Progressives have promoted what’s known as Modern Monetary Theory (MMT). Regardless of whether President Joe Biden knows or understands MMT, he has embraced it and imposed it on the U.S. economy. We are all living and struggling with the results.
For a definition and explanation of MMT, we’ll use Investopedia.
The central idea of modern monetary theory is that governments with a fiat currency system under their control can and should print (or create with a few keystrokes in today’s digital age) as much money as they need to spend because they cannot go broke or be insolvent unless a political decision to do so is taken.
Ah, but classical economic theory says that flooding the economy with fiat money would lead to inflation, and potentially rampant inflation.
The article continues:
While supporters of modern monetary theory acknowledge that inflation is theoretically a possible outcome from such spending, they say it is highly unlikely and can be fought with policy decisions in the future if required.
MMTers got the big spenders they wanted. The Committee for a Responsible Federal Budget reported last September the Biden administration has approved $4.8 trillion in new borrowing. And that was before Congress passed the $1.7 trillion spending package in December.
If MMTers wanted a demonstration project to prove their theory, Biden, Democrats and even a few Republicans were willing to oblige.
So, how’s that working out?
Turns out inflation is more than theoretically possible and not so “highly unlikely” as MMT proponents thought. It also turns out that fighting inflation with future policy decisions hasn’t been as easy as MMTers would have us believe.
Indeed, as the Federal Reserve Bank aggressively raised interest rates to fight that inflation that wasn’t supposed to happen, banks have been caught in the squeeze, holding long-term, low-interest assets they can’t shed without big losses. Hence, the current banking turmoil.
But hasn’t inflation been moderating? It appears so, but very slowly. And that moderation may be mostly, or perhaps entirely, a result of the money supply declining—which MMTers oppose—since February of last year.
It remains to be seen what will happen now that the Fed and the FDIC have decided to make billions of dollars available in an effort to quell a run on the banks and other bank failures.
Will the government have to borrow or create even more money? Will those steps exacerbate inflation again? No one knows.
But one thing we do know: Modern Monetary Theory is dead. May it rest in peace (in hell).