Modern Monetary Theory - Kwasi but twue

The MMT view of things is perfectly simple.

1. When the government spends money, it is printing or creating money. It does not need to ‘borrow’ money to spend, either there are coins and notes in circulation, or Treasury Bonds, which are just two types of the same thing. Cash is liquid and non-interest bearing, bonds are less liquid and interest bearing. But both are issued and backed by the same government.

2. When the government collects taxes, it is unprinting or destroying money. The purpose of this is to create demand for the currency (primary aim) and hence avoid inflation and keep interest rates down (outcomes). It is broadly agreed that that low inflation and interest rates are A Good Thing.

Some MMT supporters look at the first part, the spending/printing side and say, “Oh well, the government doesn’t need to borrow money or collect taxes to be able to spend”, which is to completely the second part. These people are moving the debate backwards and discrediting MMT, which is not a policy recommendation, it is a simple description of how things work.

The recent Truss/Kwarteng foray into cutting taxes was a bad idea politically (it would have increased inequality) but the financial markets don’t care about that, they care about the second part. Unfunded tax cuts reduce demand for a currency and hence lead to the currency weakening relative to other currencies; hence imported price inflation; as well as higher domestic inflation (more money sloshing about chasing the same amount of goods and services); and higher interest rates (to compensate for future expected inflation and general uncertainty that the government doesn’t have a clue what it’s doing).

Simply reversing the proposed tax cuts has reduced the damage in part, but not completely. If a car runs you over, you can’t ameliorate your injuries by having the car reverse back over you again! And with Truss and Kwarteng at the controls, you can expect to be the victim of lots of hit and runs in future.