26 Nov Modern Monetary Theory
Key Points:
- Modern Monetary Theory reminds us that monetary financing of government spending need not be inflationary if there is spare capacity in the economy.
- But it suffers from a number of problems: it implies there is always some sort of free lunch; it underestimates the costs of large-scale public employment programs; and it underestimates the difficulties politicians have in turning off monetary financing once inflation has returned.
- Arguably much of the same can be achieved by independent central bank QE and fiscal stimulus but without the key pitfalls of MMT.
- For investors, the interest in MMT is another sign that the risks around inflation may shift from the downside to the upside on a five to ten-year horizon.
