Modern Monetary Theory Explained - Is MMT Right or Wrong?

In Modern Monetary Theory Explained, I simply lay out the key principles of MMT and look at what some of the arguments are for and against it.

Modern Monetary Theory (MMT) may have been around for many years but it has recently gained in popularity with the advent of Stephanie Kelton's book, The Deficit Myth, and the way in which it accounts more elegantly for debt dynamics and inflation over the last decade.

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[crawkn]

One of the first inklings I had about what I eventually learned was called MMT was the realization that a great many activities which can be easily classified as productive and profitable to society aren't getting done, while readily available resources aren't being employed. This means that availability of money is an artificial constraint on wealth production. This condition exists even at times of supposedly low unemployment, because a very significant portion of the literally unemployed aren't counted among those available for employment. This too is a false constraint.

It is nakedly irrational to contend that greater wealth can be achieved by intentionally keeping resources idle than by employing them productively. Reduced wealth results when resources are misallocated to activities which are unproductive or consumptive. This can happen when too much money accumulates in the hands of those who don't need it, and aren't inclined to produce anything new of real value with it.

[richardcope]

A most excellent tutorial. Seems very accurate to me.

My concerns about the Uncoventional measures taken by leading central banks are -
1) BoE has admitted to distributional impacts of QE most of the benefits of it have gone to the already rich.
2) Are we measuring inflation properly?
3) Why do we partially or completely disregard asset price inflation e.g. cost of houses, bonds etc?
4) Ultra-low interest rates distort markets and will cause widespread havoc if they ever revert to norm. The long-term consequences of ever more personal debt increases risk to debtor if their income folds in the future. The risk long-term that people are "willingly" taking on is scary.
5) What if ALL expanding Central Bank balance sheets prove wrong in the long term? What if all their unconventional measures prove misguided ?
6) The illusion of money being scarce, even if it isn't, can be a positive. Otherwise people might ask the question why do I work so hard for silly bits of paper or numbers on a computer?
7) What if foreigners no longer wish to hold your national currency or your Sovereign debt ?
8) MMT & QE look like great short term fixes despite the downsides but what of their unproven long term consequences ?

[rolyars]

One major hole in the argumentation about inflation is that it is viewed only in terms of the CPI. Money printing using QE did in fact cause a lot of inflation, but only in assets (stocks, real estate etc.). This is because that huge amount of liquidity technically couldn't go to other places much the way QE was used during the first rounds after 2008. In other words, all that money simply didn't get into the real economy boosting demand and salaries. This is why we have unaffordable housing, for example, and I think it might cause big problems down the road.

[nthperson]

One problem for those who seek to manage the economy and maintain a steady but low rate of inflation is that not enough attention is paid to the nation's land markets. For not very convincing reasons, neoclassical economics has simply removed land as a distinct factor of production, despite the fact that land (i.e., nature) has a zero cost of production in terms of labor and capital. Every parcel or tract of land of whatever potential use has some annual rental value based on actual and perceived locational advantages. This rental value Henry George and many others have argued rightfully belongs to the community, to society. If the full renal value of locations was captured by government to pay for needed and desired public goods and services, there would be no actual or imputed income stream to be capitalized into a selling price for locations (or for other natural assets, such as frequencies on the radio and television broadcasting spectrum). Under current conditions, however, rents are significantly privatized. Speculation in nature can is often is quite profitable because of the under-taxation of nature. Land speculation is a major cause of inflation, a cause largely ignored by those who calculate inflation and the CPI.

[patchpeek]

MMT is effectively currency debasement and a justification for deficit financing and ballooning government debt, which results in a fragile financial system vunerable to collapse due to unaffordable indebtness.

MMT theory seems thin on how to combat inflation. In the 1970s we had inflation spike to 20% and income tax levels were already 89%; yet "increasing taxes" is their answer at 18:00 ! Hard to grasp.

[lukebowers]

A most educational video thank you, ime in my 40's now & up till this last few years have not invested in my future, ime now pouring everything i get into hard assets such as vaulted gold & silver because it looks like i might actually live long enough to see pension age, your video's are most informative & enjoyable & pleasantly presented. Keep up the good work

[severeddaff]

Oh Ramin, no, seriously? So much outstanding content on your channel, it's sad to see you hawk this insane theory. I urge people to watch George Gammon's video on mmt to see it placed in the full context of the real economy rather than a few narrow points on monetary policy and nods to causation, where it might appear momentarily to work in theory.

[Phil_D_Waller]

Brilliant, thanks very much for putting this togther. I think MMT is misunderstood, it isnt a policy, its a description of govt and central banking mechanics. It explains what happens when a govt spends and taxes. The only policy is a job guarantee which is a buffer stock of employed people as opposed a buffer stock of unemployed people, which helps with price stability is a better automatic stabiliser and also is just generally a better policy !

[AlecMuller]

12:06 "People said the money-printing during the financial crisis would cause inflation, and it turns out the narrative was completely false." Exactly *who* got that newly printed money? Was it poor people who spend most of their income on CPI goods? No, it went to wealthy people who spend a tiny fraction of income on those goods, and plow a far higher fraction into stocks, real estate, and other assets. The printing not only caused an *asset bubble*, it also artificially increased wealth inequality. MMT is great for moneyed elites and disastrous for everyone else.

[laurentirgo]

3 years old suggests this video needs to be updated as inflation did resurge in a very big way and world wide. MMT has flaws.

[desmondknox]

Zimbabwe and Venezuela need some mmt then. Lots left off the table with this theory.

[pattty]

This was the top video when searching "mmt explained", thought that would be useful as your channel is doing something right

[jank]

A couple of things you have to ask yourselves is why MMT may not be practical for us, since if no answer can be found, it is a sound path to embark on.

MMT's core fundamentals derive in part from Keynes' theories, which many would argue were an ideal set of monetary & fiscal policies that could help revive economies that collapsed due to a decrease in aggregate demand. However, Keynes himself argued that his theories where to be applied only under specific circumstances where AD fell and AS (aggregate supply remained constant) in which case the Government should increase their spending and create a fiscal deficit to consume the extra surplus in supply that would remain available in the economy in order to cut the bottom & later on the top from the business cycle. In order to do this, Keynes argued that governments should run a fiscal surplus during the boom years, reducing the monetary supply in the economy that had been introduced during the bust period. This is of course a huge oversimplification of his theories, however, few economists outside of the classical schools of economic thought found much issue in these recommendations, for which they were implemented by governments all over the world. The issue of course was that economic assumes that people are rational, at least to some extent, and that politicians want the best for their country, but as we all know, it is not from the goodness of the butcher's heart that we get meat to eat for dinner, it is due to their own self-interest. This meant that nations all over the world took Keynes idea's and kept only the part that was politically profitable, at the end of the day, who cared about the business cycle when elections creeped up in the corner, right? This has led nations all over the world to create huge fiscal deficits that they will never pay off. This has created different consequences for different nations since each situation is different. For those that borrowed in other country's currencies, the risk of default grew exponentially, causing many economical collapse along the years. For others, welfare states where implemented with the best of intentions to ensure that the people found themselves better off regardless of their faith, & slowly but surely these nation's cultures and motivations to continue innovating, continue growing (in terms of REAL GDP) and continue prioritizing their liberties over their paper money has subsided.

Now, where could MMT fail in the US? Let me start off by being clear, I am not sure whether it would work or not work, I am not sure whether it is desireable or not desireable, frankly, each individual's morality & ideology will lead them to a different conclusion, but I am sure that it is essential to question any theory or economical current that one seeks to adopt BEFORE doing so.

Firstly, for MMT to work the Federal Reserve would need to be politically independent in order to act in response to the levels of inflation and not to the demands of a president or congress seeking re-election. We know that on paper they indeed find themselves in this position, however, just a quick look at present times and at what has been historically done to Keynes' ideas can tell you that this is largely an idealistic utopian belief.

Secondly, The Federal reserve would need to have real time, exactly precise data on what the current monetary supply IN CIRCULATION is, the actual rate of price inflation in EACH AND EVERY INDUSTRY AND REGION since bubbles can form in all asset classes as well as all cities in the country, and one number reflecting all states and cities would not accurately do justice to the real situation on the ground. It would also have to find a way to inject or retrieve money from certain sectors of the economy and certain regions of the country without necessarily impacting all others, which would prove excruciatingly difficult in this era of special interests.

Thirdly, the individuals at the federal reserve would not only have to have even more power than they currently do, they should be expected to exercise this power absolutely perfectly, making all the right decisions at the exact right time with no margin of error whatsoever.

Fourthly, the currency value of the currency in foreign exchange markets would be expected to be analysed and controlled heavily to ensure that the country's exports remain competitive in the global outlook to ensure that more productive, supply generating companies and jobs are not lost as a result of government intervention, which would be considerably difficult since our currency follows the laws of supply and demand similarly to all other goods and services.

Even more points: Unelected officials will be given the remote control to our economy not only with the ability to create money like they currently do, but with the ability to decide or directly guide the taxation imposed upon the population regardless of the will of the people, since imposing taxes is vital in MMT's regulation of Inflation.

- In the event of that a given good's supply is reduced substantially, say Cars, the Fed would have to ensure that none of the money being introduced in the economy be directed towards the purchase of cars, since doing so would inherently become inflationary quite rapidly, for which they would have to greatly reduce the freedom independent adults have on what they want to do with the product of their work, going far beyond what we now consider the role of a government that believes in democracy and the will of the people.

- In the event that a mistake is made and inflation arises, taxation will have to be increased to levels much higher than what we currently consider reasonable, which will decrease motivation of production in the private sector thereby reducing aggregate supply of goods and reducing the amounts of goods available in the economy for money to purchase, creating more unemployment and either worsening inflation if people are subsequently employed by the job guarantee that MMT's superstars prescribe only to bid up the prices of these goods which are collapsing in supply, or creating mass suffering amongst people who have no job, have no money, have high demand for money since their tax obligations are high and are forced to see prices rise around them.

Many more things can be said about the theory but I've gotten quite tired as is. Again, I do not claim that these points are inherently valid or that MMTers cannot provide me an answer for them, as a matter of fact, that is exactly what I hope will happen as the reason I post this comment is to get some insight as to how you would combat these issues if MMT were to be implemented.

Personally I find many elements of MMT really insightful and extremely useful, whereas I struggle to grasp other elements of the theory like any other theory out there. Apart from the Job Guarrantee, I attempted to leave out policy prescriptions since they are for the most part absolutely appalling from my point of view, and it serves no purpose discussing them until we have reached a consensus on how MMT would actually work.

Whoever you are, & I plan to comment this on multiple videos to get more insight, I highly encourage to write your thoughts and comments on what I have just laid out, as well as any concern or alternative you have for the theory, please keep comments civil so we can learn and grow together, thank you!

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[vaclavmiller]

These videos on marco are just fantastic - I'm taking MMT much more seriously having seen this one. Thanks so much!

[edblomfield]

If inflation runs hot under MMT and governments have to raise taxes and cut spending (i.e. put people in the public sector out of work) that’s not going to make them very popular. It therefore seems likely that they would not take sufficiently strong action for fear of being voted out, and sooner or later inflation would get out of hand, no?

[mulllhausen]

11:10 "Now after the [2008] financial crisis, central bank balance sheets grew imensely. Both in Europe, and in the US... Now the narrative that I remember in 2011 was that everybody was talking about the amount of money printing being done by the central bank - the FED - and also by the ECB. And the accepted wisdom was that this would be hugely inflationary. And although inflation did go above 2% - both in Europe and in the US - it certainly didn't stay there. In fact what characterises the decade after the financial crisis is that inflation was actually below target, and central banks were strugging to get inflation back up to that 2%, despite massive bond buying programs all over the world. So it turned out that this narrative that was almost certain that we were going to get hyperinflation was completely false."

Not at all. Only the things that the new money is spent on will go up in price (inflation). And since the FED put the money into the stock market, the stock market went up in price. Hence why it is at all time highs despite the fact that we are now in the deepest recession since the great depression.

[CaseyBurnsInvesting]

MMT is the reason why this economic crisis has created a wider wealth gap and every other crisis will continue to.

[charlierob]

Thank you for the video, I have read Stephanie’s book to and the one word I am left with is responsibility. I would struggle to see politicians being responsible when so many other human motivations are at play

[rongants]

MMT says, basically, that the US Government can do whatever they please, without consequence.
And so they will. And if they are wrong, who will suffer?:
-Not the Government drones.
-Not the proponents of MMT.
-Not their corporate cronies.

It will be small business, the middle class, working Americans who suffer.
So, WHY aren't we allowed to vote on this?

[stuartwood]

MMT solves nothing, just ask japan or Europe who have been trying to inflate their way to growth with more debt.
Now an increasing amount of tax payers money is being used to finance the debt without anything to show for it.
You can print money, you can’t print growth.