The Potential of Modern Monetary Theory

You have got to hand it to the proponents of Modern Monetary Theory (MMT). MMT offers a conceptual framework of U.S monetary and fiscal operations which accurately reflect the workings of these operations in both the U.S. and other nations with free floating national currencies. The advantage of the MMT conceptual framework is that it can be utilized in a manner which serves a broad swath of the American people while it has the potential to minimize the class conflict which currently prevails in the United States. If the financial and economic establishment would take some time to study MMT rather than presume to know MMT, they might recognize the possibilities inherent to the MMT approach.

In MMT’s recognition that Federal Government spending creates new money and that taxation and federal borrowing are only necessary to control inflation, interest rates, and for other public purposes, MMT releases the federal government of spending restraints while perhaps saving the capitalist class from higher taxes currently deemed necessary for increased social spending under obsolete theories of fiscal and monetary policy.

Under the old theories of fiscal and monetary policy, still prevalent in the minds of Washington politicians and the general public, the federal budget is deemed analogous to a household budget: spending is constrained by income; spending beyond income must be matched by borrowings. There is, however, a major distinction between the U.S. federal government and an American household. The Federal government has the ability to create its own money. With this in mind, how is it possible for the federal government to be fiscally restrained? There are, however, other restraints on federal spending, most important of which is inflationary pressure in the goods, services, and asset markets. Too much federal spending, i.e, money creation, without an appropriate level of money destruction, will create inflation in these markets. Taxation and borrowing are the tools requisite to money destruction in order to prevent inflationary pressures. If one were to travel through the accounting process, one would readily see that the MMT explanation of this process is an accurate portrayal of current monetary and fiscal operations in the U.S.’ economy.

The advantage to the financial elite of MMT thought is that they generally might be able to have their cake and eat it too. Increased social investment under MMT need not necessarily be achieved through increased taxation on the upper economic layer of American society. Increased taxes on this group of people would only be deemed necessary if increased consumption among working people when combined with the consumption habits of the ruling elites, put a strain on global productive capacity to an extent which causes inflationary pressure. This seems unlikely for two reasons. First, working class people and upper economic class people do not generally consume the same types of items. Upper economic class individuals could continue to enjoy items of luxurious consumption without inflationary pressure due to a lack of competition from working class people for these items. Second, to the extent competition exist between these two groups for similar goods and services, there is nothing which would limit the expansion of productive capacity in order to relieve the inflationary pressure. Accordingly, higher tax rates on the economic elite may not be necessary as a money destruction measure in order to prevent inflationary pressure. Global production capabilities make the current setting completely unlike Weimar Germany or Zimbabwe, the Countries which opponents like to trot out as examples of what happens when the federal or national government takes greater control over the money creation process.

Weimar Germany and Zimbabwe suffered hyperinflation due to severe productive capacity restraints and a corresponding lack of quality assets which left both Nations unable to absorb new money creation. This is unlike the current setting in which there are virtually no restraints to enhanced global production, setting aside the very important consideration of the environmental impact of such enhanced production. This impact, however, could be greatly mitigated with a Green New Deal financed through MMT principles. Due to global production potentialities, inflation caused by supply constraints seems extremely unlikely.

There is, perhaps, some credence to the argument that increased federal spending through the Job Guarantee program, a vital aspect of MMT, could create inflationary pressure due to an enlarged trade deficit. The Job Guarantee would increase national income, which, if not matched by an increase in the production of domestic goods, would increase demand for foreign goods. The increased supply of dollars in foreign markets would exert downward pressure on the dollar which is generally believed, within orthodox theory, to create inflationary pressure. This, however, would likely be offset as foreign nations and the Eurozone, in an effort to remain competitive in foreign trade, would take action to devalue their own currencies in order to maintain equilibrium in trade relations.

Without going into detail, MMT offers other legitimate counter arguments to the theory that enhanced inflationary pressure would emerge due to an enlarged trade deficit. If inflation were to result due to increased money creation due to the Job Guarantee, this indicates that the capitalist model is hopelessly dependent on a pool of unemployed and impoverished workers in order to control inflationary pressures. If this is the case, then the whole capitalist framework needs to be tossed aside and replaced with a radically new economic order. Who wants to live in a system where the prosperity of some is dependent on the poverty of others? They, the ideological proponents of the capitalist order, would of course argue that full employment is possible in a capitalist economy outside of the MMT framework; but history does not support their view: and a few months of close to full employment at the end of a business cycle doesn’t support their view either.

One would think that the Nation’s vested interests would recognize the frailty of their control over the world order and would embrace MMT as an economic framework which would improve the conditions of the working classes and consequently secure their lofty positions on top of the hierarchy while simultaneously strengthening the foundations of the capitalist order. Through an understanding and the exercise of MMT prescriptions, the ruling elite could save themselves the trouble of managing an increasingly restless population on both the Left and the Right. If they read deeper into MMT, they would discover there is money to be made through subscription to MMT thought: the result of increased purchasing power among those in the lower economic classes.

There is no proof beyond doubt that a monetary economy based on market value principles is capable of producing an equitable society. The premise of greed, the elevation of material possession over the value of human life and welfare: both foundational to capitalist thought, along with the spiritual import of such thought, likely makes capitalism an unworkable solution to just world order. But if it is possible to make capitalism work for all people, MMT seems to represent the best path to get there. MMT represents a sharp advancement in monetary thinking. It provides a pathway towards full employment and within the context of the Green New Deal could very well enable sustainable prosperity for all Americans. Although the proponents of MMT argue their theory does not represent a reform of the current system but rather is a correct description of the current workings of the Nation’s monetary and fiscal operations, a reformation of our thought processes along with some changes in the legal framework under which current monetary and fiscal operations operate in this country will be required in order to utilize the potential inherent to MMT thought. MMT might represent the last best hope for the capitalist order to save itself, from itself

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