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January 1, 2023 by David E. Hultstrom

Modern Monetary Theory and Free Lunches

The recent higher inflation has dampened enthusiasm for this somewhat, but I hope with a short explanation to drive a stake through its heart.

(If you have no idea what this is, see this and this – or just go and enjoy your life!)

This is a very simple explanation that glosses over a little of the detail, but I don’t think misses anything essential.

Assuming the global economy grows there is a need for more dollars (global, not domestic, because a lot of dollars are held elsewhere). Right now, to increase the money supply, the Federal Reserve (the Fed) buys Treasurys. Those holdings of Treasurys are basically permanent (unless the global economy shrinks at some point or the dollar is no longer used as much). The Fed uses the interest from those to pay its expenses and then remits the rest of the interest to the U.S. Treasury. So if we think of this as a household, you find some money (the amount the Fed prints, which we will assume is exogenous) and redeem some debt (pay down your credit card) and then have the extra funds to spend (the interest is now less) on stuff. If you just spent the funds directly it isn’t different. (I.e. assuming the spending is the same, the level of credit card debt is eventually exactly the same. Just in one case you pretend to pay down your debt and then run it back up, where in the other you just spend it directly.) So, for MMT, if the level of money printing is held to the same level that the Fed would have created with open market purchases it leads to the same place.

It appears that the MMT proponents don’t realize that you are still constrained by the normal growth of the money supply or you will have higher inflation. They seem to believe it is a “free lunch” of some sort. The problem (IMHO) is that “borrowing” to buy stuff feels/seems worse than “printing” to buy stuff. Since I think the problem is the expenditure level is too high, I don’t like anything that makes it easier to tax/borrow/spend even if it’s just a change in mental framing. I would love it if there was no withholding allowed, no sales taxes at point-of-sale, etc. Everyone should have to write a check every April 15th for their total contribution to the commonweal. That would lead to a very different level of expenditure and much better debates on taxes and spending! Withholding was originally Friedman’s idea but he wished it didn’t last.

TANSTAAFL!

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