Vol 3, Issue 3. Quarter 1 – 2026.

There is a collection of ideas floating around known as Modern Monetary Theory (MMT), or Modern Money Theory. The major conclusion of this so-called “New” theory is that a country that issues debt in its own currency, while simultaneously managing the size of the money supply can never default on that debt because they can always print money to pay it off. In addition, the size of that debt loses relevance under a number of additional assumptions. These assumptions (in short) include the following:

1. The economy is at a level below full employment.
2. Money can be “printed” to raise us to a level of full employment without increasing inflation.
3. Once full employment is reached, a continuation will produce inflation, but this is ok because,
4. The Government can simply raise taxes to prevent this inflation from occurring.

In many respects there is not much here that is actually new. It has been argued for at least 200 years that the money supply, and thus the business cycle can be managed by using either Fiscal Policy or Monetary Policy. Think –  Government Spending, or Actions by the Federal Reserve. MMT essentially argues that using Monetary policy is not needed once full employment is reached, because the government can simply raise taxes to balance the system. This may be the funniest economic theory that I have ever run across. But before I explain what I mean by that statement let me point out a few smaller problems.

First, the definition of “Full Employment” is a lot more fuzzy that you may think. Economists have argued for a few hundred years that there is a “natural” or “normal” unemployment rate. People who graduate from school do not begin work instantly – there is a lag. People drop out of the workforce temporarily as they relocate, have children, recover from illness, etc. Thus, they will be out of work for a while. Natural business activities will lead to mergers, acquisitions, business closings, etc. Each of these activities will have some people find themselves unemployed for a time. As a result, the natural unemployment rate is not 0%. Most scholars argue that it is somewhere around 3 – 4% and some argue that it is a bit higher than that.

Second, the idea that increasing the money supply will not cause inflation until full employment is reached is not supported by the evidence. Prices rise in part due to “inflation expectations”. This means that prices do not politely refuse to rise until full employment is reached. They start rising long before that happens. In addition, there is a high correlation between inflation rates and the size of the money supply.

The money supply in the US, as measured by the most frequent measurement (M2) grew by roughly 7% per year since 1959. The average growth rate for the GDP over that period (not adjusting for inflation) was 6.4%. I guess I am supposed to believe that this is just a silly coincidence, right? In other words, Real (Inflation adjusted) GDP growth plus inflation was 6.4% per year while the money supply grew at about the same rate. This suggests to me that much of the new money was tied to GDP growth, most of the rest was tied to inflation, and a little was lost to friction. MMT tells me that, that was old news, and doesn’t apply any more. Two plus two used to equal four, but this time it’s different.

But let’s ignore all of these fancy sounding arguments for a moment and get to why I think that this is literally funny. Warren Buffet made a famous remark in 2011 when he said that he could “end the deficit in five minutes”. In his words all that we had to do was to pass a law that would make all sitting members of Congress ineligible for re-election if the deficit exceeds 3% of the GDP. In other words, if you tell congressmen (and Senators) that an action will guarantee that they cannot win the next election, they will stop doing that action.

My observation about national politics in the US over the past 50 years boils down to this. I see only 4 ways to lose an election.

1. Cutting Social Security
2. Raising taxes
3. Causing inflation
4. Causing unemployment.

To be a bit more fair, I should have added “being perceived as” in front of each of these actions, but I think that you get my point. It’s not actually raising taxes that is the issue – it’s all about whether you get blamed for them rising.  But my main point is that I do not honestly believe that any other actions guarantee that you lose the office. You can own slaves, kill people, steal money, violate every law known to man, refuse to put any effort into the job, cheat on your wife, suffer from alzheimer’s, smoke crack, drive a woman off of a bridge, and a host of other things. But if you do any of these Big-four things, you will lose. Consider the recent history of 1-term presidents.

Jimmy Carter was perceived as causing inflation and raising taxes– 1-term. George Bush historically said – “Read my lips. No new taxes.” He then was forced to raise taxes – 1 term. Trump’s Covid response was perceived as causing unemployment – 1 – term. Biden was perceived as causing inflation – 1- term. We will see what happens next.

Here is the MMT narrative that I think is so funny. The president comes into office. The country is either at full employment or it is not. If it is not, then MMT says the government should print money, because if it does not, unemployment will follow and that candidate will surely lose. Once this is done and full employment is reached the government has 2 choices. Either they raise taxes – and lose the elections. Or, they allow inflation to grow – and lose the elections.

The bottom line is this. Either MMT is junk (which I highly suspect) or it is true. If it is junk, then I don’t really need to discuss it any further. If it is true, then it can never be implemented, because implementing it is political suicide. Either way, I think we’re about done here.

If you have time on your hands, and want an extended treatment of this topic, you may want to look at “Modern Monetary Theory and its Critics”. This is a collection of essays – both for and against. The biggest problem with this book is that for those without a pretty good handle of economic theory to begin with, it’s a bit tough to follow and will probably put you sleep in about 15 minutes. But if you can stay awake for a few hours with it, this will help.

As always, we make no claims to brilliance. This is just an honest attempt to translate the speech of eggheads into English for those of us who want to manage our own finances. Stay tuned for more. Better yet, sign up for our monthly newsletter and get more fully arguments sent to your email box on a monthly basis. No fee, no sharing of your contact information. Just simple talk on issues that matter to you.