Saturday, October 30, 2021

Musings on Modern Monetary Theory, and Why National Deficits and Debts Matter

  By Rudy Barnes, Jr.

President Biden and his Democrats propose to fund their Build Back Better package of social programs based on modern monetary theory (MMT).  In contrast to traditional economic and monetary theories, MMT asserts that the cost of those social programs on top of America’s existing national deficits and debts don’t really matter.

One premise of MMT is uncontested.  There are no Constitutional limits on Congress borrowing money or the creation of new dollars; but traditional economics posits that taxes are needed to repay borrowed money, and that creating new dollars to pay national deficits and debts causes inflation.  Those traditional  economic theories are contested by MMT.

Inflation is the nemesis of a healthy economy.  MMT acknowledges the danger of inflation, but asserts that national deficits and debts don’t have to be repaid by taxes or the creation of new dollars.   To support that claim, some have cited the massive U.S. national debt after WWII; but then America was the primary producer of goods for a world depleted by war.  

Today America consumes more than it sells and has a massive national debt of over $28 trillion dollars.  The Federal Reserve has kept interest rates near 0%, but inflation has recently spiked and is not diminishing.  Yet the Fed has not increased interest rates to dampen inflation or reduced inflationary subsidies to a booming Wall Street that creates disparities in wealth.


Fed policies that keep interest rates at low emergency pandemic levels exacerbate runaway inflation and increase disparities in wealth by favoring investments in equities over personal savings.  So long as personal saving is considered a virtue and inflation a vice in America, the unlimited spending by big government fostered by MMT that causes inflation will be opposed--except in a national emergency like the pandemic.

MMT promotes the concept of full employment that would require massive increases in welfare payments for a guaranteed basic income.  Keynesian economics and MMT are based on the assumption that no tax increases will be needed for such socialistic cradle to the grave welfare programs; but there is no evidence to support such an optimistic assumption.

MMT also assumes that America can carry its massive debts indefinitely; but if interest rates rise and increased productivity and taxes don’t dissipate the national debt, new dollars would be needed to sustain the economy.  If the dollar ceases to be the world’s currency, creating new dollars to save the economy from past MMT profligacy would be hyperinflationary. 

MMT and traditional economic theory are not all that different.  Both recognize that Congress and the President provide the money needed for political priorities, but that too much spending can create inflation, and hyperinflation can undermine the economy.  The real issue is understanding the correlation between spending, debt, taxes and inflation, and that issue must be resolved before MMT can be a new paradigm for American economic and monetary policies.  


If you Google modern monetary theory (MMT), this is how it’s  described in simple (?) terms: Modern Monetary Theory (MMT) is a heterodox macroeconomic framework that says monetarily sovereign countries like the U.S., U.K., Japan, and Canada, which spend, tax, and borrow in a fiat currency that they fully control, are not operationally constrained by revenues when it comes to federal government spending.  Also, see Wikipedia at

For a description of Modern Monetary Theory, explained, a very detailed walkthrough of the big new left economic idea, by Dylan Matthews, Vox, April 16, 2019, see

Stephani Kelton alleges that there are six deficit myths: The federal government should budget like a household; Deficits are evidence of overspending; Deficits will burden the next generation; Deficits are harmful because they crowd out private investment and undermine growth; Deficits make the U.S. dependent on foreigners; and Entitlements are propelling us toward a long-term fiscal crisis. Kelton develops her case against the deficit myths in chapters 1-6, and in chapter 10 she reiterates her theories while acknowledging that the Congressional Budget Office opposes her optimistic economic assumptions by predicting that increasing deficits will create serious problems for the U.S. in the future.  See Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy, Public Affairs, New York, 2020.   

Paul Krugman has suggested the gimmick (his terminology) of minting a platinum coin with a face value of $1trillion to counter the budget debt ceiling that has stalled the Democrats $3.5 trillion Build Back Better social programs.  Krugman confirms that the Fed’s economic influence comes from its ability to increase the monetary base “at will”, and he asserts “So as long as the U.S. government doesn’t rely on money creation to pay its bills, the dollar won’t collapse.” But Krugman concedes that minting the coin might create a temptation to do just that.  Nations    sometimes do cause high inflation by relying on the printing press--There’s Venezuela [not to mention Germany in the 1920s]  Such hyperinflation is usually a byproduct of extreme political dysfunction, which leaves governments unable to raise revenue or limit spending.” See

The Editorial Board of The Washington Post, usually a strong supporter of President Biden and Democrats, has described their Build Back Better proposals as “getting worse and worse.”  See

No comments:

Post a Comment