Chopping down the Magic Money Tree: The pitfalls of Modern Monetary Theory – The Property Chronicle
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Chopping down the Magic Money Tree: The pitfalls of Modern Monetary Theory

The Analyst

Austerity, welfare, pensions – all our fiscal dilemmas could be easily solved by printing money. This is the conclusion of a fashionable strand of macroeconomics called Modern Monetary Theory (MMT) — but does it stand up to scrutiny?

At the heart of MMT is an approach to macroeconomics developed by British economists in the 1970s – the idea that there are two sides to every transaction and so total income always equals total spending at the level of the whole economy. If one person, sector or country runs a deficit by spending more than they earn over a period, another must be running a surplus so that income and expenditure are the same.

For example, China and Germany ran increasingly large trade surpluses prior to the financial crisis due to their undervalued currencies and pursuit of export-led growth. These surpluses created large trade deficits in countries like the US and UK. If a country is running a trade deficit it is spending more than it is receiving and must be running up debt. So this method, called the “flow of funds” approach, reveals how eastern exports can inflate Western credit booms.






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