The dangerous thought bubble out to destroy your wealth

The dangerous thought bubble out to destroy your wealth

I’d never heard of Modern Monetary Theory (MMT) until about two years ago.

For good reason.

It was a fringe idea. Something that would lead to dangerous levels of government debt and inflation. At its core is the idea that a country with a fiat currency system can print money to support the economy without going broke.

In the past, people have argued that it’s economically irresponsible to issue unlimited money because there would be rampant inflation and unsustainable government debt.

Yet now, this dangerous idea is forming. That perhaps, if governments and central banks work together by altering taxes, and having central banks change the value of money through interest rates, MMT might work.

Furthermore, supporters of MMT insist that comparing a household budget to a government budget is wrong. That they are two different beasts. That a country can’t go bankrupt if MMT is managed efficiently.

There’s a problem with that analysis though.

MMT proponents assume the people in charge would ensure MMT is used to benefit the economy, not self-centred politicians…

The RBA asks for help

For the past couple of years, MMT has been an American problem.

The idea was initially thrown around by a small group of economists…and then gained favour with US politicians as a solution to the country’s debt-burdened, slow-growing economy.

Now, the idea of MMT has reached Australia’s shores.

Just this week, the idea of MMT Down Under appeared in The Australian Financial Review:

‘…what makes MMT so innovative is the interaction between politicians and central banks: monetary and fiscal policies work in tandem, so that as the government issues debt to boost its fiscal spending, the central bank buys the bonds – essentially monetising the debt.

This analysis is flawed.

For starters, central banks and governments are meant to work independently of each other. They aren’t supposed to be in cahoots.

However, Australians are beginning to see MMT ideals infiltrate our economy.

The re-elected Liberal government has assured us we’ll get a tax cut, effective this July. Plus, word on the street is that the Reserve Bank of Australia will be cutting rates next week.

Not only that, but RBA Governor Philip Lowe believes the Aussie government also needs to do some heavy lifting, telling the AFR

I think it would be a mistake to rely solely on monetary policy here. What will drive stronger growth is structural policies that promote firms hiring people, investing and being innovative and expanding.

Things like education policy, the attitude towards entrepreneurship and innovation, the way we invest in infrastructure, the design of the tax system—these are the things that ultimately drive economic growth.

The point is, MMT has gone from a fringe idea to a potential solution to the ‘slow growth’ problem among governments in the developed world.

It won’t work.

And I’ll leave Jim to explain why.

Read on to learn about possibly the most destructive monetary theory coming your way this year.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia