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Why "Modern Monetary Theory" is Unworkable in the Real World

An increasing number of Seeking Alpha authors and commentators (perhaps most prominently, Cullen Roche) have recently been embracing the concept of Modern Monetary Theory (NYSE:MMT), with many of them pointing to this explanation of MMT on the Pragmatic Capitalism web site.

Basically, MMT claims that fiat currency government budget deficits are unlike household budget deficits in that fiat currency governments can cover their deficits by printing as much money as they need, and then if they print TOO much money they can control the ensuing inflation by raising taxes while concurrently cutting government spending, thereby pulling the excess money out of the private sector financial system. However, as with many ivory tower theories, MMT falls apart in the "real world." Here's why:

In a time of excessively high inflation-- when Americans' purchasing power is being severely eroded-- how many elected politicians will vote to raise voters' taxes enough to stifle that inflation? The answer is: none (at least, none who want to get reelected). Instead, those politicians-- giddy with the vote-buying power of the printing press-- are liable to keep printing and spending the nation into true hyperinflation, by which time MMT would probably require a near-100% tax rate in order to get prices back under control. THAT'S why we need the fiscal discipline of treating the Federal budget as if it *is* a household budget, despite the theoretical differences between the two.

Furthermore, MMT-ers seem to completely ignore the psychological foundation underpinning a fiat currency. Specifically, the dollar will only be accepted as a way to transact for goods and services if those who accept it believe that they in turn will be able to spend it for a like amount of goods and services themselves. However, if folks begin to believe that the preservation of the future buying power of that currency resides solely with the whims of elected politicians, they're going to demand a substantial "inflation risk premium" before accepting that currency, thereby sparking a self-fulfilling inflationary spiral.

Thus, MMT-- like many academic theories-- is unworkable in the real world, and thus should be labled as such in economic textbooks and journals before it's able to cause irreversible damage to the American economy.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.