Weekly Geopolitical Report – Modern Monetary Theory: Part II (March 18, 2019)
by Bill O’Grady
In Part I of this four-part series, we introduced this report and discussed the origin narratives of Modern Monetary Theory (MMT). This week, we will examine the principles and consequences of the theory.
Principles of MMT
MMT begins its analysis with a focus on macroeconomic identities and flows. The theory states that the creation of money begins with government. The government buys goods and services and injects money into the economy. That money goes into the private sector through the banking system and is either spent or saved by households and firms. To prevent the money supply from becoming excessive, the government taxes households and businesses or issues bonds that absorb cash and, in return, become financial assets.
These macroeconomic identities all balance to zero, as referenced below in our WGR series from May 2017.
 Although the purpose of this report is to examine MMT, our focus is more on the ramifications of the theory on hegemonic policy and exchange rates. For those interested in studying the theory more fully, see op. cit., Wray, or a simplified video is available: https://modernmoney.wordpress.com/2014/02/10/mmt-nutshell-diagrams-and-dollars/
 For a deeper discussion of macroeconomic identities and flows, see WGR series, Reflections on Trade: Part I (5/1/2017); Part II (5/8/2017); Part III (5/15/2017); and Part IV (5/22/2017).