‘We’re already in MMT’

There’s a misconception Modern Monetary Theory - or MMT - is something various central banks and policymakers may consider or move towards as a result of the economic fallout from the COVID-19 crisis, according to Dr Steven Hail, Lecturer, School of Economics at The University of Adelaide.

In truth, Dr Hall argues, for many countries MMT is already here. “Modern monetary theory is a description of the monetary system as it actually works at the moment,” he said.

Dr Hail made the comments on a call with ANZ Chief Economist Richard Yetsenga. You can listen to the conversation in an edited version of the call below.

Yetsenga said he was intrigued by the theories around MMT and cautioned against rejecting it out of hand.

“There are important questions about (a) MMT’s ability to control inflation sustainably; and (b) the efficiency of the spending that comes out of the public sector,” he said.  

“But we aren’t in inflationary environment in most economies, and haven’t been for some time. Deflation is the bias.”

Yetsenga said the ideas in MMT raised some important questions about the current global system.

“If MMT comes with an inflation risk, conventional monetary policy frameworks seem to me to come with a deflation risk,” he said.  

“In other words, the conventional monetary framework many countries use has its own problems. We need to work harder at assessing the balance between the two, rather than presuming the current system is problem free, and comparing MMT with perfection.”

Dr Hail called out Australia and the US as countries which explicitly fit the MMT framework.

“Our argument with the mainstream narrative is that - without going way back into history of economic thought - it's always ignored how monetary systems work,” he said.

“You only have to pick up an introductory economics textbook to see that it doesn't start with money, banking and balance sheets… instead, you get a chapter on money in banking somewhere towards the end.”

Dr Hail said MMT describes an alternate view on how the global monetary system actually works.

“Modern monetary theory - and nobody has really convincingly come up with an argument against this part of it, the descriptive part of modern monetary theory - seeks to describe the nitty gritty of how reserve accounting works,” he said.

“[It’s about] how the economy can be seen as a set of balance sheets evolving over time, always potentially evolving in ways which could lead to growing financial fragility and instability.”

Listen to a podcast of the call above to find out more.

Shane White is content manager at ANZ Institutional