Modern Monetary Theory (MMT) is growing strongly in America, partly due to the open admiration that the new Member of the House of Representatives Alexandria Ocasio-Cortez has expressed for it. Criticism is there too. For example, MMT is being dismissed as a way for governments to stop paying off their debts. This is too short, because MMT is more nuanced. But the theory is still unconventional, turning our understanding of the financial and economic world upside down.
The essence of MMT is that governments take the lead in steering the economy from central banks through government spending and tax cuts. Governments with their own currency can do this because they can never go bankrupt. In other words, they can borrow indefinitely. According to Mary Pieterse Bloem, Professor of Financial Markets at Erasmus School of Economics and Global Head Fixed Income in the Global Investment Center of the Private Bank of ABN AMRO, if this theory is seriously implemented, the current madness of the financial markets as a result of central bank policies will become even crazier.
MMT supporters believe that the government can curb inflation by raising taxes in a flexible, automatic way. So if the price level rises too fast, the government withdraws money from the economy through higher taxes, so that people can no longer bid prices. In contrast, as economic activity decreases and demand for money falls, the government lowers taxes and spends more itself. If you are dismissed, you will get a job with the government. So everyone in the MMT world has a job for life.
According to Mary-Pieterse, MMT will be very nice for portfolios for a few years. Higher economic growth and lower interest rates will drive prices higher. But we shouldn't fool ourselves about what the next policy can cause, namely a financial bust, as the fiscal impulse fades and the economy starts to slump again.
The entire article can be read here (in Dutch).
- Professor