Modern Monetary Theory and Mustachians

Lately, I often heard of Modern Monetary Theory and some argue that some aspects of it are already in place.

Modern Monetary Theory advocates that governments can create money to spend, and that if this creates inflation this can be fixed by raising taxes.

Let us keep aside that I am not convinced it is going to end well, and let us just assume it gains in momentum: What are then the consequences for us Mustachians? Do we need to adapt our investment method?

Are there any central banks/governments following MMT? As far as I know, it’s still a very heterodox theory, so I would assume the answer is that no government or central bank will fight inflation by raising tax, but will instead follow mainstream tools (which is rate increases afaik).

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I would say no. We’re talking of an increased likelihood of doomsday scenarios. Those should already be in our plans.

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I think if this is ever going to happen, then that will be the point where Bitcoin is going to skyrocket.

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No central bank (or government) officially has adopted a MMT policy. But yes, it absolutely is already here. It is no coincidence that the discussion about MMT flared up notably about 10 years ago, as the quantitative easing programs in reaction to the global financial crisis in 2009 had shown first signs of it. Certainly, the reactions now seen to cope with the Covid crisis can be considered in line with MMT (best example being the recently passed infrastructure bill in the US).

The big question is simply: Are the current inflationary tendencies temporary, triggered by Covid (due to disrupted supply chains and general inefficiency in the system), or are they the consequence of all that money printing of the past ten plus years?

If the latter, central banks should raise interest rates. If higher interest rates persist, governments could struggle to serve all their debt after refinancing at higher rates, and would have to rise taxation. This is directly related (at least at today’s debt level and assuming cutting services is not an option) and not an either/or option on interest rates vs taxes. The only difference MMT makes to mainstream thinking, is that it declares this mechanism not a problem, but rather an acceptable part of the deal (as long as debt was incurred to serve the public and not bail-out banks).

What do to as an investor? Keep calm and continue to invest monthly in a diversified portfolio. The only thing you can do wrong is standing on the side line uninvested, not benefiting from the asset bubble due to all that money, but still eventually being hurt by the inflation.

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