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Back in 2012, I began introducing readers to the concept of Modern Monetary Theory, or MMT. At that time, I suggested those who follow finance, economics and government start to learn about this economic concept, as I thought doing so would help when evaluating some of the behavior of our politicians and even the Federal Reserve.

Now, seven years later, MMT is making a high-profile resurgence in the national conversation, as politicians, mainly on the American Left, have begun promoting policies and making statements which invoke this concept, oftentimes confusing, and yes enraging, those who aren’t familiar with it. So, I thought I would revisit MMT again.

When politicians like U.S. Rep. Alexandria Ocasio-Cortez and Sen. Bernie Sanders propose massive expansions of government through social programs like Medicare-for-all, job guarantees and the tenants of the Green New Deal, the immediate response from conservatives, and some Democrats, is, “How are you going to pay for all that?”

Careful listeners will hear beyond the mantra of “we’ll take it from the rich" and realize that, often, the level of spending being proposed far exceeds the possibility that the programs can be financed by additional taxation. The next part of the response has been “we’ll just figure out a way to pay for it,” which understandably elicits angry responses from those who are politically or philosophically opposed.

The “way to pay for it,” in my opinion, harkens back to the concept of MMT. In its most basic form, MMT stipulates that a sovereign government that creates its own currency and borrows in its own currency can borrow indefinitely without risk of ever defaulting on its debt. This is because the government, through its central bank, can simply keystroke new currency into existence to pay its debts, as long as the debts are denominated in the government’s own currency as well.

Considering this stipulation, one might ask “if the government can create as much money as it needs to fund itself, why does it need to tax us at all?” Well, in an MMT system taxation is important as a way for the government to control inflation and deflation, and taxation, charged in the government’s own currency, is important because it requires businesses and individuals to make an effort to obtain the government’s currency, if for no other reason than to satisfy their tax bills.

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In effect, taxation creates inherent demand for currency, therefore providing the currency with a fundamental level of support.

Now, if you’re reading this thinking, “Is Marc saying the government can borrow as much money as it wants and then just print funny money to pay the bills when they come due, is he saying the deficit and debt don’t matter?" The answer is a bit of yes and no.

The government, pursuant to MMT, has the incentive to optimize employment in its economy while at the same time making sure its currency is stable and not experiencing excess inflation. So, with these objectives in mind, it has to balance its borrowing to avoid inflation, but at the same time it doesn’t have to worry about whether or not something can be “paid for,” as it can simply keystroke the money into existence to do so.

I really don’t like addressing a topic this complicated in this forum, but I feel as the new House of Representatives comes online and the Democratic Party’s Presidential primary system gets underway, having an understanding of the MMT concept will be helpful when deciphering the ever-louder rhetoric.

It’s going to be a long 20 months until the next Presidential election. Having an understanding of MMT, whether you agree with the concept or not, might just help maintain a bit of sanity along the way. A little online research may be warranted.

Opinions are solely the writer's and are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing involves risk, including loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial.  Contact Marc at marc.ruiz@oakpartners.com Securities offered through LPL Financial, member FINRA/SIPC.

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