Do the major world economies tend to follow the Modern Monetary Policy?

Part 1 : the foundations of the MMT

In the current economics context of high debt level, more and more major economies highlight an interest for the Modern Monetary Theory or MMT and more especially on the positive role of Currency issuance on Debt and Unemployment. Under MMT, the debt level is unlimited and the best interest rate level is set to 0%. Inflation is a monetary issue while being totally controllable by State through taxation. In this case, Sate interventions in economy in financial sphere are justified to reach full-employment.

The State’s Monopoly on Money and Currency: the Pilar of MMT

The MMT is based on the hypothesis of State Monopole of Money both for creation and destruction.  As State can control issuance of Money thought cash injection or public spending, he can also withdraw thanks taxation.  Under this mechanism, taxes are paid in the local currency controlled by the State then economics agents should have this currency to paid them. Consequently, agents enter merchant economy to acquire it. The Market appear to be a generalized form of currency exchanges between agents, people buy and sell consumer goods only to have cash denominated in local currency. The value of the local Currency is determined by its capacity to pay taxes. In this case, the Taxation is the channel used by State to decrease the Monetary Masse. Money is then endogenous as only State can create and destroy it!  The fiscal and taxation system is then the unique way to create demand of currency (to pay taxes) directly translated by an increase of Goods and Services Supply.

Money is then created by State through government spending in a first time. Private sector receive currency from government demand, and then are able to pay taxes and maintain activities. However, States can continuously increase spending and so generate a fiscal deficit.

This fiscal deficit is the main source of new Money and State should fund it in the Capital Market by debt issuance.  Under MMT, the Ricardian equivalence is not accepted as debt are not funds by future taxes increase as the Private Sector acquire States obligations denominated in local currency. So, as State issued Debt in local currency, he can refund it by issuing more currency! In this case, there is no eviction effect under MMT. The outstanding of debt is then equivalent to the level of private sector saving waiting to be used to pay taxes in the future.

Consequently, State cannot default as government spending are unlimited in nominal term (thank monopoly) but limited in real terms cause of technical aspects (natural resources, workforce etc ..) To avoid default, the State should issue more Money to refunds perpetually.

Inflation and Unemployment

As described previously, the price of currency (its value) is determinate by State only and equals to the state value of production to acquire currency. If at time t, State buys X quantity of Goods (or Labor) at Y quantities of devises, and at t+1 State are willing to pay 10X for the same amount Y, then the price is divided by 10. Then the general level of price is assimilated to the expression of ‘’Currency Price’’. In this case Inflation is not an issue as State can perfectly control real value of Money.

This fact leads to consider Labor as an expression of currency demand related to an increase of economic activities useful to acquire Currency to pay taxes! So, Unemployment is an unsatisfied Currency Demand and Full Employment are the equilibrium where all the currency demand is served.

The State can then play an important role against unemployment as he should to increase Money in circulation and then increase it Government Spendings !

However, the MMT implies that State should issue Debt in Local currency to be sure to destroy the same amount in real term through taxes. Then, the MMT should include International Exchanges and Trade …

To be continued !


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