Modern Monetary Theory

2nd Apr '20 by Ken Lowes

4 comments 465 reads

In the event of a catastrophic happening governments simply spend money that they don’t have until the problem goes away. Is it possible? Or is it just doubling up on black (roulette) until black turns up, providing of course you have sufficient funds to keep doubling up. Governments can spend simply by printing money until it is worthless. This appears to be what is now happening in order to try and resolve the debt burden. Or do we assume it isn’t a burden if you can shut it away until the problem is resolved. But how will it ever be resolved? This is now my fifth stock market crash but the first which appears unsolvable without huge pain. It must be worth discussing if only to try and establish how we can benefit from it as investors.

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dmjram

3rd Apr '20

Governments, excluding the rare time they are running budget surpluses, are always spending money they don't have.

The external value of the currency and the linked domestic inflation rate are the constraints on money printing but only if a government wants to be constrained. Inflating away debt via financial repression is a long established practice post crisis and huge run up in borrowing. Alternatively, maybe they'll just park all the debt forever at the central bank and not bother with the pretence that the real economy has to service the interest payments for a nation borrowing in its own fiat scrip.

Time will tell...

Ken Lowes

5th Apr '20

Hi dmjram

I think you have described MMT. this is worth watching

aflash

6th Apr '20

While some of the Finance arguments seem OK, the Employment ones seem suicidal.

I have long followed the Austrian school. Their concept that social phenomena result exclusively from the motivations and actions of individuals ties in with the herd mentality of investors, making markets overshoot in both directions.

The Austrian theory of business cycle focuses on banks' issuance of credit as the cause of economic fluctuations. ...... reserve banks extend credit at artificially low interest rates, causing businesses to invest in roundabout production processes which leads to an artificial "boom".... this then leads to a misallocation of resources which eventually must end in a "bust.''

We see this time and again, the most recent example being companies buying back their own shares with liquidity provided by the central bank to stimulate the economy. It pushed the prices of financial assets up for a few years but now their shares are worth less than when they started.

Argentina is a good example supporting the MMT argument that provided a country borrows in its own currency it can pile on debt without provoking inflation. Argentina borrowed heavily in USD and has inflation over 40%p.a.

However I would argue that elsewhere inflation has been mild because technology has reduced prices. Robots can manufacture, services can be provided over the internet, logistics can source computer components and food from where production is cheapest.

Technology also cuts out human intervention. That is the first argument against the MMT aim of reducing 'involuntary un-employment.' Hands were needed in Agricultual and Industrial society but now Brains are needed. Most people do not use theirs.

The second argument is Why?

U.S.S.R. promised full employment and we know what happened. They 'pretended' to work and the authorities 'pretended' to pay them. Cuba puts people to work but highly qualified graduates prefer the tourist industry where conditions are better. Both they and the Russians have a high level of Education because the government insists on excellence.

Humans are 'lazy' and the majority will seek the easy way.

There are exceptions: highly motivated, highly intelligent, highly altruistic and otherwise highly driven personalities 'should' be rewarded. Not all seek to differentiate themselves through wealth but any suggestion of 'guaranteed employment' stinks of mis-allocation of resources.

Government intervention in the work place, which is what MMT seems to propose, would lead to bureaucracy, privilege and 'make-work' projects just to keep people busy.

Spend on education, a few more economics students might solve something.

7th Apr '20

I found this topic on YouTube very helpful "Everthing you want to know about Monetary Theory" ( sorry cant give you the link) it appears to suggest that borrowing is not a problem it is the misappropriation of the money borrowed that causes the problem and the controlling effect is inflation. So borrow as much as you need to build and generate wealth and employ people in a productive capacity at an appropriate wage to ensure they do not become permanently unemployed

Modern Monetary Theory

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Ken Lowes

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