Modern Monetary Theory (MMT)

In the lecture of Yeva Nersisyan we learned about Modern Monetary Theory (MMT). A significant feature of MMT is its focus on the origin of money and how the government issues its own tender under a managed currency system. As long as governments may spend through currency issuance, they will not face a shortage of their own currency. Hence, the logic that tax collection is necessary as a source of revenue does not hold. MMT considers the role of taxes to be ensuring the basic liquidity of the legal tender and a means of regulating inflation and inequality. The conventional wisdom often misunderstands the role of the government in the economic system: while a corporation is a currency user, the government is a currency issuer.

Just because spending is not constrained by tax revenues or outstanding debt does not mean it can be expanded without constraints. The criterion for fiscal discipline is the capacity of the national economy, the government can expand fiscal expenses and cut taxes so long as the economic balance is maintained and inflation is not too high. Yeva said ‘inflation can be avoided by policy focused on mobilizing resources and releasing them as necessary’. The lower the inflation rate, the greater the room for aggressive fiscal expansion, and the higher the inflation rate, the narrower the room for aggressive fiscal expansion.

The appropriate fiscal policy in a sovereign currency country is always constrained not by the size of tax revenues or government debt, but by the availability of resources to implement them. Once specific physical or labor resources in the economy are exhausted, additional spending there will only increase the cost of that resource, leading to inflation.

We learned throughout the lecture that the real constraint (for a privileged economy like the US) is access to resources, not money. Furthermore, we were reminded that interest rates are controlled by central banks so they are not influenced by the price fluctuations of the markets.

We realized that the fact that the European Central Bank has committed to save the Euro (buying government bonds whenever a European nation is in trouble) is similar to what Turkey did recently when its currency depreciated.

It was also especially interesting that the real constraints for countries like the US are not money (as they are in a privileged position) but rather the things to buy: as in COVID were masks or ventilators, but more recently semiconductors are lacking in supply. There may be also problems with resources of the labor force, but these are less present in developing countries.

Yeva also said that MMT was validated through the pandemic fiscal policy (although the chosen ways were not ethical in our view, e.g. the episodes that happened on airports to buy resources at the last minute and even making a third party break a contract. So, what has been proven is that money acquisition is not a real problem because the Treasury may create more, even if the spending may go “over established values”.

Based on the lecture "Modern Monetary Theory (MMT)" by Yeva Nersisyan during AEMS 2022.
Written by: Antonio Pelegrina and Toshiyuki Sawa