Modern monetary theory (MMT) has been a hot topic in recent months. Central banks across the industrialised world have struggled to hit inflation targets. If Governments could just print money to spend, then the resulting economic growth could, in theory, push inflation higher. The ‘systemic’ threat posed by the Zero Lower Bound would then diminish.
Nevertheless, there are clear risks. There is an inherent discipline imposed upon Governments when they can only borrow by issuing bonds to the public. If a government appears to be wasting money, private sector credit spreads may not come down as with conventional QE. They may rise, as the policy (MMT) appears unsustainable.
The only true route to higher standards of living lies with increased investment and specifically higher productivity. Spending money simply to reflate, for example, by increasing spending on public sector wages, or benefits, does not in the long run raise standards of living.
Indeed, today’s economy enjoys a classic Keynes equilibrium, where investment is rising (if we take the wider, proper measure which includes intellectual property products), jobs are being created, and profit margins remain strong. The latter helps fund R&D, an important driver of productivity. This is ultimately a far more effective route to prosperity.
