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Modern Monetary Theory

I seem to recall someone mentioning this topic on an OGM call. It’s a subject I was completely ignorant about until reading this interview that Anand Giridharadas conducted with Stephanie Kelton.

Brief excerpt:

" ANAND: You are a leading champion of what’s called Modern Monetary Theory. It’s a domain with a devoted fan base and many people who don’t understand a thing about it. Give me the explanation you’d give to a 10-year-old about what the old thinking was and what MMT seeks to replace it with.

STEPHANIE: The first chapter in my book is called “Don’t Think of a Household.” I open with a Sesame Street reference, so this is an explanation that most 5-year-olds can grasp. For those who grew up watching the show, a frequent segment was aimed at helping kids distinguish things that are alike from things that have some fundamentally different characteristics.

“One of these things is not like the other,” the song went. So think about these four things: A household, a business, state and local governments, and the federal government. The first three share something important in common: none of them can issue the U.S. dollar. In order to spend, they must first come up with the money.

The federal government is completely different. It has the sole legal authority to issue the currency. Biden was right! Article 1, Section 8, of the U.S. Constitution enshrined that power. Unlike the rest of us, the federal government can spend money it doesn’t have. New dollars are created every time the federal government spends.

Take the Covid relief package. Congress didn’t go out and “find” $1.9 trillion before passing that legislation. It didn’t have to, because it has something the rest of us don’t — the power of the purse. The bill effectively ordered up $1.9 trillion new dollars from a bank called the Federal Reserve. The Federal Reserve carries out payments on behalf of Treasury, using nothing more than a computer keyboard to change the appropriate bank account numbers.

If you received one of those $1,400 stimulus checks, that money was keystroked into existence to help your family. If you’re unemployed, and you’re getting an extra $300 a week in unemployment benefits, you’re also receiving newly created dollars, courtesy of the federal government.

If households, businesses, governors, and mayors had this power, they would plug any holes in their budgets on their own. But they can’t. They are financially constrained. The federal government isn’t.

MMT is about providing an accurate description of the monetary system that exists today and government finance mechanics. In other words, MMT describes how things work. We’re not on a gold standard anymore, but we haven’t come to terms with what that means.

We still have this idea that the federal government needs our money in order to pay its bills. That is wrong. Could Congress spend too much? Absolutely! But the punishment for overspending is inflation, not insolvency, contrary to what Ron Paul, Ted Cruz, and Lindsey Graham would have us believe.

At its core, MMT is about replacing the (flawed) concept of a government budget constraint with a natural resource (inflation) constraint. It’s not that there aren’t any limits. There are! But they’re not on the financing side (as we have been trained to believe). Our government cannot run “out of money,” as President Obama once falsely [claimed]. We cannot end up like Greece, and, contra [these economists]), we were never facing a fiscal crisis.

MMT teaches us to ask not, “How will you pay for it?” but “How will you resource it?” The politics are hard, but coming up with the money for Medicare for All, tuition-free college, or a huge infrastructure package is the easy part. Managing the use of our productive resources, and respecting our ecological constraints, is the defining challenge of our time."

Thanks Ken! I’m not an expert on this but my systems thinking hat makes me consider the cost of inflation given its determinants.

Can you say more about that?