Modern Monetary Theory (MMT):
Modern Monetary Theory, often referred to by Democratic politicians as MMT, should be called “Magical Monetary Theory”. Promoted by those that think there really is a “free lunch”, it is difficult for me to imagine any self-respecting PhD economist would put forth such an utterly silly and disproven concept.
Advocates of MMT suggest that it makes no difference that a government continues to expand its debt so long as that debt is in the currency of the government. Interestingly, they also then say that their theory is true up until it no longer works. One only has to look at Japan’s history over the last 40 years in order to realize that MMT is wrong.
In the real world, increasing the amount of government debt takes money out of circulation and therefore away from productive investments. The result is that the velocity of money moving in the economy then slows which leads to deflation. The crowding out of private investments results in stagnation, low incomes even with low interest rates in a low inflation environment (low inflation is trending towards deflation). We saw the beginning of this in America during Obama’s second term.
The fact is that smaller government and lower government deficits leading to lower levels of government debt is the only prescription that results in long-term, robust economic growth. As a part of this effort, The Federal Reserve is totally accurate in their desire to reduce the amount of assets they hold, so that they become less of a factor in the government debt and mortgage markets.
Reducing Fed assets is called Quantitative Tightening (QT) and is a form of monetary tightening. It drives up interest rates because it forces other investors to buy those assets. Chairman Powell was correct in 2018 in everything except he attempted to move too fast.
But it is important for interest rates to trend back towards “normal” and for The Fed to reduce its balance sheet thereby eliminating its distortion of the financial market. That combination enhanced by reduced government deficits is the only prescription for long-term economic growth in the United States.