The logic of modern monetary theory

Modern monetary theory seems wacky to me.

But try as I might, I can’t find any logical flaw in the basic idea.

Governments create money.  Why, then, do governments ever have to borrow money?  Why can’t they simply print the money they need to cover deficits.

One answer:  It would be inflationary.   But inflation is too much money chasing too few goods and services.   To the extent that government spending would generate goods and services that otherwise would not exist, new fiat money would not be inflationary.  And to the extent that there was a danger of inflation, the excess money could be soaked up through taxation.

MMT supporters said last year’s debt crisis and government shutdown were unnecessary.   The government should simply have created a trillion-dollar platinum coin (which is supposedly authorized by an obscure law), deposited the coin in a Federal Reserve Bank and used the new money to buy up the excess government bonds.

Again, I can’t see any logical flaw.  If the Federal Reserve has authority to create money to buy up bonds, why can’t it buy up Treasury bonds, liquidate them and reduce the national debt?

But the whole idea makes me uneasy.  I do think the U.S. government ought to be spending more money than it is for infrastructure, education, scientific research and other things needed to the nation’s future.   That’s not the same thing as thinking there should be no limits at all.

I fear MMT would remove a sense of limits.   I willingly pay taxes to support police, firefighters, schools, public roads, water and sewerage service and so on.  I’m not so sure I would willingly pay taxes just to reduce the money supply.

Tags: Economics, MMT, Modern Monetary Theory, Money