<aside> 🗣 I asked a clever friend to read my original draft and ask as many questions as he could to expose the gaps in my explanation

</aside>

Alex's Original Email

Alex's Original Email

[The big one] What about inflation? Wouldn't issuing much more money cause things to spiral out of control?

Related question: are you sure the speed of increase of money is immaterial? I was under the impression the speed of increase would have to be carefully managed under an MMT model...

As a definitional point, there are a bunch of different causes for inflation. The question refers to demand-side inflation, where aggregate demand in an economy exceeds the ability of the economy to satisfy it at an accelerating rate.

MMTs acknowledge that government overspending would cause inflation when the economy is at full resource utilisation (i.e. the unemployment rate is close to nil). In fact, it's the reason governments can't just issue money regardless of economic circumstances.

The condition is important though. When the economy's resources are not being fully utilised, there's no evidence that government spending will create inflation. For example Japan's public debt has blown up from 50% of GDP in 1990 to just under 200% today with zero inflation!

In short, the amount of money doesn't matter. The extent of resource utilisation in the economy is the essential metric.

Sources: MMT and Inflation (Part 1), MMT Response to Inflation

What about FOREX rates? Wouldn't going gangbusters on issuing money cause it to crash against other currencies?

To restate your question: If the government runs deficits (i.e. creates money) then the money supply increases, leading to:

1. Devaluation against other currencies
2. Imports for that country becoming relatively more expense (hence creating inflation, or a general rise in price level).

MMTs say that these things are true, but far more limited than previously imagined. For example:

• Though imports become more expensive, exports also become cheaper for foreign buyers leading to higher export revenue (and greater national income);
• Large sectors of the economy (e.g. the services industries) will be unaffected by the exchange rate movement;
• Imports may face greater competition from local alternatives, so that the full extent of the price rise isn't felt.

So the 'pass through' effect of an exchange rate movement to inflation is relatively small. It may even be nil in an economy with a current account surplus (where export income exceeds import expenditure).

Finally, in the long-run the strength of the currency depends on the quantity of output in an economy. Since MMT is focused on capacity utilisation, it should have a strengthening effect on foreign exchange in the long run.

Sources: MMT and the external sector – redux, Is Exchange Rate Depreciation Inflationary?

I don't quite understand the 'Governments should be persistently running deficits' clause - if Governments can issue heaps of money, why do they need debt? Who are they borrowing from? Wouldn't they just pay back debt to avoid paying interest on the loans?

There are three ways for the government to finance its deficit spending:

1. It can issue IOUs (bonds) which the central bank purchases in a direct transaction ("Overt Monetary Financing")
2. The central bank can purchase government bonds from the private sector, therein increasing the amount of money in circulation ("Open Market Operations")
3. It can simply create the money out of thin air in its account with the central bank, and then spend that money. It does away with the "fiction" of government borrowing entirely! This is the power of being monetary sovereign. Of course interest needs to be paid on this money by the central bank (the overnight cash rate), but this is negligible or can even be zero because there is no longer independent exercise of monetary policy. This is something of a mind-freak, but it's a central tenant to MMT.

At the moment governments do #2, which is pretty complicated. #1 and #3 are much simpler and achieve the same aim.

There's some other ancillary reasons that a government might still wish to issue bonds, like providing a risk-free asset for savers in the private sector, but it's not essential.

Sources: There is no need to issue public debt, Overt Monetary Financing in terms of simplicity and transparency

Why do MMTers think this will work - is it purely theoretical? Put another way, is there any evidence it would work? Are there any major caveats besides those three conditions?

What happens if one country does it and no others - is that a doomed experiment?

Nope. One country can happily implement MMT in isolation.

Presumably, if you tried MMT and it failed, that would leave your economy in very bad shape?

• Related question: my impression is you can't half attempt a MMT model for your economy, you'd need to go all-in to see whether it really worked - is that correct?

Unfinished

Well let's walk it through. Let's say:

1. A government issues a ton of bonds which the central bank buys (Overt Monetary Financing, explained above).
2. The government's debt-to-GDP ratio goes way up (from 50% to 150% say)
3. So long as the government controls the central bank

When you say 'significant stores of foreign currency debt' (criteria 3 in the list of conditions) - do you mean that they're the debtor or debtee? If they're the latter, why would this impact on their ability to create their own money?

It's the former.

Let's say Australia has a ton of debt which is issued in USD. If they run huge deficits (and so their currency devalues against USD in the short-term), the interest they need to pay on that debt skyrockets. Taken to the logical extreme, they could default on the debt.

It's an important qualification, because large tracts of the developing world issue debt in USD. It means they don't fulfil the conditions of being a monetary sovereign, and would be unable to implement MMT.

Is this purely an economic policy model, or does it require the Reserve Bank to be on board?

In the MMT paradigm there is no requirement for an independent central bank because monetary policy is subordinated to fiscal policy. Basically the Reserve Bank would be merged with Treasury.

Heavy stuff!

How does the 'new money' get injected into an economic system? Does more cash money need to be physically printed under this model?

Unfinished

More cash doesn't need to be physically printed. It's one of the big straw-man characterisations by critics of MMT (and our friend Luke Davis!).

How does this link to the Green New Deal?

How does this tie in with UBI?

UBI is a possible policy route if one accepts that MMT holds true.

Most MMTers think UBI is a poor policy idea. They prefer a Government Jobs Guarantee because:

1. It necessarily creates full employment. Anyone who wants a job can have one, provided by the government.
2. It acts as a price anchor. Prices are indirectly set by how much labour a person has to sell (i.e. their wage) to acquire goods and services. The government can set a basic wage, say $10 an hour, which will then anchor the prices in the private sector labour market.