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Relative Theory of Money - P2P Foundation

The theory has received enough traction that the popular Planet Money podcast recently ran an episode on the topic. A central idea of MMT is that a government that issues its own fiat currency can pay its bills in that same currency. These governments need not worry about budget deficits when contemplating additional spending.

Thus because the US government has a monopoly on money creation, our federal government does not need to raise all its revenue through tax or bond finance. A government with its own currency cannot go bankrupt because it can always issue more currency to cover any budget deficit. Kelton and other MMT advocates argue that this why the US government can afford expensive programs such as a jobs guarantee and universal healthcare.

Money: Theory and Practice

While MMTers do not see government debt per se as a problem, they do concede that were the government to spend beyond the capacity of the economy there would be a risk of higher inflation. MMTers argue that if high inflation were to become a danger, the government can increase taxation to remove excess currency from the economy. In the Planet Money podcast, however, Kelton indicated that she is not currently worried about inflation. When asked if putting even more money into the economy might lead to higher inflation, she noted that inflation has been quite low in recent years:.

We've been doing it.

We've done it and done it and done it. Where is the inflation problem?

What Are the Baby Steps?

I don't see it in the UK. I don't see it in Japan. I don't see it in the US. Kelton is right that inflation has been low in the US and other developed countries, but she and other MMTers are wrong in assuming that fiscal policy determines inflation in those economies. Since , inflation in the US and many other developed countries has averaged two percent.

Market monetarists argue that nominal GDP total dollar spending on all goods and services in the economy is the best way to determine whether monetary policy is too tight leading to a recession or too loose leading to high inflation. During the recovery from the Great Recession, nominal GDP growth has averaged only four percent per year, which largely explains the low inflation rate.

Milton Friedman

The s was also a period of expansionary fiscal policy and rising government debt, and inflation also fell during this period, as the Fed reduced the growth rate of the money supply. A sentiment of patriotic sympathy was at length revived in the breast of the fortunate exile; and he lamented, with a flood of tears, the guilt or weakness of those magistrates who had perverted the wisest and most salutary institutions. We pay interest costs on every product and service we buy. Products and services can be cheaper without interest. On balance, most people pay interest to the wealthiest people.

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This contributes to wealth and income inequality. Interest promotes short term thinking with regard to investment decisions as future income needs to be discounted against the prevailing interest rate. Interest is a reward for risk and promotes risk taking that can destabilise the financial system. The financial system is backed by public support so interest can lead to moral hazard. This can result in private profits and public losses. The lower interest rates go, the more projects become economical, and the more wealth can exist.


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The holding tax allows interest rates to go negative and this can provide a stimulus during economic slumps. The maximum interest rate restricts credit if the economy does well so that the economy will not overheat. There are fewer problematic debts as market participants in poor financial condition can't borrow.

The reduction of problematic debts improves financial stability and reduces moral hazard. Interest can contribute to wealth inequality, depletion of resources, and financial and economic crises. There is a trend towards lower interest rates caused by wealth inequality and efficient financial markets. Monetary reform aimed at ending fractional reserve banking is not viable. A tax on money as proposed by Silvio Gesell makes it possible to have negative interest rates.

If interest rates can be lower, there can be more capital, hence more prosperity. Credit and high interest rates contribute to economic cycles. When interest rates are lower, there can be more debt, which raises the need for a way to reduce leverage. The holding tax can balance the markets for money and capital when the equilibrium interest rate is below zero so that there is no need for stimulus. Lower interest rates can make more investments profitable and this can help to improve the economy.

The interest rate ceiling can prevent the economy from overheating as there will be less credit during economic booms as other investments are more attractive.

Explaining M.M.T.’s Appeal

The interest rate ceiling can help to reduce reckless lending because there is no reward for taking excessive risks. Excess capital and debt: if there is more capital and debt relative to national income, the interest rate goes down because the marginal utility of investments is lower. Wealth inequality: if more capital is in the hands of a few people, a smaller amount of capital income is consumed and more is invested, so that there is capital abundance and a constraint on consumption, so that profits and interest rates go down.