Is money endless? - November 18, 2018
A new economic theory believes that states can have infinite money. Followers also believe that we shouldn’t care about national debts anymore, as long as a country have a strong economy and a proper supply and demand. Could this be true? Let’s see what Modern Monetary Theory is all about!
Modern Monetary Theory, that’s the name of the relatively new economic idea that believes money can be endless under certain circumstances. Although the idea has century old roots, it found popularity in the last years as more and more economists say that it might be right. Journals – like Bloomberg, The Nation and Vice among many others – also started to write about the idea.
States can have infinite money
The main idea behind the Modern Monetary Theory is that in fiat systems money is simply created by a state. A fiat system means that no commodity like gold “backs” money, only the promise of the state itself. (This change happened in the US in the 1970s.) In a system like this, the state creates the money with printing, or lately through digital transactions.
MMT also states that for decades we were thinking about the relationship between government and private sector in the wrong direction. The general belief is that a government collects taxes before it can spend money. (Just like a household does with salary.) But in reality – believes MMT –, expenditure comes first simply with creating more money out of thin air. MMT also believes that there’s nothing that can stop a state creating more money.
Sates destroy money, too
This doesn’t mean that it doesn’t need taxes anymore. On the contrary, taxes are still an important part of the system but for a different reason. They help regulating the economy. If there’s too much money in circulation, taxes can be raised, so money goes back to the state itself.
Money going back to the state is also key. Followers of MMT believe that when money goes back to a state through taxes, it simply disappears. Therefore, when a state raises taxes, it destroys money. This is how modern fiat systems can regulate markets. Too much money could indeed lead to inflation, so in those cases money simply needs to be called back and destroyed.
Economy needs to be strong
Followers of MMT also doesn’t believe that money is endless, and a state should create as much as it wants all the time. They believe that when an economy is strong, and it has all the factors of production (work power, raw materials and demand), it could create money to fulfill those needs. For this, it could also use bonds and it shouldn’t care about the debt that creates as long as money can be used.
This is important since it means that states can go bankrupt if they don’t have the proper economy. This is how they explain the default of Germany before World War 2. Germans might have been able to print more money, but they didn’t have the needed materials and goods to fulfill demands. Therefore, their currency started to become worthless. This is also how the father of MMT, investor Warren Mosler earned hundred millions of dollars with the Italian crisis in the 1990s. He believed that Italy can’t go bankrupt, since it has the economy and it will simply print more money to pay its debts. He bought Italian debts marked by many as risky for cheap and later made a fortune out of it.
What could this mean?
Although there are more and more followers of this theory among the Democrats in the United States, there are still many who oppose it. Mostly because MMT states that the size of state debt doesn’t matter if the economy has the proper supply and demand.
But debt is a highly debated thing in the US (and it’s still record high). Democrats and Republicans fight with each other on how to push it down and this fight won’t end soon as it surely has political gains. Still, lately there is a new fraction that believes they don’t have to push it down, they should spend more money on things that help consumption because it makes the economy stronger. Global changes may come even later. The European Union for example strictly regulates how much debt a country can have; therefore, EU countries can’t print as much money as they need. Countries with weak economies may also have a problem.
However, countries with strong economies may use money more freely (to make their economy even stronger) if MMT holds its ground and proves to be right on the long run.
Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.