Written by Sig Silber
John Mauldin has been familiar with Modern Monetary Theory (MMT) for some time. I have reviewed a number of articles by him and others in his organization where people have discussed MMT in the comments section. Apparently, John Mauldin has concluded that MMT is a serious Threat as discussed in Modern Monetary Madness. It is a mystery to me why he has come to that conclusion.
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All MMT does is provide an explanation of how fiat currency works. The best use of MMT is (IMO) the three-sector model to look at the relationship between the government Sector of any sovereign nation, in this case the U.S., which has the ability to issue currency (Currency Issuing Sector) and a second Sector, the rest of the U.S., (ROUS) that uses (rather than issues) currency. This Sector includes the Private Sector and also, somewhat surprisingly (until you think about it), State and Local Governments. The Third Sector is the Rest of the World (ROW).
When you do that, you realize that it is desirable to keep the Currency Using Sector in the U.S. (ROUS) supplied with sufficient purchasing power not to shrink and possibly even to grow. In the best of cases, you would attempt to do that for the ROW also except perhaps that part of the ROW you considered a current or potential enemy.
What is so frightening about that?
Another part of MMT is that the issuing part of government can not be forced into bankruptcy since it can issue as much fiat money (physical or electronic) as it pleases. That can be disturbing to some from a moral perspective but that is reality. Should we ignore reality?
Now I believe John Mauldin is impressed with two well-known economists: Carmen Reinhart and Kenneth Rogoff who either intentionally or by mistake used a defective spread sheet to conclude that there was a tipping point where debt to GDP slows down growth. Well I do not have the credentials of those two well respected economists but I was taught that you need to differentiate between cause and effect and they seem to be mostly oblivious to that requirement. Is it the case that a high ratio of debt to GDP slows down growth or does slow growth lead to a higher ratio of debt to GDP?
Inquiring minds might want to know.
The answer may be different for different nations. For example things are likely different for those who need foreign investment to be successful.
I will agree with John Mauldin that the implications of MMT need to be carefully considered. I personally fear that having more people dependent on the State can lead to a loss of Liberty. I think that is a real problem as we move forward into a World of Abundance and a reduction in the labor component of more things.
But this very difficult problem can not be addressed by attempting to debunk MMT which simply shows that Austerity is a choice but not a requirement. Austerity is usually a politically difficult choice.
We do have to deal with how we transition into a World of Abundance but to deny that this is our future is not a very good way of preparing for it.
Inflation is a side issue and a separate topic worth discussing. But if you do not wish to have inflation, the remedy is simple: do not issue too much fiat currency. (An aside: the discussion of inflation is not complete unless it also considers deflation.)
Bottom line: Most proponents of MMT do not recommend inflation. This is a factor that seems not to be recognized in “Modern Monetary Madness”.
This is the latest in a series of posts addressing MMT (Modern Monetary Theory) and related issues about money. The previous articles:
- MMT Sounds Great In Theory . . . But (Lance Roberts and Michael Lebowitz)
A Brief Critique Of ‘MMT Sounds Great In Theory … But’ (Dirk Ehnts)
Conflation Of Monetary Operations With Public Policy Options Is Confusing The Public MMT Debate (Sig Silber)
MMT: The Descriptive And The Prescriptive (Clint Ballinger)
Modern Monetary Madness (John Mauldin)
The Economist: Misrepresenting MMT (Dirk Ehnts)
How To Use Public Policy To Guide Accumulation Toward Virtuous Ends (Carmine Gorga and Michael Emmett Brady)
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