Modern Monetary Theory (MMT), Warning: Danger!

Published by Philippe Herlin | May 30, 2019 | Articles 3356

A new theory is becoming increasingly successful in the United States, and it is starting to make people talk about it in Europe. Remember this name, you will hear it more and more: the Modern Monetary Theory (MMT). It comes from the left wing of the Democratic Party and recommends running even more budget deficits, but financed by the printing press rather than by Treasury bonds. Why? Because we can make more deficits that way!

Indeed, if the public deficit is financed by bond issuance, the limit is the ability of economic agents to hold bonds, and this can quickly become saturated once savers have devoted a large proportion of their assets to life insurance (mainly invested in government bonds). Things become more complicated when the level of savings is low, as is the case in the United States. Of course, there is still the possibility of selling these bonds internationally, but here again the absorption capacity is not unlimited and, above all, this entails a geopolitical risk, as a creditor country can sell in bulk in order to cause a fall in prices or even a financial crisis.

On the other hand, the limit to the deficit financed by the printing press is the ability of economic agents to hold money, which is very important because they have difficulty losing confidence in the currency. The banknote seems to embody an unmistakable "official" value. Moreover, there is no "flight from money" phenomenon in Japan, where public debt is almost three times the level of GDP.

Modern Monetary Theory (MMT) is a bonus to irresponsibility, a headlong rush forward, with an end that will be painful because those who profess it have obviously not studied Zimbabwe, Venezuela, or Weimar's Germany closely. In these countries, the printing press has led to hyperinflation and widespread ruin. At some point, economic actors begin to doubt the value of money and they quickly get rid of it to acquire real property (food, real estate, gold), prices explode and the situation becomes irreversible.

This theory is rather a counter-offensive of the Keynesians, who are still obsessed with public spending, and it finds a new justification with "ecological urgency" and "energy transition" which require trillions of investment, with a haste that seems quite dubious. It is in any case through this means that the "MMT" is making its way into Europe and already several politicians are calling for investments in renewable energies to be removed from the 3% budget deficit rule, or for the ECB to contribute directly to these expenses.

Let's be clear, the supporters of Modern Monetary Theory want our ruin, and they, unfortunately, seem more powerful every day. To protect yourself from it, you don't need "theory", just a good reflex: move towards real assets (physical gold, real estate...).


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Philippe Herlin  Finance Researcher / Doctor in Economics

   

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