Tuesday, March 12, 2013

What is Modern Monetary Theory, or “MMT”? « naked capitalism

Unless you were a finance or Econ major, you probably don't have a very good understanding of how money works (excepting of course, your role in the process).  Read this to know a little more. 

The essential insight of Modern Monetary Theory (or "MMT") is that sovereign, currency-issuing countries are only constrained by real limits. They are not constrained, and cannot be constrained, by purely financial limits because, as issuers of their respective fiat-currencies, they can never "run out of money." This doesn't mean that governments can spend without limit, or overspend without causing inflation, or that government should spend any sum unwisely. What it emphatically does mean is that no such sovereign government can be forced to tolerate mass unemployment because of the state of its finances – no matter what that state happens to be.

Virtually all economic commentary and punditry today, whether in America, Europe or most other places, is based on ideas about the monetary system which are not merely confused – they are starkly and comprehensively counter-factual. This has led to a public discourse about things like budget deficits and Treasury debt which has become, without exaggeration, utterly detached from reality. Time and time again, these pundits declaim that hyperinflation is imminent, that interest rates are on the verge of an uncontrollable upward spike, and that the jig will be up for sure just as soon as the next T-bond auction fails. But even though, time after time, it is the pundits' prognostications which fail, no one seems to take any notice. This must change. A reality-based economics is needed to make these things make sense again, and Modern Monetary Theory is here to put everyone on notice that a quite different jig is the one that's really up.

The gold standard was finally and completely abolished over the course of a two-year period which started in 1971, when Richard Nixon ended the convertibility of the dollar for gold and devalued U.S. currency for the first time since the end of World War II. In 1973, the U.S. stopped trying to peg the dollar to any currency or commodity, instead allowing its value to be set on a freely-floating international currency market. The monetary system we inaugurated then is the one we still have now.

Typos courtesy of my iPhone

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