Money Doesn’t Grow On Trees – The Problem with Modern Monetary Theory (MMT)
“To preserve our independence, we must not let our rulers load us down with perpetual debt. We must make our election between economy and liberty, or profusion and servitude.”
In the past few years, a hybrid economic model known as Modern Monetary Theory (MMT) has picked up support in democratic political thinking. A combination of a few different economic theories dating back to the early 1900s, MMT’s basic solution – if a country needs money, it prints money. Proponents argue that strong, independent nations (like the United States) control their own currency, and therefore, can create as much money as required to address issues of national import like unemployment, universal health care, and pretty much anything else that is seen as a priority. While in theory MMT may appeal to our human sensibilities and the desire for individuals to have security, in practice, it has always proven disastrous through the creation of devastating inflation.
In the first half of the 20th century, and around the time that the roots of MMT thought were formed, several countries were left reeling from the economic after-effects of World War I. Among those countries greatly affected, Austria, Hungary, Poland, and Weimar Germany opted to print money and monetize their debt – and each case led to hyperinflation. While each unique case study is well-documented in Thomas Sargent’s The End of Four Big Inflations, it is worth noting that within less than five years each of these four countries had their currencies devalued on the order of millions to trillions when pegged to the U.S. dollar.
More recent examples of the perils of MMT include cases like Brazil, Zimbabwe, and Venezuela. Although in these more recent examples, the hyperinflation took longer – averaging around twenty years, the results were no less disastrous in scope and scale. As an example of the order of magnitude of inflation, Venezuela reached an estimated inflation rate of 80,000% a year by the end of 2018 - this would be equivalent to your morning cup of coffee (if you could find one due to scarcity) costing $2,400.
Most recently, some proponents have pointed to Japan as a success story for MMT, citing their large debt-to-GDP ratio, extremely low interest rates, with seemingly no negative impact. However, if the goal is to experience growth and economic prosperity, Japan has demonstrated neither as a result of their MMT-like practices. For all of the effort and risk, as many critics have noted, Japan’s economic prosperity is only slightly higher than before the turn of the century, and is still plagued by rolling recessions, inflation, and low interest rates.
Finally, there are those like Jonathan Hartley who have interestingly asserted that MMT has crossed over into more mainstream channels like press and policymaking because it allows for the advancement of a particular political and ideological agenda. In other words, as a theory of convenience, printing money allows the politicians of today to look like heroes, while passing along the problems and impacts to the politicians of the future. Traditional economic wisdom and a cursory literature review of leading economic theorists should really be enough to convince policymakers that they are operating outside of their depth when recommending, or even putting MMT into practice. In the game of monopoly, you can draw out the game by spending all of your money, mortgaging all of your properties, even taking an IOU if playing by certain house rules -but, at some point, there is no money, property, or IOU left to pursue and collapse is inevitable. If we continue to print money at the current rate, other countries could lose confidence in our currency and decide to pin their currency value to another country's currency. If that happens, America has lost the game. Let’s not play Monopoly with America’s future.