Modern Monetary Theory or MMT has been gaining some traction amongst policy makers and academics. Although, I don’t think the theory itself deserves a serious response, because of the political support it is getting there is a need to clarify why MMT is shallow and not worth pursuing in real world. MMT is the theory that governments, unlike households, do not spend money by earning revenues (through taxes or otherwise). They spend money by printing new money as they have monopoly on money issuance. Thus governments need not worry about the constraints of budget deficit .

The basic premise of MMT is that fiat currency is monopoly of the central government of the country. This is a valid premise (as of now). But the subsequent conclusions and insights driven from this premise are pure blunders.

Firstly, the conclusion that the government can take for granted the monopoly on currency is fallacious. History has shown that countries need not retain their monopoly on monetary system for ever. People will eventually choose the monetary system that is most suitable for their economic activity. Today USD might be the main currency of United States but tomorrow it could be Bitcoin or something else.

Secondly, even when a government has guaranteed monopoly on currency through regulation, uncontrolled exploitation of the monopoly will lead to disastrous consequences of hyperinflation, as seen in several instances over the last 100 years. This is especially true for countries where the currency does not have international acceptance i.e. most currencies other than the USD.

Thirdly, an obvious fact of life is that money does not create goods and services, labour, time, and land create them. Just by printing more money the government does not increase overall goods and services available to people. By printing more money and using that to spend on deficits will only redistribute wealth. Instead of spending money specifically obtained by taxation, the government spends money obtained through a hidden tax often referred to as “inflation taxation”. This activity takes away private economic decision making and replaces it with centralized planning. This is bound to be economically inefficient.

Finally, although the verbiage of MMT is new, but the policy of printing money and using for deficit spending is already being used in practice, albeit in a roundabout way. Governments across the world finance their deficit through borrowing (by the way of issuing bonds and bills) from the market and this causes the interest rates in the market to go up. The central bank of the country prints money and buys back these bonds/bills to keep the interest rates within their target range. This process is called open market operations. This combination of financing deficits through bond issuance and open marker operations by the central bank is tantamount to deficit financing through printing money. Thus the policy implications of MMT are already being put in to practice. It is a different matter that this roundabout way should be stopped based on the same logic described in the previous three arguments.