Modern Monetary Theory 

#GS3 #Economy 

Modern Monetary Theory attempts to provide a solution to fund-strapped countries such as ours, especially during the current economic slowdown where the government needs to push fiscal stimulus to kickstart the economy. 

The theory, supported by economists such as Stephanie Kelton, L Randall Wray, Bill Mitchell and Warren Mosler, moved in to the limelight recently when US politician, Alexandria Ocasio-Cortez, stated that the theory needs to find a place in discussions revolving around stimulating growth. 

What does ‘Modern Monetary Theory’ say? 

  • In conventional economic theory, it is accepted that the government pays for its expenses through the taxes that it collects. To pay for the rest of the expenses, it borrows money by issuing bonds. But government borrowing has an effect of increasing the cost of borrowing or the interest rate paid by individuals and businesses. 
  • MMT takes the opposing stance and states that countries that have the sovereign right to print their own currency can never run out of money and default. In order to default, it would have to mean that they do not have any more money to pay their creditors. But this can never be the case as long as countries are free to print as much money as they want. 
  • So, taxes and borrowing do not pay for government spending, instead money is created through government spending. In other words, the theory gives governments the leeway to spend as much as they want on public expenditure and not worry about ballooning fiscal deficit or government debt. 
  • MMT believes that governments can use taxes as a means to make people use the currency as well as to control inflation. 
  • The argument of MMT that government borrowing should not be equated with borrowing of individuals and businesses and that governments just cannot default, as long as they can print notes to service the loan goes against conventional belief; but this has been proved right in Japan, Italy and now in the US. 

Concerns of inflation  

  • The fear that excessive government borrowing could lead to inflation is also not borne out by current events as despite large government borrowings in developed countries over the past decade, inflation has been stubbornly low. The money issued by the government to various banks seems to have helped repair the banks’ balance sheets, rather than being brought out in to circulation in a large way. 
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