Modern Money Theory or MMT is macroeconomic theory which forms the basis for analyzing an economy as it in reality exists. The theory is regarded as a group or set ideas, concepts or notions which define how monetary and fiscal policies should be carried out within an economy, and how effectively the policies can benefit a nation based on its unique set of resources and monetary limitations (Wray 9). It’s established as a way of doing economics, based on the incorporation of an autonomous modern day to day monetary system and the dynamics of operating a “fiat currency” economy. This means that more central government spending inserts more funds more money into the economy, and accumulates savings (Wray 76).
According to Dr. Wray's book the "Modern Money Theory”, the theory is based on three unique concepts which establishes the central or federal government to be the monopoly supplier of currency in the economy, that the elasticity and equilibrium in the economy maintained by a floating monetary exchange rate system, and finally that the legal tender unit of currencies in the economy can only be snuffed out through payment of taxes. Dr. Wray’s theory significantly lays more emphasis on the repeatedly misinterpreted concepts of “fiat-money” economy, which is categorized to consist of currencies not “backed” or “constrained” by fixed substances standards such as gold or other precious metals and stone such as silver and diamond. In its place, the currencies are only limited by total amount of outputs channeled out of the national economy (Wray 175).
The theory asserts that the current global economies with fait money system can be run or managed by ensuring the rate of inflation and deflation are balanced. This is done by making sure the prices don’t increase faster than the provided wages, and by slimming down the government spending in such as a way that both the internal and external markets are at equilibrium. The author claims that sovereign countries with their own monetary system (currencies) are only constrained by real limits, and at no time are they constrained by financial limits for the reason that there are the sole issuers of their own fiat currencies (Wray 219). This fact does not mean that such governments can spend without limits because it might lead to inflation and shift of the balance curve to increased imports rather than imports. Unlike other types of money system, the fiat system advocated by Dr. Wray's in his book “the Modern Money Theory” constrains the taxes collected from the public from being used in the government expenditures, to a certain extent the taxes collected are solely used as a type of private sector demand reduction.
Though perceived by many as the system of the future, literally MMT is the weirdest of all known economic models. This is based on the fact the theory asserts that instead of net savings and interest rates being determined by market forces they are essentially fixed by the government. This means it’s utterly impossible for the government to establish net savings in its budget unless it experiences a budget deficit. The deficits in one sector tend to be offset by surpluses in other government sectors, a mechanism which creates inconsistencies leading to accumulation of financial debts. The theory also pays no attention to the consequences of government spending on the real economy. For example, the theory deals with issues of unemployment by increasing the budget deficit and inflation by establishing a large financial plan surplus and also rotates around the notion which asserts that for any “financial asset there is an equal offsetting liability” (Wray 254).
Wray, Randall .Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. New York: Palgrave Macmillan.304 Pages. Print.