As a parent, have you ever seen one of your kids walking down the hallway with a large stick and been forced to ask, “And what are you planning on doing with that?”

You don’t ask because you’re particularly interested in the stick. You ask because that stick is a sign that something is going to happen soon. And you’re going to have to deal with the consequences.

The Growing Popularity Of Modern Monetary Theory

Well, some prominent left-leaning politicians are waving around a new stick these days: Modern Monetary Theory (MMT). The theory is quickly gaining popularity, so it is important for you to be familiar with it, regardless of your political persuasions.

MMT is popular because it allows for seemingly unlimited government spending and deficits without negative consequences. Understandable, right? Don’t we all wish that money grew on trees?

How Modern Monetary Theory Works

Well, according to MMT, money grows on printing presses. Because, well, it does. We create money by printing it.

The theory states that as long as a government prints its own money and issues debt in its own currency, it can spend and take on debt to its heart’s content without worrying about paying it back. There is no need to collect taxes to pay for the debt, you can just print more money.

This is a relief to everyone who is concerned about how our country’s growing debt burden is going to affect future generations. But, is it too good to be true? What’s the downside?

The downside is inflation. You may have learned in Economics class that the risk of printing lots of money is inflation, where the money simply isn’t worth as much anymore. That $10 that used to get you a double Western bacon cheeseburger super-sized meal will only buy you a measly little kid’s burger, and not even a drink to go with it. That’s inflation.

It’s okay for the government because they can print money. But you can’t. High inflation is usually bad for everyday people.

How Modern Monetary Theory Addresses Inflation

And MMT acknowledges that. Instead of seeing taxes and debt as a way for the government to pay for things, MMT sees them as tools to combat inflation.

Prices beginning to inflate because there is too much money in the economy?

Take some money out.

How?

By raising taxes or selling bonds. When we give money to the government by either paying taxes or buying their bonds, it takes that money out of the economic system.

MMT holds a very different perspective on debt and taxes than the traditional view. Usually, when government spending is proposed, we ask, how are we going to pay for it? We want to know what kind of debt or taxes will be required to cover the cost.

Proponents of MMT say that we should instead be asking, how will this affect inflation? We don’t have to worry about how to pay for things (just print the money!), our only real concern should be inflation.

What Does It Mean For The Federal Deficit?

You may be getting suspicious that espousing MMT could lead to greater federal budget deficits. You’re right. In fact, according to MMT, a deficit is a good thing. A $1 trillion deficit is an extra $1 trillion in the economy. As they say, the government’s deficit is the people’s surplus.

Unemployment is seen as evidence that the deficit is too small. MMT strives to find a perfect equilibrium where there are low unemployment and low inflation, regardless of debt or deficits.

What Does This Mean For You?

Why does any of this matter to you?

Well, the politicians promoting this theory are very popular, especially with young people. If you don’t think young people’s trends matter, LOL. Yes, you know what LOL means. And it’s not because you learned it from Merriam-Webster. Young people have more power than any of us old fogeys want to admit.

Now, MMT could easily fizzle out as completely as MySpace and mullets. However, it could also become the “new normal” like the internet and cell phones. Therefore, it is important for you to understand. For all we know, we could be the guinea pigs that get to test it out for the first time in the coming decades. It has yet to be proven, do you think it will work?