What is Modern Monetary Theory, what is it for, and how will it affect our economy? Modern monetary theory is a heterodox economic theory that explains currency as a public limited asset and unemployment as proof that a government currency monopoly is too controlling the supply of goods needed to satisfy savings desires and pay taxes.
So if you are asking what is modern monetary theory, then you have reached the right place. The purpose of this article is to answer the question “what is modern monetary theory” and then delve into how it will affect the economy.
In its most basic form, modern monetary theory pertains to a system in which central banks, acting on behalf of governments, target certain quantities of money that will be lent out in return for real goods and services that consumers will purchase from those banks. The primary concern of central banks is to maintain consistent and sustainable economic growth and employment levels. The thought process behind this action is that if interest rates are allowed to rise due to market conditions (which would inevitably lead to increased government spending), the central banks will lose their credibility and the public will turn against them, causing hyperinflation or a complete collapse of the currency system.
It goes without saying that in such a scenario, the public will suffer a massive loss of purchasing power and will begin to accumulate great amounts of debt that will only grow worse as time goes by. Now, if this sounds like a pretty scary scenario, what does modern monetary theory have to say about it? For starters, it would say that interest rates should be allowed to rise because of the public’s lack of confidence in the ability of the central banks to manage their debt properly. It also has to do with the fact that excessive government deficits lead to a rise in interest rates as well, which in turn causes even more damage to the economy. It’s just a simple matter of numbers really.
Now then, I’d like to discuss why keeping inflation low is a good idea even in a slow growth economy. There are two reasons for this. One is that high interest rates cause inflation, which is the opposite of what we want. With an artificially low interest rate, the costs of lending money are driven up significantly, causing the cost of borrowing to rise above a level that the economy can handle, leading to hyperinflation or a complete collapse of the currency system. Keeping inflation at manageable levels is the only way to avoid this problem.
Another important factor in what is modern monetary theory is the concept of flexible exchange rates. This is where the central bank trades currency for another depending on current circumstances. For instance, if the exchange rate between the US dollar and Japanese yen was too high, the bank will make an effort to change it so that it matches the value of the Japanese currency. In theory, this should cause the Japanese economy to expand because they would be paying less for their dollar, causing the economy to expand. In reality, most people do not even realize what this does because the vast majority of people base their economic decisions on the value of the dollar against the Japanese yen, not on the value of their currency.
The last major concept to discuss in what is modern monetary theory is free trade. In a truly free market, all goods and services are supplied at a given rate by the producers in order to match demand.
If there are excess production and not enough consumers to fill the needs, then money supply and interest rates will be influenced, causing them to either increase or decrease. In a true monetary economy, no government influences the supply, resulting in free markets with true supply and demand