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Modern Monetary Theory

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There is a question worth exploring: If a state collects taxes, on what money does it do it? The only way to have money is to emit money beforehand, right? So, the cycle is money -> taxes, or taxes -> money?1

In times of recession, many questions can arise regarding how to increase public expenditure without risking rampant inflation. MMT2 seems to address some of the problems, looking at how the state can spend money smartly without triggering a race in prices.

The idea is that if there's idle capacity, a country can issue money to buy those products. Since it won't compete with other sectors, prices do not need to go up (somehow exploiting a non-linearity of the offer-demand curve). What I couldn't get is what happens with the money poured into the economy. People working on those factories will spend the money elsewhere, etc.

What is interesting is that this only works if there's no public debt in foreign currencies. You can't print money to pay a foreign debt, which links the value of the internal currency to that of the external one. And printing will only increase the supply on one side without counter-offering with an increase in offer.

In the view of MMT, emission of money is limited only by inflation. One can print as much money as one wants until the moment inflation kicks-in. In principle that can explain what happened in the US, that injected trillions of dollars into the economy without inflation.

Another interesting perspective is that taxation can be used to remove excess money, counter-balancing the race for inflation. In this perspective, tax cuts are almost equivalent to money-printing.

Tags: #MMT #economics #monetary-theory


  1. https://www.npr.org/2021/01/20/958854717/modern-monetary-theory-classic 

  2. https://en.wikipedia.org/wiki/Modern_Monetary_Theory 

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Aquiles Carattino
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