Supporters of the “modern monetary theory” believe that government debt with the printing press to Finance. In the United States, brings a lot of criticism, but also encouragement from a prominent page.
It could all be so easy, according to Larry Randall Wray. For 25 years, the American Economist conducting research on a formula to combat unemployment, recession and social inequality. His approach is based on the Modern Monetary Theory, in short, MMT. Which in turn goes back to the “state theory of money”, a 100-year-old theory of the German economist Georg Friedrich Knapp. The full-bodied promises: debt without remorse.
What sounds like a promise, like a Healing, makes sense. Because, as long as a state is heavily indebted in its own currency, he can not go broke. If receipts are missing, the reasoning of the Economists, you can always be financed by the Central Bank. States should be allowed to spend as much money as you want. The Second world war, Wray, have shown that “economic miracle” could result: “debts were the Basis for the Golden age of capitalism,” says Wray to the DW.
With his theory Wray is still considered as an economic outsider. Together with the Hedge-Fund Manager Warren Mosler, another pioneer of the MMT, tried to Wray for years, to make the for many of the more obscure theory presentable. Simply printing money to Finance debt, sounds like the majority of economists, however, reckless. “Many simply don’t understand,” says the 66-Year-old. He believes that a false, lurid propositions to contribute to the bad Image of the MMT.
Voodoo Economics?
Among the vehement opponents of the greatest economists in the world. Paul Krugmann, for example, Economics Nobel laureate and columnist for the New York Times, ranted several times already against MMT. Kenneth Rogoff, former chief economist of the International monetary Fund (IMF), described the theory as nonsense and quackery. Also in the case of the American Central Bank (Fed) pushes the concept of criticism. “The idea that debt has no role to play for countries that borrow in their own currency, in my opinion, is simply wrong,” said Fed Chairman Jerome Powell in February before the banking Committee of the American Senate.
Nothing more than hocus-pocus? Larry Summers referred to MMT as “Voodoo Economics”
Even supporters of the Democrats, who are quite open to higher public debt, struggle with the modern theory of money. In a guest post for the Washington Post, Lawrence H. Summers, described former economic adviser to Barack Obama’s and Secretary of the Treasury under Bill Clinton, MMT as “Voodoo Economics” and “away in the disaster”. MMT-related policy ideas were responsible for the Hyperinflation in Latin American countries such as Venezuela. In recent years, prices have risen according to the IMF, there is about ten million percent.
The MMT-trailers Summers is right about one thing: fiscal policy must back more to the center of the American government. Although US President Donald Trump has adopted until the beginning of 2018, a comprehensive tax reform. While companies benefited, to get the promised relief only slowly among the citizens.
Instead, the side-effects, the state, the receipts are missing. The US budget deficit is almost a trillion dollars, which is the highest level for seven years. The massive tax cuts at a time of rising social spending have saddled the American budget is a massive burden, experts say. Only MMT could back straight again, say the supporters of the theory.
With debt out of the crisis
The core of the concept, a new distribution of roles between fiscal and monetary policy. While States normally used to Finance through taxation and Central Bank Inflation prevents, for example, the modern monetary policy, the opposite conditions. The Central Bank takes on the role of the sponsor: it finances the government and creates capital, where money is missing. So you could make almost unlimited debt to investments in the country to boost and to avoid recessions.
Popular the new theory, especially when the left wing of the Democratic party, which has been strengthened since the election victory of Donald trump’s. Both of the now-independent Senator Bernie Sanders, as well as Alexandria Ocasio-Cortez, the 29-year-youngest member of the U.S. house of representatives, are in favour of the modern theory of money.
You should provide the economic base for the expensive social programs of the politicians. In addition to extensive Job guarantees and the “Green New Deal”, the turning ecological Industry, also includes the introduction of a national health insurance, which would cost several trillion dollars annually. Higher government deficits would be necessary. But that’s exactly the to be, thanks to MMT and printing press, no Problem, argue the advocates.
With encouragement from the left: Alexandria Ocasio-Cortez, member of Parliament of the Democrats in the US representative house
The reasoning of some MMT advocates is preparing conservative Economists abdominal pain. “You sell the theory on value,” says George Selgin, Director of the Center for Monetary and Financial Alternatives at the Cato Institute, a libertarian think tank. It agree though, that countries should not have to Worry about can not pay their debts, because there is always enough money reprinted could be. The not be done, but without the risk. “Who needs a currency of its own for this, risked Inflation,” says Selgin to the DW.
Also, Scott Sumner, a Professor at George Mason University, warns of “nasty side effects” of the MMT. To make “debt to Fund political projects, is a bad idea,” says the 64-Year-old. Today’s deficits would become a burden for future generations. Better to have a progressive consumption tax, in order to support the American economy.
Inflation, where is thy sting?
It is not so, that the followers of the MMT would be blind to the dangers of their own theory. “We know that inflation is a risk,” says pioneer Wray, to the prejudice of carefree MMT Economists clean up. Although the monetary value of the USA is not threatened currently, and the Dollar is a strong currency. The Inflation should increase, however, also have MMTler an answer. To reduce “the purchasing power of the consumers, we would have to raise taxes,” says the 66-Year-old has so far made no survey of how the came actually amongst the citizens. “From a balance, we would simply increase the later the pension claims in old age and social security to improve.” The in turn financed by debt.
To Haruhiko Kuroda, head of the Bank of Japan, is the financing of public debt for years, everyday business
Perhaps, but it does not need all of this, as prominent cases, such as the USA and Japan demonstrate. Because, although the U.S. national debt is as high as never before, pulled on the Inflation. In February it fell even to the lowest level since September of 2016. Also, the proportion of voters who sees the reduction of the government deficit as a top priority decreases according to the polls steadily.
In Japan, in turn, the state and the Central Bank are experimenting for several years with elements of MMT. By using the Central Bank presses the government wants to bring the highly-indebted, demographically shrinking the country to a sustainable growth path. The Bank of Japan buys securities in orders of magnitude, the quantitative easing exercises elsewhere in the shade. The Inflation remained in turn, so far, historically low.
That the Japanese Central Bank seems to be economic gravitational forces off, many Economists, however, still creeps. How long the Central Bank can set the purchase program to continue, without losing their credibility, it remains a balancing act. It is an exciting Experiment that could pave the MMT the way – or not.