Trying to Understand Modern Monetary Theory

in steemleo •  11 months ago  (edited)

Today I decided to try and understand MMT. I've heard of it before, but never really looked into it in detail. Even though I didn't think I would agree with the theory I tried to be open to it. One day is definitely not enough to fully understand it, but I want to make this post so that I can get some feedback on what I've understood so far and hear some of your opinions.

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MMT proposes that a country that is the sole controller over their monetary supply, like the United States, can never default on their debt because they can manipulate other things to prevent that from happening.

To me, MMT makes the system seem inflexible. For MMT to work, debt needs to be low so interest rates will not be able to rise up again. In fact MMT would prefer the interest rate to be 0 permanently. It proposes that treasury bills are not even needed and the government should just print the money.

Although I am struggling to grasp how this could work I do have to look at Japan. Japan currently has a debt to gdp ratio of over 200%. Somehow Japan is still staying afloat with negative interest ratio. However many people would say that inflation should be increasing, but in Japan the inflation rate is only around 0.8% and the central bank has been trying to get it to 2%. Overall, what a weird situation. I wonder what Japanese investors think of all of this.

I don't know if I would call Japan a success story. Reading about MMT does make me believe that things could be prolonged much longer than expected in the United States. MMT seems like long-term it will limit options and may be the path to the end. The government can keep interest rates at 0% and force people to invest instead of save of their money and lose 2% each year to interest. This artificially keeps stock prices high. Then since there would be no option as people earned more they would continue putting money in so that deep recessions could be avoided? Because there isn't much leverage with 0% except printing more money(which they are for). Yes the printed money can generate more tax dollars and future profits, but I can't wrap my head around how it would work long-term. It seems like a bit of a gamble that requires continued growth. Whether or not we can expect continuous growth is another topic. It also seems like MMT works in a system were people are bad with their money and the printed money is spent. As a whole MMT appears to me a solution that tries to embrace a broken system.

What are your thoughts on MMT? Do you struggle to understand how it is going to work long-term? This upcoming recession will be a real test to see if these concepts have any validity. If you are pro MMT I would be even more interested to hear your perspective so please do not be afraid to share.

- Schubes
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I'm a fan of MMT and think debt hawks are mostly irrelevant and silly.

How do you see the debt not being a problem in the future?

revolution and doing away with the entire monetary system

Dear @schubes

Great choice of topic. Financial education is something we all need and I really enjoyed reading your publication and I found it very valuable.

Recently I've been learning a lot about inflations, value of currency, printing money, debts etc. All those aspects that are part of our globacl economy. And I also have some trouble putting it all together.

MMT proposes that a country that is the sole controller over their monetary supply, like the United States, can never default on their debt

Ehm. I'm afraid I've lost you here. US cannot default their debt? I didn't know that.

In fact MMT would prefer the interest rate to be 0 permanently

I've learned that in Switzerland interest rates are negative. I wonder what MMT would have to say about it :)

It seems like a bit of a gamble that requires continued growth. Whether or not we can expect continuous growth is another topic.

Economy growth is build pretty much on growth of debt (since new money = new debt and debt=money). Question is: how much longer can we all increase our debts? One day this train will have to crash ....

ps. we're living in very interesting times. I wonder if we will witness all current economies collapsing within our lifetime. I hope not.

Yours
Piotr

MMT proposes that a country that issues it's own currency can never go broke. Not sure if I agree with that either, but I'm just presenting the MMT argument. Basically if money is used to stimulate the economy then it will create growth that makes up for the pumped money. Inflation is complicated and is part of the picture I have trouble putting together. I think they would not want negative interest rates because they need inflation to slowly eat away the significance of the debt. Then again some don't even care about the debt at all? It's confusing.

The reason I say can we continue growth is because it seems we are maximizing growth in a lot of areas. Our society is wasteful in how we use our resources and this wastefulness is helping the economy. This in combination with MMT could create a big problem.

I like this idea of writing a post to try and learn something. In fact, that's what I did yesterday with the Simulation Argument. I think this is a great way to generate content that helps everyone, including ourselves!

I too am intrigued by MMT. At first, I thought they were just Neo Keynesians. But after investigating a lot about monetary policy, I came to realize that they do have a point, though I'm not sure I totally agree with it. The key is seignorage (or what some countries call exorbitant privilege). The JPY is historically a regional trading currency. USD is a global reserve currency. So these countries (and others like them with built-in advantages to their currency) have kind of a free pass on the debt argument. They can pay debts with a product that only they can create and can create virtually for free!

Other countries, however, do not have this privilege. And for them, I guess, there's Bitcoin!

Hi, @schubes!

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