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Lizzy Francis – What Is Modern Monetary Theory? An MMT Theorist Explains

Summary:
A resurgence in a popular economic theory might make it possible for Universal Child Care and other programs to actually see the light of day MMT makes a distinction between the issuer of the currency, which is the federal government, and the users of the currency, which is everybody else. States, municipalities, us, individuals, families, households, and companies, and the rest of the world. Once we look at that distinction, it becomes illogical to say the government needs to borrow money in order to spend it. In order for the U.S. dollar to exist in circulation in the economy, it must come from the only source: the federal government. What do you mean? The federal government spends money into existence. That’s what allows for the circulation of currency in the system, so that the

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A resurgence in a popular economic theory might make it possible for Universal Child Care and other programs to actually see the light of day


MMT makes a distinction between the issuer of the currency, which is the federal government, and the users of the currency, which is everybody else. States, municipalities, us, individuals, families, households, and companies, and the rest of the world. Once we look at that distinction, it becomes illogical to say the government needs to borrow money in order to spend it. In order for the U.S. dollar to exist in circulation in the economy, it must come from the only source: the federal government.
What do you mean?
The federal government spends money into existence. That’s what allows for the circulation of currency in the system, so that the rest of us can use, spend, borrow, and lend it to each other and use it to pay taxes back to the government. So, in MMT, first, the government spends, then taxes some of it back. Then the question becomes: if taxation doesn’t fund government programs, what’s the purpose of taxation?
MMT’s explanation: Because taxation is required for everyone, it creates demand for an otherwise useless piece of paper. The US dollar is not backed by gold or silver. So that in and of itself gives it value. It’s required via the coercive authority of the government. It’s required for the payment of taxes.
Okay, so taxation gives money value, but it isn’t required for enacting new programs that would require a lot of federal spending. So, why are taxes still important in the MMT framework?
Taxation also withdraws money from the system. So, yes, the government can spend anything it wants, but that would put too much money in the system, which would allow consumers to go on a shopping spree and could cause inflation. So taxation takes some of that money out of circulation. It can tame inflation.
What’s stopping us from adopting an MMT mindset and just going right into funding a huge social program right now, tomorrow?
Inflation is the limit. Let’s say, tomorrow, we decide as a nation that dental care is a human right, and we are going to provide it to every person in this country. Anyone can call up their dentist and schedule an appointment without insurance. The government is going to pay for it. I call my dentist and say, ‘I’d like to schedule an appointment.’ They say, ‘Sure. We’ll put you on the list and we’ll see you in 2035.’ And I say, ‘Why?’ They’ll say: ‘Because everyone is calling and everyone is scheduling because they were excluded before that.’
What good does it do for us, having the government pay for dental care, if we don’t actually have the physical resources and productive capacity to provide those things? The dentist will say, ‘By the way, we have this premium platinum service where you pay $7,000 and we put you in an elite club and you can schedule your appointment next week.’
If you have a shortage of productive capacity, and a huge amount of demand, regardless of whether we have the money or not, that will cause inflation. MMT says let’s increase the productive capacity of all the things that we care about: renewable energy, medical services, whatever the national priorities are. The good thing is those resources are producible. Dentists can be trained.
Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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