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New Monetary Theory is Like Sleepwalking

New Monetary Theory is Like Sleepwalking 

QUESTION: Bernie Sanders was basing his whole economic proposal to just keep spending and make everything free. They seem to be teaching this in school now. This macroeconomic theory whereby a country’s spending is only constrained not by revenue in taxes but by inflation when it creates a sovereign currency. It seems too good to be true, but some economists were teaching this to my son. Would you care to comment on this theory?

JH

ANSWER: The problem with what many call “new” or “modern” monetary theory is that it is like sleepwalking. You walk, creating GDP, while you are also dreaming. It reminds me of Shakespeare:

“To die, to sleep–To sleep–perchance to dream: ay, there’s the rub, for in that sleep of death what dreams may come when we have shuffled off this mortal coil, must give us pause.”

This economic theory is the same old incantation — how to prosper with other people’s money. Rome had no national debt and no central bank. It created money to fund itself. In hard times, they used the law to confiscate the property of people as they are doing today with their civil asset forfeitures.

What is missing in this theory is the question of debt. They assume they can borrow without end and never have to account for what they have done. They fail to understand that concept and try to regulate pension funds, which requires them to obtain government debt that they never pay off.

Yes, you can just create money to fund the government and it is confined by inflation. That is a true statement if taken by itself. However, you cannot then borrow with no intention of paying down the debt because the accumulative interest payments will end up representing 100% of the debt. This theory fails for it ignores dealing with the debt.

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