Modern Monetary Theory = MMT What is it? Politicians may start talking about this in economic debates and we are already using it. The theory says debts don’t matter as we owe the debts to ourselves. We can just print more money if we need it. We measure the amount of inflation and if it is too high we print less. Ever notice how the government runs huge debts and runs a deficit but never goes bankrupt? It works until it doesn’t as too much debt is never a good thing.
Case example: Argentina defaulted on its debts to external creditors in 2014 and several times before then. Investors no longer had faith in their ability to repay cause they stopped paying. The annual inflation there is around 30%per year. You better spend that paycheck when it comes if you live in Argentina.
Printing too much money to cover debts in the worst case it can cause hyperinflation as in Zimbabwe or 1920s Weimar Germany or modern day Venezuela.
Hey guy I didn’t come here for an econ class. I want to know how this affects me!
Ok then, why am I bringing this up? Because you as an investor and saver need to know how to deal with higher inflation and MMT is coming up a lot in policy debate circles. If inflation rises from say 1.5% to 4.5% it’s a whole different game. Interest rates have to go up a lot. And that inflation eats away at your wealth. See my post on inflation. The cost of capital and debt also goes up a lot.
The problem for the developed world though is there is too much savings so rates aren’t as high as they should be given the amount of debt in circulation. That extra money has to go somewhere. Many societies are aging and those savings need to be invested somewhere putting downward pressure on rates. Also, consumers in many Asian countries and Germany save too much and spend to little. They are fearful of the future so there is an imbalance of savings and spending. If it wasn’t for that our interest rates would be much higher. Would you lend someone dubious money at 1.5%? Really?
So if there are politicians talking about MMT know you will need to up your game. BTW the current Trump administration in the USA is doing exactly this that is spending way more than they take in due to tax cuts. The other side is proposing this too so there’s no escape. Meaning MMT is here but just not called that. It may not end well. Once debt loads get too high the easiest thing to do politically is to inflate the debt away. That means printing money so trouble for thrifty savers like you and me. Be wary.