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Modern Monetary Theory

By Alisha Jain 


 MMT is a theory quite different from conventional economic theory. It advocates that governments that control their own currency can spend freely, as they can always create more money to clear the debts in their currency. So, what it means is that countries that issue their currencies can never run out of money. MMT comes from the work of economists such as Hyman Minsky, Wynne Godley & Abba Lerner during the 20th century. Economists such as Bill Mitchell contributed to this more recently. The theory proposes that government spending can grow the economy to its full capacity, eliminate unemployment, boost the private sector, and finance major programs such as universal healthcare, free college tuition, and green energy. If spending leads to government deficit, this isn't an issue as the government's deficit is the private sector's surplus. Opponents argue that it'll lead to hyperinflation. MMTers says that as long as there is an unused economic capacity or unemployed people, inflation will not happen because of increased government spending. Prices will be hiked only when supply fails to meet demand or lack of labour or capacity. MMT propagators also say that the government can control inflation by spending less or withdrawing money from the economy through taxes. That's the reason why government tax under MMT theory. Also, the bond is issued to prevent interest rates in the private economy from falling too low, else money can be created without issuing bonds. So, as per MMT, taxing less than government spending and issuing bonds isn't a big deal under most prevailing situations. In traditional economics, the notion of printing money to solve the country's problems is regarded as a bad idea. Yet MMT propagates money creation as a useful tool & it doesn't automatically devalue the currency or lead to inflation. It says that in order to balance government books, economies underperform due to lack of investment, losing all opportunities & resulting in unemployment. For example- In the 2000s, Zimbabwe printed so much money, devaluing its currency so much that the country once printed a $100 trillion note as legal currency. But here, the cause of hyperinflation was a sudden decline in production and it went from being food exporting breadbasket of Africa to a nation suffering from starvation. Therefore, if spending is increased without producing goods, inflation will surface & if spending is increased on top of it, hyperinflation will result. MMT also advocates the idea of government-funded job guarantee if the private sector fails to provide full employment. Spending on such a scheme would be capped when full employment is reached. Forms of federal job guarantees have existed in the past. In 2002, Argentina launched the Jefes Programme offering basic wage jobs to the head of every household.

 But there are downsides of MMT as well. It can be subjected to political bias if a central bank follows the government's direction eroding people's trust in financial institutions. The government might not be able to spot accurately & timely when the economy has reached full capacity, which can lead to inflation. Also, the government might not want to hike taxes as it disappoints people. If the government holds a significant amount of debt in other currencies, printing money and depreciating its currency could make it harder to pay off debt. University of Chicago Booth School of Business surveyed 42 of America's top economists on the validity of MMT. No one agreed that governments able to print their currencies should forget about fiscal deficits or freely spend as they want. Nobel Prize Winner Paul Krugman has argued that running large deficits could lead banks to refuse to lend at reasonable interest rates, creating inflation as the price of credit increases and investors may flee. So, the applicability and usability of MMT is quite debatable and depends on the prevailing situations in a particular country.


Alisha is pursuing economics from Hansraj College. She strives to learn and explore the real world and what is happening around the globe.

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