Modern Monetary Theory Explained in 60 Seconds - Information You Need To Know

Modern Monetary Theory (MMT) suggests that so long as a government’s debt is denominated in its own currency there is no upper limit on countries' monetary borrowing. Bottom-line – you can borrow as much money as you desire. Public debt is irrelevant since additional printing will address the issue.

Why do you need to be aware of this theory?

  • It may force draconian tax increases and cost-cutting by the government and endanger your retirement.

  • It assumes our debtors will not force higher interest rates on the federal government in the future. It also assumes our debt will continue to be issued in the world reserve currency which allows the U.S. to borrowed at a reduced interest rate.

  • The MMT (paragraph 6) approach appears to implicitly assume that a high level of debt will not be problematic because it can be financed cheaply by maintaining low-interest rates. Underlying this policy is the assumption that Congress can act quickly to counteract deficit-driven inflation with tax increases or spending cuts that would allow the economy to maintain low-interest rates on public debt.

  • It lulls the government and Americans into a false sense of complacency.

How We Can Reduce National Debt:

  • Reduce fiscal deficits by cutting spending, increase taxes or a combination.

  • Grow your economy and eliminate debt through economic expansion.

  • Chief global economist at Vanguard notes this is impossible.

  • We have a history of weak expansion (less than 3% 2017-2019) and reduced population growth which has negative implications on growth. The U.S. population is aging rapidly and seniors reduce consumption which does not contribute toward economic expansion. 5% growth won’t even come close to covering the increasing debt associated with unfunded liabilities over the next decade.


  • Print more money per MMT proponents.

Opinions:

  • Jonathan Hartley – Article- https://www.nationalaffairs.com/publications/detail/the-weakness-of-modern-monetary-theory.

  • Economists and politicians - some believe MMT negates the concern about the national debt and long-term printing of money.

What do economists think about MMT?

A recent Chicago Booth IGM Forum survey of 50 of the most respected academic economists found that not a single respondent agreed with the central claims of MMT regarding deficits, currency production, or inflation. Even left-leaning Keynesian economists like Summers and Krugman have loudly denounced MMT claims as "dangerous" and "obviously indefensible," respectively.

Main Flaw:

You can’t simply borrow in perpetuity. Lenders will eventually lose faith that repayment will occur and they will either stop loaning money or demand a new higher rate of interest. This will force interest rates to increase and drive inflation, cost-cutting, and taxes. MMT only survives in a low, low-interest-rate environment.

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