What is MMT Economic Theory?

Many economics students ask themselves:

“If central banks have the power to print money, why don’t they print more and distribute it? It would be easy to end world hunger.

The teachers replied with a broad smile. These ideas have been applied throughout history and have always caused economic disaster by hyper-inflation. Economic solutions are not so easy.

Emperors or kings who preferred to listen to advisors with easy solutions to solve their high debts or serious economic problems usually caused by wars, ended up paying debts by printing money by their central bank or equivalent.

A variant already used by the Romans was to progressively reduce the percentage of gold or silver in the minting of legal tender coins. The key was that the population did not realize it in order to avoid losing confidence in the coin. Both variants led to disaster.

Also in recent years we have examples like Zimbabwe and Venezuela the two worst economies of the last decade by hyperinflation that destroys the national economy.

What is surprising is that today, the most famous economic theory, the fashionable theory among academics and diverse political currents in multiple countries is the so-called “Modern Monetary Theory” (MMT).

In the first place, they have given it a nice name that convinces you just by hearing it. What is surprising is that it is called “modern” when it is an older policy than a matusalén. I would actually call it “John Law Theory”.

Core Principles of MMT

The central argument of this economic theory is based on the fact that it is no problem to increase public deficits, you can spend more than you earn without a problem.

Everything would be solved by printing all the necessary money. It would be that the governors spend without limit without the need to issue debt as until now and without resorting to taxes on the population.

This money, for example, could finance a universal monthly income for the population.

It is not necessary to be an expert economist to understand why this economic theory would not work, it is pure common sense.

It has already been applied hundreds of times in history and has always failed miserably. The Chinese were invaded by the Mongols after the economic collapse of their empire because of these policies.

Weimar’s Germany ended up destroying their economy. France in the 18th century with this same economic theory recommended by John Law ended in chaos and in a few decades suffered the French Revolution.

How do you solve a complex problem of economic needs or high debt?

You have two options, either with a lot of work, intelligence and sacrifice or you go to a shaman who offers you the magic solution you dream of without having to sacrifice or have to make an effort.

Some superior organism prints money and gives it to us in exchange for nothing and thus you solve your problems or those of your citizens.

In fact, if you apply such a measure, you could waste wildly, receive free money to repay your debt and then you can go back into debt or waste without problems because you have already found the solution to the global economy.

The small detail is that nobody would trust the currency or the printed money and nobody would lend money to third parties.

How the MMT really works

In Finland it has been tested for a year provisionally and randomly with 2,000 unemployed and the government opted twelve months later to eliminate it.

In Spain, a popular initiative for a Basic Income was carried out in 2014, for which more than 500,000 signatures were presented.

According to its “Article 1. Right to Basic Income. It establishes the right of every person, by the fact of having been born, to receive a periodic amount that covers their basic needs. Basic Income is constituted as an individual, universal and unconditional right”.

It does not seem very difficult to find 500,000 people who sign a petition to receive a monthly salary without working, with the only condition of having been born.

It was very interesting to hear Mario Draghi’s last press conference. As he never sidesteps any question, he was asked twice whether at the last meeting of the ECB Council there was talk of giving money directly to the population (“helicopter money”).

Already at the ECB press conference on 10 March 2016, he replied that it had neither been studied by the ECB nor discussed at the Council meetings.

Draghi explained that the term “helicopter money” has many different meanings, although in any case this led to two accounting and legal problems.

In fact, in 2015 it stated that helicopter money probably does not fall within the ECB’s tasks or mandate and that the instruments of which it is aware should also be used (specifically use the term outside common knowledge).

In his last press conference as President of the ECB, Draghi first replied that this instrument was not discussed in the ECB Council. At the insistence of a second journalist, Draghi replied that these aspects should be said by politicians and not by central banks.

His exact phrase was “Giving money to people in any form, is a measure or instrument of fiscal policy (governments), not monetary policy (central banks).

Mario Draghi and the MMT

After the end of Mario Draghi’s mandate, with his last Council meeting and press conference on 12 September, it is time to take stock of his management.

Without a doubt, with the Italian in charge, the President of the ECB has been the most powerful position in Europe, probably above the power of Merkel and without a doubt with more influence than any other President of the European Government or of the European Council itself.

Mario Draghi, in my opinion the most brilliant central banker of the last 30 years, including Greenspan or Bernanke, for two key aspects of his work:

  • His “expertise” or “know how” in the functioning of the financial markets.
    • Mario has worked at Goldman Sachs and has been director of the Italian Treasury, the body that issues more bonds and receives more international investments than any other European body.
  • His excellence in communication.
    • With the Frenchman Trichet, in addition to committing two serious execution errors, which he never wanted to acknowledge a posteriori, it was a nullity communicating.
    • He did not answer any question that he did not like and he confronted the journalists-economists.
    • With the Dutchman Wim Duisemberg, a very low-profile governor was seen.

For any student or those interested in economics, Mario Draghi’s press conferences are essential. Here you can find the entire transcript of questions and answers at his last press conference.

The biggest criticism of central banks and their aggressive monetary policies after the 2008 crisis, with negative interest rates and purchase of public debt from governments, for almost a decade now, is that they are putting at risk their credibility and that of the currency, the central instrument of the entire economic system.

In fact, the new governor of the Central Bank of Austria has begun to dissent, along with members from France, Germany and other central-northern European members, from decisions to resume the ECB’s non-conventional policy. See here the thread of the explanation.

After the Bretton Woods agreement, fifty years ago, the world economic system based on the Gold Standard ended, and we enter a new monetary era we could call “Trust Standard”, by which the columns of the economic system is the citizens’ confidence in the value of the currency that has no physical backing.

With the risk of collapse of the world financial system in 2008 and that of the Euro in 2012, exceptional and unconventional measures had all the logic.

After overcoming both crises, the continuous application of the same policies that are not having any effect on the improvement of economic growth or on the increase of inflation sought, are the germ of the increase of political populisms and pseudo-economic theories such as the MMT.

A beginning of the application of economic theories in the style of the MMT would accelerate distrust in the world economic system through distrust in the value of the currency.

Despite the aggressive monetary policies leading to an increase in the ECB’s balance sheet, neither expected inflation nor economic growth accompanies it.


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