Covid-19 Stimulus, Fed QE, Corporate Bailouts, Move Modern Monetary Theory (MMT) to the Mainstream
With the financial crisis of 2008, quantitative easing (QE) moved to the forefront of our collective conscience. QE meant the Fed was intervening in the liquidity crisis by intervening in the markets and buying the Treasuries bonds thereby stabilizing interest rates and the yield curve–the latter largely by keeping it from inverting for any appreciable length of time.
In 2020, we’ve suffered the global COVID-19 Pandemic. Once again, in order to stabilize the markets, the Fed has stepped in but this time in a form of QE5 by purchasing not only treasury bonds but also corporate debt. Can you say, “Europe?”
So we ask the rhetorical question, how do we pay for all this? Well, enter into the mainstream the 100-plus-year-old economic theory known as Modern Monetary Theory (MMT). While Keynesian economics and its subsequent iterations treated money as a scarce resource essentially; not so MMT. Keynesian economics leads to the conclusion that as the money supply increases due to treasury printing, the government is in competition with the private sector, and interest rates adjust to market conditions and may then be used to slow inflation by discouraging borrowing and vice-versa. The oft-ridiculed MMT economists urge (and have for a century although there weren’t many of them) that a government may print as much money as it needs to in order to optimize employment. Then, as inflation becomes an issue due to an oversupply of money (M2), then the government may reduce the money-supply (and thereby lower prices) by manipulating tax rates instead of interest rates. So, tax rates increase and money is taken from the system and placed back into the treasury, and vice-versa. MMT maintains that there is an infinite supply of money. So, given that “street” version, see below for the Wikipedia version the Wonks among us will demand.
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MMT advocates argue that the government could use fiscal policy to achieve full employment, creating new money to fund government purchases. According to advocates, the primary risk once the economy reaches full employment is inflation, which can be addressed by raising and gathering taxes and issuing bonds to reduce money and the velocity of money in the system. MMT is debated, with active dialogues  about its theoretical usefulness, the clear useful real world practical applications and implications, together with the varying effectiveness of its targeted use and varying challenges of its policy prescriptions.
- Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;
- Cannot be forced to default on debt denominated in its own currency;
- Is only limited in its money creation and purchases by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment;
- Can control demand-pull inflation by taxation and bond issuance, which remove excess money from circulation (although the political will to do so may not always exist);
- Does not need to compete with the private sector for scarce savings by issuing bonds.
These tenets challenge the mainstream economics view that government spending is funded by taxes and debt issuance. The first four MMT tenets do not conflict with mainstream economics understanding of how money creation and inflation works. For example, as former Fed Chair Alan Greenspan said, “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” However, MMT economists disagree with mainstream economics about the fifth tenet, on the impact of government deficits on interest rates.
A 2019 survey of leading economists by the University of Chicago Booth‘s Initiative on Global Markets showed a unanimous rejection of assertions that the survey attributes to modern monetary theory.
Sources: Wikipedia https://en.wikipedia.org/wiki/Modern_Monetary_Theory
Modern Monetary Theory (MMT): A General Introduction.Political Economy – Development: Fiscal & Monetary Policy eJournal. Social Science Research Network (SSRN). Accessed 10 April 2020.
Warren Mosler, ME/MMT: The Currency as a Public Monopoly
Éric Tymoigne and L. Randall Wray, “Modern Money Theory 101: A Reply to Critics,” Levy Economics Institute of Bard College, Working Paper No. 778 (November 2013).
Wray, L. Randall (2015). Modern Money Theory : A Primer on Macroeconomics for Sovereign Monetary Systems. Houndmills, Basingstoke, Hampshire New York, NY: Palgrave Macmillan. pp. 137–141, 199–206. ISBN 978-1-137-53990-8.
Fullwiler, Scott; Grey, Rohan; Tankus, Nathan (1 March 2019). “An MMT response on what causes inflation”. FT Alphaville. The Financial Times Ltd. Retrieved 27 April 2019.
Bell, Stephanie, (2000), “Do Taxes and Bonds Finance Government Spending?”, Journal of Economic Issues, 34, issue 3, p. 603-620
Sharpe, Timothy P. (2013) “A Modern Money Perspective On Financial Crowding Out”, Review of Political Economy, 25:4, 586-606
Fullwiler, Scott; Kelton, Stephanie; Wray, L. Randall (January 2012), “Modern Money Theory : A Response to Critics”, Working Paper Series: Modern Monetary Theory – A Debate (PDF), Amherst, MA: Political Economy Research Institute, pp. 17–26, retrieved 7 May 2015
Fullwiler, Scott T. (2016) “The Debt Ratio and Sustainable Macroeconomic Policy”, World Economic Review 7:12-42
Marc Lavoie. “The monetary and fiscal nexus of neo-chartalism” (PDF).
“Modern Monetary Theory”. Chicago Booth IGM Forum. The University of Chicago. 13 March 2019. Retrieved 20 April 2020.