We have discussed a number of times of the past few months the concept of Modern Monetary Theory, or MMT.
MMT is an emerging economic school of thought involving ideas some would consider radical regarding central banking and government deficit spending.
The primary concept of the theory is governments can spend as much as deemed necessary, without concern for deficits or debt, in pursuit of stimulating an economy to produce at full capacity. The theory also stipulates that a central bank, like the Federal Reserve, can create new money to finance this spending without concern of currency devaluation (inflation) as long as the government conducts business (taxes and spending) in the currency it is creating.
My supposition regarding MMT is once a basic understanding of these concepts was attained, much of the confounding spending behavior exhibited by our federal government could be viewed in the framework and better understood by us in the “real world.”
Most of my background exposure to this theory has come from some non-mainstream sources on the web sent to me by friends and readers interested in this topic.
So I was surprised to see an article in the publication Investment News illustrating the theory going mainstream. Investment News is the premier trade publication for the investment management industry and recently printed an article reporting on a series of training speeches being given by Stephanie Kelton, the head of the economics department of the University of Missouri-Kansas City, to investment advisers and financial advisers around the country.
The topic presented by Kelton is “how money really works” intended to educate advisers on developing strategies within a fiat currency system (which is the system we use). MMT serves as the foundation of the training.
I can appreciate the academic discussion regarding MMT, and when viewed with an open mind much of the logic in the theory seems well founded.
My concerns however have more to do with the “real world." MMT based policies will invariably lead to an economy completely awash in liquidity, whether productive or not, and excess liquidity invariably leads to financial bubbles. And bubbles scare me.
Policies founded in MMT also concern me because I think they tend to scare business owners and entrepreneurs operating in the real economy. Unlimited liquidity and spending may facilitate trading and speculation on Wall Street, but real business owners tend to get scared by government deficits and debt.
When business owners are scared, they defer investments such as buying new equipment or hiring new employees. So unless we all intend to work for the government or become Wall Street speculators, I worry MMT based policies could actually serve to inhibit true prosperity.
But this school of thought appears here to stay and I once again urge you to become informed on this theory.