Governments have printed a lot of money in the last few years. Consider the US: from February 2020 to March 2022, M2 money supply increased 40.6% (from US$15,458bn to US$21,739bn).

This raises an interesting question: can we print money forever?

Or, rather: can we print money forever without negative results?

Intuitively, most people would probably say no. Yet Governments seem to be increasingly shifting into the opposite camp – and this is all driven by a somewhat controversial economic theory.

Introducing: Modern Monetary Theory

Modern Monetary Theory (MMT) is a macroeconomic framework that challenges the traditional approach to government finance.

It’s become increasingly popular in recent years, and claims that governments that issue their own currency (like the US), have more space to spend than previously thought – and are not limited by taxes or borrowing to fund this spending.

The four key principles of Modern Monetary Theory:

1. Currency Issuance: A sovereign government that issues its own currency can never run out of cash because it can create and issue new currency. This is different to households or businesses, which have to earn or borrow money before spending it.
2. Government Spending: Governments should prioritise full employment and public wellbeing, rather than balancing the budget. In other words, governments should spend as much as it needs to achieve this without concern over the impact on the deficit or debt. MMT argues that government spending can stimulate economic growth and create jobs.
3. Taxation: Taxes are a tool for managing inflation, rather than funding government spending. Taxes can be used to reduce public demand, which can control inflation by limiting the amount of money in circulation.
4. Inflation: Inflation (not the deficit or debt) is the true constraint on government spending. If the government spends too much without sufficient productive capacity, it experiences inflation.

Implications for government spending:

MMT has big implications for how governments behave, as it argues that the government has more fiscal space to spend than suggested by traditional economic models.

In simple terms: governments can spend more without worrying about the impact on the deficit or debt.

(When you talk like that, you can see why this theory might be popular with politicians…)

This means the government has increased freedom to fund important public programs (healthcare, education, infrastructure, etc.) without worrying about how to pay for them.

What do the critics say?

Critics say that unlimited government spending could lead to hyperinflation, which can be detrimental to the economy. They also suggest that excessive government spending can crowd out private investment, which can hinder long-term economic growth and innovation.

How could MMT impact the economy? 

This is still under debate. Fans of MMT argue that it helps to:

• Stimulate economic growth.
• Create jobs.
• Reduce inequality by providing a more robust social safety net.
• Achieve full employment.

However, critics say that it could create:

• Inflation.
• Higher interest rates.
• A decline in a currency’s value.
• Reduce incentives for private investment.
• Lead to a lack of fiscal discipline.

As with any economic theory, the true economic impact of MMT depends on how it is practically implemented. But if you’ve ever wondered how governments can ‘get away’ with printing so much cash – then hopefully this theory shines a light on the answer.