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I am looking around at a lot of the central banks around the world (primarily ECB, Fed, and BOJ) and they all seem to be simply printing their way out of any issues with their economies. As far as I understand, this is the central component to MMT. Is this sustainable without collapsing currency? I can't understand how massive supply increase doesn't led to reduction of purchasing power of a currency.

Additionally, will the low-rate environment remain permanent? I can't imagine the Fed, for example, raising rates substantially as 1. It would tank most assets and 2. It would make the already incredibly unwieldy sovereign debt that much harder to manage. It would seem we are locked into an endless money printing path that essentially can't be stopped without immense pain. Am I right in this understanding?

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    $\begingroup$ MMT is not something you can do. MMT is a theory that describes the way the world already is and always has been and always will be (unless we get to post-scarcity). It's like asking: is Newtonian gravity sustainable? $\endgroup$ – user253751 May 3 at 17:41
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    $\begingroup$ "I am looking at the planets and they seem to be orbiting around the sun. As far as I understand, this is the central component to Kepler's theory. Is this sustainable without collapsing into the sun?" I am trying to illustrate that the map is not the territory i.e. the theory is not the reality and reality is the same no matter which theory you use to explain it. $\endgroup$ – user253751 May 3 at 17:43
  • $\begingroup$ But you do have an interesting question about whether the world is going to be stuck in the low-interest money-printing path. That just isn't called "MMT". $\endgroup$ – user253751 May 3 at 17:47
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MMT is propounding to be a theory. A theory can't be sustainable or unsustainable. However, I think you meant to ask if the policy proposals of MMT-ers would be sustainable so I will answer assuming that is your question.

Now MMT is not a proper scientific economic theory* as it is not rigorously defined (Mankiw 2020), so it is not actually clear what MMT policy implications are but many MMTers generally claim that central bank should monetarily finance government spending, and that generally any amount of real spending can be funded by monetary expansion. Moreover they generally claim that countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt.

These claims of MMT are rejected by virtually all professional economists. For example, recently IGM forum made poll among top US policy economists to gauge how many economists believe in the above mentioned propositions of MMT, and the results shows that none of the top economists polled (all economists in the poll are a representative sample of Ivy league economists) did agree with any of the stated MMT propositions (see here). But then even MMT proponents generally do not agree on what MMT is. I seen people claiming it is a monetary theory and others claiming it is whole new economic paradigm. Moreover, the MMT is generally criticized for its policy prescriptions and even generally as a theory itself in the academic literature (e.g. see Mankiw 2020 or Palley 2014)). Furthermore, you should note that I do not know of any central banker at Fed or elsewhere that would be supporter/adherent to MMT (I suppose some might exist but nobody who is publicly known).

Additionally, will the low-rate environment remain permanent?

This is a good question without a good answer. It might be. Summers (see Summers 2014 in Teulings and Baldwin (2014) or Summers 2015) argues that we will live in low rate environment due to secular stagnation and overabundance of savings (indeed Fed is forced to keep interest rates low due to enormous supply of savings). The secular stagnation hypothesis has its proponents but it is far from being completely accepted by profession. To an extent we really live in secular stagnation and there is permanent over-supply of saving due to aging populations, slow technological growth and so on it might be permanent. However, it might as well be just transitory phenomenon caused by the sheer magnitude of Great Recession (indeed before pandemic hit Fed and other central banks were already planning to hike the interest rates but then pandemic hit - see this Dec. 2018 news article).

I can't imagine the Fed, for example, raising rates substantially as 1. It would tank most assets and 2. It would make the already incredibly unwieldy sovereign debt that much harder to manage. It would seem we are locked into an endless money printing path that essentially can't be stopped without immense pain. Am I right in this understanding?

Fed can do it in small steps in order to avoid popping potential bubbles. In fact that was the plan before covid-19 hit, to slowly rise interest rates instead of dramatically hiking them. See this NY times article on what Fed officials were claiming they planned to do, from before covid hit, here.


* from the mainstream perspective on demarcation of science where theories have to be rigorously defined and testable to be considered scientific, of course there might be some alternative interpretations of what science is see discussions in Reiss Philosophy of Economics

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  • $\begingroup$ I wouldn't say that MMT theorists claim that any amount of spending can be funded, but rather, they claim that the amount of spending which can be funded is higher than the amount which politicians are currently willing to fund. $\endgroup$ – user253751 May 4 at 19:28
  • $\begingroup$ Also, I claim that they claim that government deficit is the wrong thing to analyze. In other words: if you are creating the correct amount of money via government spending, and deleting the correct amount via taxation, but this produces a stupid-looking deficit figure, you should not change the creation or deletion figures just to make the deficit figure match what you think it should be, because those are the important figures and the deficit is not. $\endgroup$ – user253751 May 4 at 19:29
  • $\begingroup$ It doesn't mean you get a pass to do any amount of creation-via-spending or deletion-via-taxation that you want. $\endgroup$ – user253751 May 4 at 19:33
  • $\begingroup$ By contrast, traditional economists would say that if the government is running a high deficit, you must reduce spending or increase taxation to keep the deficit down. $\endgroup$ – user253751 May 4 at 19:34
  • $\begingroup$ @user253751 those claims are reported in the sources I cited as stated in the answer, there is no unified MMT so maybe somewhere else you heard different claims but these ones are reported and referenced above $\endgroup$ – 1muflon1 May 4 at 19:34
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First of all, the headline of this post "Is modern monetary theory sustainable?" is really misleading and shows how common it is to misunderstand what MMT is hence it's important to describe here what MMT is. Therefore i have edited the post to remove references to MMT.

"they all seem to be simply printing their way out of any issues with their economies. Is this sustainable without collapsing currency? I can't understand how massive supply increase doesn't led to reduction of purchasing power of a currency."

Some of the insights of MMT show that the act of printing money has no affect. What matters is what the money is spent on. If you just print money and leave it in bank accounts, it will have no affect.
If the government is just buying its own government bonds, as happened in QE, then clearly thats not going to have any direct impact on the Real economy. Both Money and Treasuries are IOUs of the government so its just exchanging one iou for another.

Some key MMT references: Books / Papers from the Levy Institute of Randall Wray , Stephanie Kelton, Scott Fullwiler Papers and blog writings and books of Bill Mitchell Writings of warren mosler

Books

https://www.amazon.com/Modern-Money-Theory-Macroeconomics-Sovereign/dp/0230368891

http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

https://www.amazon.com/Deficit-Myth-Monetary-Peoples-Economy-ebook/dp/B07RM72BT7

https://www.amazon.com/Macroeconomics-William-Mitchell/dp/1137610662

Blogs

http://bilbo.economicoutlook.net/blog/

http://neweconomicperspectives.org/

Papers http://www.levyinstitute.org/ (thankfully with no paywall, very economical! whats the use of papers that only the ivory towers people have access to :) )

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