How Modern Monetary Theory Explains Very Well
the ongoing ‘everything bubble’
[Note: Not a proponent of MMT, just noticed this about it.]
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Modern Monetary Theory (MMT): first developed in the U.S. in the 1970’s — by primarily accountants, not economists — to explain how the central bank (CB) and the central government (CG) work in tandem in funding the funding of the CG and in the process supplying the economy with money in the form of currency (following the collapse of the gold standard and the advent of ‘free-floating’ currencies)
‘everything bubble’: a common term these days for the ongoing rise in prices of assets (things that generate an income and/or will hopefully be able to be sold at a profit in the future) of all kinds, everywhere
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According to MMT, a CG can and does simply ‘spend money into existence’. That is, it can actually create money — as currency — in the process of disbursing it for any purpose.
[In MMT taxes are used to control inflation. They can also be used for other purposes, such as directing money towards this or that segment of society, but in terms of the economy as a whole their primary function is to control price inflation. According to MMT, the money collected in taxes is permanently withdrawn from the economy — i.e., ‘destroyed’, ‘annihilated’.]
According to MMT the CG also creates ‘assets’ — bonds (and ‘bills’ and ‘notes’, their designation depending on how long they take to ‘mature’, i.e., to reach the date at which they can be returned to the government for the amount of money paid for them — plus promised interest). Selling those assets reduces, at the time, the amount of money that will be created as the CG goes about its business. That is money the CG can use that does not involve ‘spending it into existence’. [Those ‘assets’ are commonly thought of as ‘debt’, but we’ll use MMT terminology here — though, see below.]
Eventually, however, that amount money will have to be returned to the owner of the asset — again, plus interest. In MMT, at that point money again can get ‘spent into existence’. Since assets are constantly being created and maturing — being paid off — there is constantly some net amount of money resulting from the creation and maturation of them. That amount of money can be equal to, greater than, or less than zero. If the amount of outstanding assets is increasing over time, that number will be positive: money is being added to the economy. [Even if the amount of assets is not increasing, the interest paid on them can mean more money is being created than is being collected from their sales.]
Those assets are overwhelmingly bought by rich people, pension funds, and large business enterprises around the world (and foreign governments): the investor sector of the global economy. [Sure, anybody can buy them, but for ‘regular people’ those don’t generally represent enough of a return to justify putting whatever money they have for investing into them: a person has to have a really substantial investment portfolio to be worrying about the matters that such assets address (primarily, hedging risk).] The investor sector, seeking always to put as much money as possible ‘to work’, is constantly looking to purchase assets of all kinds, anywhere. It is noteworthy that from the point of view of investors, those CG assets, which are commonly thought of as public debt, are without doubt assets.
Here’s the point: by selling ‘assets’, thereby garnering existing money for the CG to spend, then paying off those ‘assets’ at least in part by (as MMT has it) ‘spending money into existence’, to the extent that more assets are being created than are maturing, the CG is necessarily engendering a flow of newly created money directly into the investment sector of the economy — with, again, the interest paid on those ‘assets’ being in addition to the amount of money that was initially paid for them. Given the incessant increase in CG ‘assets’ around the world (and including the interest paid on them), that is creating a constantly increasing source of demand for assets of all kinds in all places, constantly driving up the prices of them. According to MMT’s explanation of these matters, then, it is not surprising that assets of all kinds are being bid up in price — constantly, everywhere.