Modern Monetary Theory

 

An economic theory called Modern Monetary Theory (MMT) has been receiving wider publicity of late. MMT holds that debts run up by governments do not necessarily cause inflation, but rather, governments do best when they invest for their people, to ensure full employment and other social goals. This post is not intended to describe MMT in detail, nor take a position for or against it. Wikipedia has a good basic article about MMT, as does Bloomberg Business Week.  Politicians seem to support it when they see it as a means to fund programs. Prominent economists are skeptical.

What does MMT mean for our personal finances?  The US is already de facto experimenting with spending well beyond revenues.  A standard measure of this is shown at https://usdebtclock.org. Regardless of the direction of politics, deficits and the national debt seem to be on an increasing trajectory for some time to come. Therefore, a hedging strategy against possible future inflation seems to be prudent, whether in commodities, real property, or businesses, or in some combination.

I am old enough to remember the anxiety my parents felt when the United States removed all the silver coins from circulation, and they in turn remembered when gold coins were removed from circulation in the great depression. I have a vivid memory of my Dad taking me aside back then and holding up a silver dollar, as he said, “remember, all true wealth comes from the earth.”  The melt value of that silver dollar today is over $12.  That dollar, hypothetically invested in the S&P 500 since 1965, would be $33 today.  The paper dollar issued in exchange for the silver dollar would be worth a dollar today.

The controversy around MMT may be only beginning, but it seems that the policy is already well established.  Maybe MMT’s proponents will be proved right: after all, the government borrowing has continued to accelerate for a decade now, with little inflation. Maybe our society can promote the general welfare by printing money. If instead skeptics are right, perhaps we will experience a true hyperinflation, as happened in Hungary, Zimbabwe and Yugoslavia, when such policies were followed. Maybe the stability and value of currency really do depend on the underlying strength of our society and government; and these rest collectively on the strength of ourselves and our families.

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