This Article is translated by DeepL Translator. The original Post in German can be found here.

Some time ago I uploaded three videos about MMT, Modern Monetary Theory.
Since this topic is now also repeatedly discussed in Europe, I would like to address it in writing with this post.

I myself see myself as a supporter of the Austrian school, which has exactly the opposite opinion regarding MMT.
I would be very pleased if readers with a different attitude in their comments would post their views.

But now to the actual topic: Modern Monetary Theory, short MMT.

In this article I refer to the statements and views of Warren Mosler, who published the following book:

SEVEN DEADLY INNOCENT FRAUDS OF ECONOMIC POLICY

Below are the common statements which are rejected by MMT:

1. the state needs tax revenues and must borrow money to fulfill its tasks.
2. the public debt means that future generations will suffer from it.
3. public debt reduces saved private wealth
4. pensions cannot be paid.
5. trade deficits are not sustainable and endanger jobs at home
6. we need financial reserves to make investments
7. higher public debt today means higher taxes in the future.

Let me try to summarize the basic concept of MMT in as short words as possible:

MMT says that the state only collects taxes to give value to the dollar and that citizens work for it. Citizens have to work to earn dollars so that they can pay their debts to the state in the form of taxes. MMT says that taxes are levied to control inflation.

MMT makes the following assumption:
The amount of currency in circulation must be sufficient to consume all the products and services produced in a year. MMT refers to real inflation as a yardstick (e.g. if the economy grows by 2%, the amount of M3 must grow by 2%), which is correct. However, MMT does not want to influence the quantity of currency by monetary policy measures of the central bank, but by increasing or reducing taxes.

MMT also says that the state can "print" currency at any time, at the push of a button. As a result, a state can never go bankrupt, since it can pay its debts or expenses at any time at the push of a button. This implies that state pension or retirement benefits are always secure. MMT sees another problem with pensioners, namely that, due to the age pyramid, fewer and fewer workers have to do the work of the baby boomers. MMT wants to counteract this problem with a state distribution of products and services.

Since future generations will also act in the same way, it is impossible that the current government deficit will affect future generations in any way.
A further statement of MMT is that all expenditures made by the state are passed on to the population one to one as assets. So when the state builds buildings, constructs infrastructure or pays salaries to its civil servants, this state expenditure goes to the population and the private economy of the country. This in turn means that the higher the government debt, the higher the prosperity of the population.

Another issue with MMT is the export deficit. MMT argues that exports are harmful because work done at home and the country's own resources, such as steel, move abroad. Accordingly, it makes no sense to export but a lot of sense to import. As a further justification, MMT mentions the fact that imports are paid in US dollars, making exporting nations dependent on US monetary policy. According to MMT, the exporting nations have accounts with the FED (Federal Reserve, American central bank) and can, for example, exchange their dollars for government bonds at any time. But since the state can print enough dollars at any time, this is not a problem for the USA.

Last but not least to point seven. Since the government only raises taxes to control purchasing power and thus inflation, it is unacceptable that a high government deficit today should lead to high taxes tomorrow.

I hope I could bring you the basic ideas of MMT a little bit closer, I don't claim to be complete, this should be only a short overview.

Now I would like to go into some statements and make some critical remarks.

The first problem is the creation of dollars at the push of a button by the state. This is not quite right, at least in the present day. The state issues government bonds which are in turn bought at auction by banks, insurance companies, etc. At the various QE s, the FED has also bought government bonds directly. ( The ECB has been doing this since autumn 2019 in the amount of 20 billion monthly) This means that the government must find a buyer for its public debt, whether this buyer is close to the government, such as the FED, or comes from the private sector is not relevant, the fact is that the government can not create dollars at the push of a button.

I don't care who makes the laws as long as I control the money.

Amschel Meyer Rothschild

This statement by Rothschild should make you think if, according to the MMT, the state can really print its own dollars in the future.

If you take a look at point 2 of the article linked here, the reality looks a little bit different. Today's national debt has no effect on future generations, according to the MMT. If only Germany had known that earlier, it would not have taken 92 years to pay off the war debts from the First World War.

Another objection on my part to the third point. There MMT claims that the debts of the state increase the assets of the citizens and the economy, because the debts flow into the private sector in the form of salaries and purchases of goods. This sounds logical and would even be correct if the state were to use its own reserves for this purpose. But according to the MMT it is not doing that. The state prints the dollars it needs and thus increases the dollar amount, which in turn devalues the individual dollar ( inflation). In order to get this inflation under control, the state, according to the MMT, must now raise taxes. Bottom line, without having calculated it, I would guess that through inflation and increased taxes, a nice little expropriation of the citizens takes place and forces them to work more, because otherwise they wouldn't be able to pay the higher taxes.

The assertion in point 4 that pensions are secure, since the state can print dollars at any time, is, in my view, for the reasons given in point 3, a rumour. According to the numbers on the pension pay outs, this may be true, but what good are 2000 US dollars if I can't even buy chewing gum with them.

Now some remarks about the import of goods. According to the MMT the exporting nations have an account with the FED where the dollars of these nations are kept. The exporting nations, let's take Japan as an example, now have several possibilities what to do with these dollars. One of them is that the dollars simply remain in the account. Another would be for Japan to use these dollars to buy American government bonds. According to the MMT, the purchase of government bonds is just a shift of dollars to another account with the FED. Comparable to paying into a savings account. The dollars lie around there for a few years and are transferred back to the original account with interest at the end of the time.
Another possibility could be that Japan changes its dollars against yen and takes them home. Finally, it could be that Japan takes the dollars home to buy oil, which is traded worldwide in dollars.
Now let's look at the consequences of these opportunities for America.

As long as the dollars are in an account or in government bonds, relatively little happens, because the dollars are not really in circulation. However, if you take the currency quantity M3 as the basis for calculating inflation, the dollars on the account would influence inflation.
But what would happen if Japan decides to go on a shopping Tour in America. The Japanese would then consume goods and services that were actually intended for the Americans in large quantities and thus throw all their dollars on the market.
As a reminder, MMT says that there must be enough dollars available to consume all goods and services. MMT also says that first the state will stock up on the necessary goods and services and the rest will be left to the population to consume.
This creates two problems. Firstly, after the state has made its purchases, the remaining quantity is reduced by Japan and is therefore not available to the Americans. This means that the dollars the Americans own are worth less, i.e. inflation due to an oversupply of dollars in relation to the goods and services offered. 

In addition, the dollars of the Japanese come on the market which have to pay for the goods and services, ergo even more dollars and therefore even more inflation. Which according to the MMT means that taxes have to rise.
For the Americans this would mean that they could consume less goods and services, because a part of it the Japanese have bought and as a reward they would have to pay higher taxes. "Suboptimal" is not really the word I would use.

What would happen now if the Japanese wanted to change the dollars into yen. Well that's relatively easy, since the US has a trade deficit with Japan, i.e. import more from Japan than export to Japan, the US has little or no yen to exchange. So they have to buy these yen in Japan with dollars to pay off the Japanese, provided Japan wants to sell yen for dollars. Again, that doesn't make much sense.

If the Japanese use the dollars to buy oil in Saudi Arabia, the US will have no problems with the Japanese, but maybe with Saudi Arabia.......
In this sense, a trade deficit is anything but a desirable state.

I have already dealt with point number 6, at least indirectly, in point number 3.

Point number 7, the debts of today do not increase taxes in the future, at least that is the opinion of MMT.
Since MMT, as already mentioned, wants to regulate inflation through taxes, this statement automatically leads ad absurdum. The more dollars, compared to the goods and services offered, the higher the inflation and therefore the taxes.

So that must be enough. I hope I could tell you my view of things and you could take something with you.

BTW: With MMT you build a great state with a lot of work slaves who depend on the state leaders for better or worse. I think some of the despots of the last century would have had their true joy in the system.

In this sense.

Tschüss Euch




Translated with www.DeepL.com/Translator (free version)