By Matthew Gaude & Shawn McGuire
How are you going to pay for it?
That’s the question everyone asks when politicians propose things like Medicare for All, free college, or the Green New Deal. While those things may be appealing, the first response for most people is “And who’s footing the bill?”
We respond that way because that’s how our lives work. If you want to vacation in Italy, at some point you have to figure out where the money is coming from in order to pay for it. After all, nothing is free.
While many politicians get very vague when that question arises, there is a new breed of politicians with a ready answer: Modern Monetary Theory (MMT). If you haven’t encountered MMT in the news lately, you likely will. So let us explain it to you.
The Basic Idea
Essentially, MMT says that as long as a government prints its own money and issues debt in that same currency, they never need to worry about paying for anything. This would work for the U.S., because we have our own currency, but not the European countries that share the Euro.
Our U.S. dollar is basically a public monopoly. Only our government can print it and if we run up government debt, we can simply print more money to pay it off.
MMT is an entirely new way of viewing money and government debt. While most people see budget deficits and national debt as negatives, MMT sees it as a positive. A deficit of $1 billion means that there is $1 billion extra in the economy. A government deficit is the people’s surplus. It states that unemployment is a sign that the federal deficit is, in fact, too small.
What About Inflation?
Most economists would argue that printing unlimited money to pay for things would lead to inflation. The more money in circulation, the more money will be required to buy things. MMT solves that problem by simply removing money from the economy if inflation starts to pick up.
How do they propose to remove money from the economy? Through taxes and the issuance of government bonds. Under MMT, you don’t need taxes and debt to pay for things because you can just print money. Rather, taxes and debt are a tool for controlling inflation and unemployment.
What Does History Tell Us?
So, does MMT actually work? Proponents of the theory point to Japan as an example. The Japanese debt-to-GDP ratio is 236%, compared to the U.S.’s 105%. Japan does not have an inflation problem and their long-term interest rates are close to 0. MMT supporters use that as proof that there are no negative consequences of debt. Others, however, point to differences in the size of Japan’s banks relative to their economy as proof that things wouldn’t work the same way in the U.S. (1)
Another example commonly cited is post-WWII America. At that time, our country carried a massive debt burden, yet capitalism and the economy were booming. As they say, the war bonds that were sold to fund the conflict weren’t burdens passed down to the next generation, but rather assets passed down.
Modern Monetary Theory states that the government can and should increase the deficit today in order to build for growth tomorrow. The value of investing in things like education, infrastructure, and research and development will be greater than the cost of the interest paid on the resulting debt. They believe that those kinds of investments will build the country’s capacity to absorb higher deficits. The only problem is that none of this has actually been proven in real life.
Now, hopefully, when you hear politicians and political commentators discussing MMT, you will understand what they are proposing: for a country like the U.S., nearly unlimited spending is possible, and taxes and debt are used to control unemployment and inflation rather than pay for things.
If you want to hear our opinion of Modern Monetary Theory or have any other financial questions, call our Live Oak Wealth Management office at 770-552-5968 or email email@example.com. We’d love to discuss it with you.
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insights and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
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