Modern Monetary Theory was too Good to be True

The promise of modern monetary theory – endless unlimited government spending – is a fool’s game

If it is too good to be true, you are probably better off not believing it. If a stranger calls you and says you have just won a fortune and all you have to do is send access to your bank account to receive it, you usually smell a rat. However, when so-called modern monetary theory (MMT) first appeared, many who should have known better fell for it.

MMT claims that governments of countries like Canada can create infinite amounts of money with no negative consequences. We could fund medicare without wait lists, make universities free, provide a guaranteed annual income – you name it.

According to MMT, governments can provide these limitless goodies when they control the supply of money. If they have a fiat (fiat is Latin for let it be) currency not tied to gold or anything else, nations like Canada and the United States can generate as much as they want – no need to depend on taxes to pay for government spending. Just use the printing press or its electronic equivalent. Government debt and deficits do not matter: they too can be covered by pumping out more cash.

Governments have not taken advantage of this potential gold mine. They have been following more classical monetary theory, which links excessive increases in the money supply to inflation. Inflation has been defined as too much money chasing too few goods. If other things remain the same and you just pump out more money, prices will rise, the cost of living will jump, and the value of any cash or savings you have will diminish.

Proponents of MMT skirt this issue by saying that putting the extra money into the economy will generate extra output. Their reasoning is not unlike basic Keynesian analysis. Keynes said that in times of unemployment, governments should put funds into the economy by spending more than they collect in taxes; in other words, run a deficit. However, Keynes knew that deficits and debts matter and the government‘s deficit spending in bad times needs to be offset by running surpluses when times are good. This will help counter inflationary tendencies.

If you read the MMT literature carefully, you will find mention of the fact that MMT works best only when there is excess capacity in the economy. The usual measure of such capacity is unemployment.

By this measure, now is definitely not the time to introduce MMT. Unemployment in Canada, the States and elsewhere is close to record lows, with labour shortages at all skill levels. Many materials, especially those needed for a greener economy, are in short supply and food security is threatened by adverse weather events. Increasing the money supply now would be adding fuel to this potential inflationary fire.

There is another major reason why MMT is not a good idea at any stage of the business cycle – one that MMT proponents do not appear to have considered. That is that no country is an isolated island. No matter what one thinks about globalization, we are all on this globe together. Even the most self-isolating country on earth, North Korea, wants the international trade sanctions against it removed.

In Canada, 63.3 per cent of our economy depends on international trade.

A central tenet of MMT is that governments are free to produce money because they control the currency. However, this freedom is limited when countries trade outside their borders and/or in other currencies.

Growing the money supply weakens the exchange rate, and a weaker exchange rate discourages investment. Foreigners lose trust, and even domestic investors may choose to do business abroad in a more stable currency.

The falling exchange rate makes everything we import more expensive. And we import a lot – just think coffee. Rising import prices are inflationary. And inflation, however caused, is not good. Think of countries like Turkey, Venezuela and Argentina, where inflation is now rampant.

The MMT promise of endless unlimited government spending sounds too good to be true. That is because it is too good to be true. We will do better to follow more proven and established monetary policies, control our money supply and keep our government budgets balanced, at least over the course of the business cycle.

By Roslyn Kunin

Dr. Roslyn Kunin is a public speaker, consulting economist and senior fellow of the Canada West Foundation.

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@TheAfroNews.Com