Modern Monetary Theory is a framework that is used to describe the novel approach to macroeconomics. The first underpinnings of Modern Monetary Theory were formed by Warren Mosler in the 1990s. Mosler reflected on the application of debit and credit as financial instruments, analyzing the source of money that was used by the banks and governments. Eventually, he realized that before the subtraction of certain funds, which refers to debit, the government should first provide this money, and this process stands for credit. Mosler started realizing that it was essential for the government to put spending to the foreground. He was convinced that without government spending, the citizens would not have enough funds to pay their taxes. Today, Mosler is regarded as the father of Modern Monetary Theory who described how taxes eventually represent the value of money that was issued by the government. It implies that the governments of countries that issue fiat currency cannot suffer from any financial constraints. Researchers are convinced that the issuer of currency can’t face any financial limitations because when the country issues money, they cannot run out of it. Therefore, the issuer of currency cannot become insolvent. Modern Monetary Theory posits that in this case, countries can always make payments when they come due. In this case, researchers who support this theory are assured that the majority of governments cannot default on public debt.
Moreover, Modern Monetary Theory also discusses the theory of inflation, representing clear objections to it. For instance, its supporters note that according to the underpinnings of Modern Monetary Theory, it is not possible to track the direct relationship between the increased supply of money and the rises in the general price level. Therefore, it is apparent that Modern Monetary Theory does not support the mainstream view of depreciation of money.
After having looked at what MMT is, let us now look at the reasons why it is not a theory that is possible and a theory that would be successful, at least in the near future.
Concentration of Power
The first argument against Modern Monetary Theory, and very likely one of the most important ones, is the fact that giving elected government officials the key to the ´´money printer´´ instead of unelected central bankers would be the same thing as giving an individual with a bad gambling addiction the keys to the casino and unlimited money coming with it. The keyword to note and remember are thus elected government officials having access to potentially unlimited amounts of money. For the majority of government officials, the ultimate goal is to be re-elected for another term in office. Having the keys to the printing press might lead to such government officials.
Inflation and the Money Supply
Now although MMT and its proponents argue that money printing by the government will not lead to inflation, this has no basis and could be said to be blatantly false. An increase in the money supply will inevitably lead to an even higher increase in demand, which would thus lead to increased prices i.e. inflation, and history has confirmed this. We have witnessed numerous cases of hyperinflation as a result of increased money printing ranging from Germany, Austria and Hungary during the post WW1 through Brazil in the 1990s to Venezuela and Zimbabwe during the last 12 years. Now, although all these countries were in different situations and faced different challenges, the common thing between them is their decision to overcome these challenges and finance the expenditures related to them by printing more money.
When Germany lost WW1, it was made to pay enormous amounts of money to the allies as a penalty for starting the war. Furthermore, going back in time we can observe that, in order to be able to start the war in the first place, Germany issued a lot of debt with the thought and hope that once they had won, they would have access to wealthier regions. Needless to say, this assumption went wrong and Germany was left with a huge debt burden from carrying out the war as well as a huge debt burden from losing it. What Germany decided to do to be able to pay for everything was print more money, and there is only one word coming to mind that can describe the results; “disastrous”. By 1923, inflation was at its highest and the German currency (Mark) was completely worthless, with one US dollar equaling 4,210,500,000,000 German Marks.
Following WW1, the very same thing happened to Austria, Hungary and Poland right after. To give an illustration of the situation, in 1918 one US Dollar was the equivalent of nine Polish Marks, by the end of 1923 that same US Dollar was equivalent to 6,375,000 Polish Marks.
The post WW1 period is not the only example of hyperinflation as a result of frivolous money printing though. Looking a bit further in time we can observe the same thing happening in Brazil during the 1990s with inflation reaching more than 80% per month. Furthermore, there are even some very recent examples with Zimbabwe in 2008 and Venezuela in 2016 until now. In November 2008, the inflation rate in Zimbabwe was estimated to be a staggering 79,600,000,000% per month, while Venezuela reached a rate of more than 80,000% per year in 2018.
No matter what advocates of MMT say about inflation and how it occurs, the truth remains and will remain that inflation is a monetary phenomenon.
Overestimation of Fiscal Policy and Underestimation of Monetary Policy
Having talked about the inflation problem let’s see what the answer of MMT is and how it proposes to prevent inflation. What MMT proposes is a full focus and utilization of fiscal policy by the government and a more or less full abolishment of monetary policy. What MMT argues is that after having printed all the money needed to fund all public projects, thus giving basic income to everyone, and putting everyone at work (some of the main policies of MMT supporters), the government can now regulate and prevent inflation by raising taxes. There are two problems with this. Number one: History has shown that raising taxes is not effective to limit and reduce inflation. In the 1960s, when President Lyndon B. Johnson followed this very logic and raised taxes to balance the budget, inflation persisted at high levels. In fact, inflation only stabilized during the beginning of the 1980s when then-Fed-Chair Paul Volcker reduced the growth of the money supply.
The second problem of purely relying on fiscal policy and raising taxes to control inflation is the trust that government officials are going to do so. If we imagine just for a brief moment that fiscal policy and taxes could successfully be used to reduce and stabilize inflation, then the following question is whether the government would raise taxes and use fiscal policy. As mentioned previously in this part of the article, the main goal of politicians and government officials is to maintain public approval and re-election.
In any case, it is hard to imagine that raising taxes in an environment of already rising prices is something that the population is going to like. Thus, this again begs the question asked previously whether MMT is viable and whether government officials are suitable and able to carry out what is required by MMT.