Recently, I have been thinking and learning a lot about Modern Monetary Theory (MMT) – the idea that the ds of the modem economy are inconsistent with the old-fashioned ways that we still think Government spending, and that these should be updated. The current, orthodox system me government as analogous to a traditional bank-taking in taxes (deposits), spending ) and borrowing from an external pool of credit that exists somewhere in the economy. believe all, economists now agree that this is not actually how the government (or banks) work, the Government, through the central bank, creates the money it spends before
Insight of MMT is this that the Government’s job is to create money to ensure that the my keeps operating, and that it taxes money out of the economy to create demand for the y, and to ensure that there is a moderating factor on the amount of money in the my to ensure that inflation doesn’t get out of hand.
Thus far, Modem Monetary Theory has just been that – a new theory of money creation, reframing how we view the system of money creation in the modern economy. There have calls to action, just a new way of thinking. This is where a lot of the mainstream critics are confused-they aren’t sure if MMT is advocating for a new system, or just reframing the current one. This is a fair response, and does require clarification from advocates of the theory.
I now want to talk about what I call an “MMT-Influenced” theory of inflation. As an undergraduate, of course my fundamental understanding of the topic is limited, and I want to op with an academically acceptable and generally useful theory of inflation that helps me conceptualize the economy. What I have arrived at is this: that inflation refers to the changing ratio between goods available to be sold and the money available to buy them, moderated of by market factors.
imagine an economy where the total material wealth of society remains constant over by remains constant over and where the central bank alone is allowed to issue currency. Let us also assume all cy remains in circulation that is to say that taxation is equal to government spending, physical currency is lost or damaged etc. In theory, there would be no net inflation. The of spending in the economy (and therefore the price of goods in that sector) could shill me, for example if one kind of spending became more fashionable, but the corollary is sed spending (and prices) in another sector-that is to say, where supply remains and the only way for the price of milk to go up is for the price of some other thing to come assuming a very basic model of supply and demand.
Certainly, this model is very (very) simplistic. In practice, none of its assumptions are true. I is a useful baseline though to build an understanding of how inflation can occur in an my. Let us now assume a comparably similar economy, but with 2% growth in national wealth year-on-year. Unless there is some change in the money supply, the amount of money available to ‘chase’ each thing produced will decrease. Therefore prices must come down (once again, assuming simplistic supply and demand laws). In order to avoid deflation, the central bank must produce some currency; the productive power of society is the mechanism by which it moderates the impact of changes in money supply on inflation (&v.v.)
A brief note before moving on – the emphasis on the money supply in causing inflation is obviously simplistic and ignores a lot of the more complicated things that happen in an economy with so much money lying around in lots of different forms and in lots of different places in a way that often substantially moderates the money supply factor – if the price of a good goes up, there is enough money in different places that is able to reassemble and pay for it, and the movement of that money may be so distributed that its effects are so complex as to be incalculable therefore the understanding I’ve laid out above might not be observably true in the modem economy at the granular level. That said, I think it can be useful for categories as large as prices in general or prices in a particular sector, From a policy perspective, the inflation rates of particular goods would not be moderated through changing the money supply. This is one of the issues with measuring inflation only lookin inflation only looking at CPI if we’re interested in the economic effects of inflation as a whole, for example with asset prices.
I think this way of understanding inflation integrates nicely with MMT. It is the government’s job to ensure that all the productive capacity of society is ‘satisfied with sufficient currency. It can do this by creating new money in response to economic growth in productive capacity (to stave off deflation) or eliminate it in the case of economic reduction (by this of course I don’t mean an economic downtum, but rather an actual reduction in productive capacity that cannot be restimulated through currency creation such as the physical destruction of productive goods or the emigration of some of the labour force.
A separate point is that with this understanding, the way we talk about government debt should be substantially reframed-the government doesn’t need to borrow money from financial markets-indeed, this is an option the government doesn’t have to take but rather forces itself to take by following the full funding rule. Instead, the government debt is a function separate from spending-the government issues bonds to financial markets to give them a completely safe place to park their money-the government cannot be be made e to to default default. As such, government spending should be decoupled from what might be better termed ‘government deposit-taking.
There is a further corollary of this way of looking at the economy-the very strange role that banks now seem to occupy. Earlier i analogized banks to the state-with this new way of looking at the state though, banks now seem even closer. Both organisations collect and destroy money and then tum around and create more money and give it to different people. Functionally, it seems, Banks have successfully privatized a part of the state’s role and use it to make profit. This scheme also reduces the government’s ability to control total money creation and, therefore, creation. By giving a profit motive to banks and aligning them with the financial sector, governments also allow the tool of money creation to be used to inflate asset prices much more than, I think it ought. Therefore this way of understanding the economy leads to the conclusion that private banking ought to end, and money creation should be centralised-effectively unifying the private and public money-creation roles under the state
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