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A Look at Modern Monetary Theory (MMT)

Having studied Economics for over five decades, I have been perplexed by the return to favor of antiquated, disproven Keynesian economic theory. Sure, it has a shiny new name, Modern Monetary Theory (MMT). It also has articulate spokespeople and supporters galore in Washington, D.C., as well as in the nation’s institutes of higher learning.

In the early 20th Century, America was introduced to the teachings of British economist John Maynard Keynes. So popular were his theories that his followers became known as Keynesian economists. Essentially, Keynes surmised that national economies were controllable through government spending. During slow economic periods, increased government spending would increase activity, boosting the country out of recession. Today, we would call this “throwing money at the problem.” Keynesians claim that the resultant surge in the budgetary deficit wouldn’t matter.

The problem with Keynesian theories is that they so often fail in practice. So badly, in fact, that Keynes occasionally contradicted himself when attempting to apply his theories to various real-world economies.

Over time, Keynes’ theories lost their luster among many academics, including American born Milton Friedman. Friedman, whose policies and theories proved more workable and accurate, introduced his Monetarist economic theory. In my college years, Friedman was “the man,” and all others were left in the dust.

According to Friedman, inflation and employment are byproducts of the supply of money. In the U.S., the Federal Reserve (FED) controls the money supply. The FED came into being in 1913, when Friedman turned 1 year old, so he grew up studying the workings of the FED. Friedman soon realized the harmful power that was vested in the unelected FED Board members.

Competing economic theories are easily classified into 2 political arenas that we now dub conservative and liberal. That has not changed since Thomas Jefferson argued against a central bank, rivaled by his pro-central bank opposition, headed by Alexander Hamilton.

Welcome to 21st Century America.

Modern day Keynesians have created a hybrid economic model dubbed Modern Monetary Theory (MMT). MMT is dependent on government’s ability to completely control fiat currency, meaning currency unbacked by commodities, simply created out of thin air by the Central Bank as a legal tender to repay debt.

While proponents of MMT call it a hybrid, or heterodox macroeconomic theory, I see nothing more or less than a rerun of failed Keynesian economic dogma, with the shiny new moniker. No government can go broke, they claim, if it has complete control over its own “printing press,” whether physical or virtual. However, in my opinion, it can financially devastate its citizenry.

During 107 years of the (Keynesian) FED, the American Dollar has lost over 96% of its original value. Any private enterprise displaying that degree of incompetence would go bankrupt and be put out of business. After all, we can’t print our own money.

Governments can print money, but they can’t print wealth.

Van Wie Financial is fee-only. For a reason.