Modern Monetary Theory (MMT)

Citi GPS Insights

What’s right is not new, what’s new is not right, and what’s left is too simplistic

  • A quick synopsis of MMT: A sovereign nation with its own fiat currency, its public debt denominated in its own currency and a floating exchange rate cannot go broke. The only limit on public spending is inflation, and this is not a binding constraint for the U.S. In some versions of the MMT, the price level is set by the government.
  • What’s right is not new: (1) To consolidate the finances of the central government and the central bank for the assessment of overall sovereign indebtedness. (2) To acknowledge that the State has a monopoly on money issuance. (3) To analyze this monopoly in the context of profitable seigniorage, which can loosen the budget constraint. Already incorporated into consolidated budget math is seignior age worth at least 0.3 % of real GDP, or around $64 billon, and possibly twice that.
  • What’s new is not right: (1) Government deficits are logically prior to surpluses because tax payers have to pay their taxes in government money. This ignores the fact that the State can lend to the private sector. (2) The public debt is not a burden on the future. This assumes that any previous public debt issuance was sufficiently catalytic on the private sector to generate the where-with-all to repay the borrowing, with interest. MMTers and supply-siders are odd bed-fellows here. (3) The government need only set one nominal price and then let market forces determine relative prices while printing money at will creates an inconsistency with monetary equilibrium. Experience with the gold standard is relevant in this regard.
  • What’s left is too simplistic: (1) The proposition that the State will not default ignores the case where the inflationary consequences of monetary finance (hyperinflation, say) dominates. (2) The proposition that the U.S. State always has the ‘exorbitant privilege” skips over evidence from both currency and U.S. Treasury markets that this privilege is not immutable. (3) That stock-flow consistency gravitates to the ZLB ignores scenarios where real-side responsiveness of investment and consumption dominate monetary finance, either to yield crowding-out or a supply side response. (4) MMT gives short-shrift to the role of financial intermediaries or asset price inflation in the transmission of monetized fiscal deficits into price inflation or into growth.
  • MMT in the Current Conjuncture: (1) On monetized deficits and quiescent inflation and low interest rates, MMT has a lot of current evidence on its side. (2) Rationales for monetized deficit finance include a jobs guarantee program and a Green New Deal. Their merits are separate, logically, analytically, and politically from MMT. (3) The amount of fiscal monetization is not as important as fiscal choices given monetization. Fiscal choices – more than fiscal monetization — either make for good countercyclical or structural economic sense, or end in an inflationary ambush.