Modern Monetary Theory is just a Theory after all…

You likely grew up hearing your parents advise you to "save more than you spend," often justified with the saying, "money doesn't grow on trees." As an adult grappling with bills and taxes, this advice probably rings true, especially if you aspire to retire comfortably. But what if I told you that sovereign countries with the ability to print their own money, such as the United States, aren't bound by these conventional financial rules? This concept is known as Modern Monetary Theory (MMT), and it has the potential to disrupt the US Dollar's status as the world's reserve currency.

First, let's delve into Traditional Monetary Theory. In this paradigm, fiscal responsibility and inflation control, both regulated by the Federal Reserve, are deemed crucial for a balanced economy. The prevailing belief is that governments should balance their budgets and avoid large deficits; interest rates should be adjusted judiciously to control inflation without stifling private investments. Furthermore, markets are expected to function efficiently and allocate resources effectively. These are just a handful of the principles commonly upheld in economic courses and theories.

Modern Monetary Theory (MMT), on the other hand, posits that countries which issue their own currency are not limited by spending constraints when it comes to sovereign government expenditures. In essence, these governments possess a perpetual money tree. Rather than funding government spending through tax revenue, they have the capability to print money to support any desired programs, irrespective of tax income. From an MMT perspective, taxes are tools to manage inflation and modulate demand. Unemployment is seen as a governmental responsibility, with the onus on the state to ensure employment through funded programs, diverging from the reliance on market efficiency. Crucially, MMT does not concern itself with debt; since the government can perpetually generate money to meet future obligations, defaulting on debt is not a conceivable outcome.

At this point, you might be thinking, "Wow, a credit card with no spending limit sounds appealing," right? However, what happens when reality catches up? The situation is far from ideal, and we may already be witnessing early signs of trouble. During the COVID-19 pandemic, the rampant printing of money led to widespread and persistent inflation. Coupled with the US's surging government debt (currently at 121% of the Debt to GDP ratio), the credit rating downgrades from Fitch and a recent warning from Moody's make for a grim outlook. Furthermore, with countries like Saudi Arabia, traditionally trading oil in the "petrodollar" system, starting to explore alternatives, the US Dollar's reliance on MMT is in jeopardy.

These challenges highlight the very reasons Bitcoin was created: to serve as a currency immune to manipulation, owned by no single entity. Larry Fink, Founder and CEO of BlackRock - the world's largest asset manager - aptly observed, "I think it's just an example of the pent-up interest in crypto. We are hearing from clients around the world about the need for crypto. Some of this rally is beyond rumors - I think today's rally reflects a flight to quality." This leads us to ponder the role Bitcoin will ultimately play in the global financial system. 

While Modern Monetary Theory offers an intriguing perspective on government spending and debt, it's not without significant risks and uncertainties, particularly for the US Dollar's future as a world reserve currency. As we navigate these choppy financial waters, the emerging role of cryptocurrencies like Bitcoin could become increasingly pivotal.

This is not financial advice and is for educational purposes only. Image: https://www.economist.com/finance-and-economics/2019/03/13/is-modern-monetary-theory-nutty-or-essential