Don’t use MMT except in an emergency?

For the first time that I am aware of MMT (Modern Monetary Theory) has been mentioned in the UK ‘mainstream’ rather than specialist press. David Smith, Economics correspondent of the ‘Sunday Times’, published an article in the paper on Sunday which is reproduced with free access on his own website.

He states:

Then there is what many regard as the ultimate magic money tree, modern monetary theory (MMT). Though this was invented in the 1990s, before the recent wave of QE, it has increased in popularity, particularly among the left in America.

It argues that countries with their own sovereign currency and central bank, and a floating exchange rate, face no constraint on the size of budget deficit they can run, because the central bank can create the money needed to cover it. If that creates inflation, then taxes have to rise to rein it back. But inflation, not the deficit itself, is the constraint on policy.

He seems to think the idea was ‘invented’ out of thin air in the 1990s even when the partial Gold Standard of Bretton Woods ended in 1971. Of course Chartalism long precedes that in 1905 (though its ideas were not translated into English till the 1920s) and Alfred Mitchell-Innes, diplomat and amateur economist though he may have been, was writing ”What is Money?’ in 1913, so the ‘Theory’ didn’t, as he seems to suggest, magically appear.

Perhaps his lack of credence towards the history on the money creation insights of MMT assist his bizarre and unreasoned conclusion:

The fact is, however, that nobody would be even giving MMT a hearing were it not for the QE experiment undertaken by central banks over the past 10 years. That is as good a reason as any for locking QE away in a cabinet marked “only break glass in case of emergency”.

I don’t know whether it was his intention, but one is left to conclude that “only break glass in case of emergency” is a recognition that MMT is actually correct, but cannot possibly be used to upset the received wisdom that is the status quo.

Unless of course, something else has done it already.

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