy in order to increase GDP.
If you pump money into the wealthiest Americans, which would include businesses as well, what would happen? That's a supply-side issue. With the wealthiest Americans, they get extra money and they don't spend it. They save that money and then the supply of money available to borrow and support growth is more widely available, which reduces the cost of capital.
If you pump money into the poorest Americans, they probably need to spend that money now. One of the greatest things you can do to stimulate demand in the economy is reduce payroll taxes. When you reduce payroll taxes, those employees go and spend their dollars the same day on things like gas and groceries for their family. So, if we have a demand-side problem, we can stimulate it through pumping money through the poorest Americans.
If we have a productivity problem, meaning that the demand is there and we have supply but we can't produce enough, then we need money into infrastructure to increase our productivity. In that case, stimulating infrastructure and productivity would lead to GDP growth and that would also offset any new money.
The trick is: where do you put the money? Political minds might are very self-interested, so pumping money into one category might be in their own best self-interest, but not best for the economy. So, what happens if you put it in the wrong place? If you increase the money supply too much where it's not needed, then all of a sudden you get high interest rates and inflation of monetary access. If you pump too much money into demand when we already have plenty of demand, you get commodity price increases. If you pump money into infrastructure but don't get any productivity out of it, then you haven’t grown the GDP either. Inflation tends to be the monetary barrier in Modern Monetary Theory, so wherever you see inflation, you know that money's been pumped through in the wrong place. The math works out well. Figuring out where to put the money is actually the biggest problem.