financial anxiety

Reducing Financial Anxiety with MMT

Modern Monetary Theory. Just the title probably sounds boring. And what does it have to do with financial therapy, anyway? I believe knowing just the basics of MMT can really help reduce financial anxiety. This is timely, since MMT has been in the news and received a lot of criticism because the huge spending bills in the US in the past few years have been blamed for inflation.

Modern monetary theory, essentially, is the assertion that sovereign nations that print their own currency cannot go bankrupt. This applies to most of the world’s countries, with a notable exception being the European nations that use the Euro.

If a nation is able to create all the money it will ever need to meet any debt that is held in the country’s own currency, it will not run out of money. If goods and services or obligations of the United States are priced in US dollars, the US Treasury has an unlimited supply of dollars to pay those obligations. The government can never be unable to afford the interest on its debt.

This does not mean that MMT supports governments printing currency with abandon. It does not mean that MMT believes deficits do not matter. There are negative consequences if a nation goes overboard with printing money. The major downside, the major constraint on creating currency, is inflation. It behooves any sovereign government to manage the money supply in ways to avoid impoverishing their citizens through high inflation that devalues the currency.

When the economy is strong and unemployment is low (as was the case in late 2020 and early 2021), MMT would contend that creating money is ill-advised. There is not solid agreement among economists or politicians that lays the primary responsibility of our 40-year high inflation rates at the feet of the gigantic spending bills passed during that time. Many believe those bills were great contributors to it, along with other factors like supply chain issues, raw material shortages, and low unemployment.

The timing of injecting three trillion dollars into a strong economy with low employment was not in line with MMT. Yet just a year before this we had several other acts that injected about that same amount into the economy. This did not result in high inflation, because the GDP had actually declined 13.8% and unemployment was in double digits. Creating money at that time probably helped us avoid a major depression.

This brings us to the connection between MMT and reducing financial anxiety. When you see spending bills being passed, it doesn’t mean there’s going to be hyperinflation. We can have money scripts that printing money is inflationary, is bad, and creates debt that may drive the country into bankruptcy. That is not true. Nor is creating money political; it is how the created dollars are spent that becomes political.

Being smart with creating the money and creating it at appropriate times is the way to minimize the downside, which is inflation. We have been experiencing that consequence, and the Federal Reserve is fighting inflation by raising interest rates. I hope this knowledge can relieve a little bit of anxiety when you hear or read scary headlines about Social Security going broke or the US going bankrupt. According to MMT, everything with managing a country’s currency is about timing, doing the right thing at the right time.

Check out The Financial Therapy Podcast by Rick Kahler concerning this topic.

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