MMT & The Crisis Response to Coronavirus (w/ Nouriel Roubini)

TL;DR

Modern Monetary Theory (MMT), a leftist idea that advocates for large budget deficits and fiscal monetization, is gaining mainstream support as a policy response to economic crises. However, the extensive use of MMT, particularly in the face of negative supply shocks like the global pandemic and increasing protectionism, could lead to stagflation in the long run.

Transcript

ASH BENNINGTON: One of the things that you're hearing in, for example, on economics, Twitter is this phrase, "we're all modern monetary theorists now". Can you talk a little bit about what modern monetary theory is, how it relates to the union of fiscal policy and monetary policy, and whether it's an appropriate policy response to this particular c... Read More

Key Insights

• 🉐 Modern Monetary Theory (MMT) is gaining mainstream support as a policy response to economic crises, with proposals for coordination of monetary and fiscal policy.
• 🏃 MMT suggests that countries with their own currency can run large budget deficits indefinitely without causing inflation, as long as they have their own central bank to monetize these deficits.
• 🫢 In the short run, the use of MMT can be effective in combating deflation and recession caused by negative supply shocks like the global pandemic.
• 🫢 However, extensive use of MMT, particularly in the face of persistent negative supply shocks and increasing protectionism, may lead to stagflation in the long run.
• 😮 The risks of stagflation include rising inflation and a prolonged period of recession, similar to the economic conditions of the 1970s.
• 🫢 The breakdown of global supply chains, increasing protectionism, and potential conflicts could exacerbate negative supply shocks and contribute to stagflation.
• 🥺 While hyperinflation is not an immediate risk, a prolonged depression coupled with extensive monetization and fiscal deficits could lead to hyperinflationary conditions.

Questions & Answers

Q: What is Modern Monetary Theory (MMT)?

MMT is an idea that argues countries with their own currency can run large budget deficits forever without causing inflation, as long as they have their own central bank to help monetize those deficits.

Q: How does MMT relate to the current economic crisis?

In response to collapsing economic activity, recessions, and deflation caused by the global pandemic, a variant of MMT involving fiscal deficits monetized through QE has gained mainstream support as a policy response.

Q: What is the difference between coordination, helicopter drop, and QE with a fiscal deficit close to zero?

When coordination is implemented, the Treasury issues bonds to finance deficits, while the central bank directly buys these bonds in the primary market. Both coordination and helicopter drop involve direct monetization of deficits, while QE with a fiscal deficit close to zero involves buying bonds from the secondary market.

Q: What are the risks associated with extensive use of MMT in the long run?

While MMT can be effective in combating stagflation and deflation in the short run, the persistent use of monetization and fiscal deficits in the face of negative supply shocks, such as the breakdown of global supply chains and increasing protectionism, may lead to stagflation in the future.

Summary & Key Takeaways

• Modern Monetary Theory (MMT) suggests that countries with their own currency and central bank can run large budget deficits indefinitely without causing significant inflation.

• During periods of economic collapse and deflation, a variant of MMT, which involves monetizing fiscal deficits through measures like quantitative easing (QE), can help avoid deep recessions.

• Mainstream economists, including former Fed Chair Ben Bernanke, are now proposing similar policies that involve coordination of monetary and fiscal policy, leading to increased monetization of deficits.