An American acronym has been making the rounds among economists since the subprime crisis, it is MMT. The letters stand for Modern Monetary Theory. Its protagonists claim that countries that have their own robust currency can and should finance themselves more through their central banks, as has been the case since the great financial crisis in the USA, Europe and Japan. As evidence, they refer to the low inflation rates that have been measured since then and the relatively stable exchange rates. The positive development in the labor market since the financial crisis is also cited as evidence.
However, the low official inflation of the past decade raises the question of whether it is being measured correctly. The shopping cart for measuring inflation takes into account e.g. not the prices of assets such as real estate, bonds and stocks. However, since the beginning of the ultra-loose monetary policy in the wake of the great financial crisis, a huge price surge has manifested itself here.
And as far as the development of the labor market over the last decade is concerned, reference should at least be made to demographics, which have helped to create high employment and a shortage of skilled workers.
More than a theory
With the validity of the MMT, Milton Friedman’s theory of money would be refuted. In his quantity theory of money, the Nobel laureate in economics, Friedman, postulated that an expansion of the money supply would be almost completely absorbed by inflation and would hardly generate any growth impulses.
Is the MMT even a theory? If it were a theory, it would have to claim validity everywhere. But if you turn away from the industrialized countries and look at Argentina, Venezuela and Turkey, for example, it immediately becomes apparent that the MMT does not apply there. Rather, the well-known textbook contexts of economics are at work there, as can easily be seen from the expired currencies of these countries.
Therefore, I consider the MMT to be essentially an American heuristic, which above all confirms the exceptional position of the USA (American Exceptionalism). US politicians (e.g. former Vice President Dick Cheney) had previously claimed that deficits do not matter for America (“deficits don‘t matter”). Of course, this counterintuitive observation is only valid as long as global confidence in the political stability and economic strength of the USA persists.
The US cannot save
It is very convenient for the United States that other industrialized countries and regions are struggling with considerable difficulties of their own, so that in the eyes of many investors there are hardly any attractive alternatives to US dollar investments. If Europe were not a reflection of its great historical differences, and if the EU had mutated into the most competitive region in the world in 2020, as Commission President José Barroso had once strived for, America’s central bank-financed urge to borrow, and thus the MMT, would be subjected to a proper stress test.
For American politicians, the mutated MMT comes in handy. Now that it has also become clear to the last citizen that Washington cannot save and that it spends considerably more annually than it squeezes from the citizens through taxes, the MMT gives them legitimation for their willingness to spend. An irony is that it is precisely the Republicans, who traditionally saw themselves as a party of fiscally conservative politicians, particularly like to don their donation pants. Your pillar saint Ronald Reagan has shown it, George Bush Junior has stepped up and with Donald Trump in view of his megalomania, completely different measures apply anyway.
Christoph Bruns is fund manager, board member and main shareholder of the fund company Loys AG. Here you will find more columns by Christoph Bruns