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Concept
Modern monetary theory
Summary
Modern monetary theory or modern money theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. According to MMT, governments do not need to worry about accumulating debt since they can create new money by using fiscal policy in order to pay interest. MMT argues that the primary risk once the economy reaches full employment is inflation, which acts as the only constraint on spending. MMT also argues that inflation can be addressed by increasing taxes on everyone to reduce the spending capacity of the private sector.
MMT is controversial, and is actively debated with dialogues about its theoretical integrity, the implications of the policy recommendations of its proponents, and the extent to which it is actually divergent from orthodox macroeconomics. MMT is opposed to the mainstream understanding of macroeconomic theory and has been criticized heavily by many mainstream economists.
MMT's main tenets are that a government that issues its own fiat money:
Can pay for goods, services, and financial assets without a need to first 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 limited in its money creation and purchases only by inflation, which accelerates once the real resources (labour, capital and natural resources) of the economy are utilized at full employment
Recommends strengthening automatic stabilisers to control demand-pull inflation rather than relying upon discretionary tax changes
Issues bonds as a monetary policy device, rather than as a funding device
The first four MMT tenets do not conflict with mainstream economics understanding of how money creation and inflation works. However, MMT economists disagree with mainstream economics about the fifth tenet, on the impact of government deficits on interest rates.
Official source
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