The most important economics lesson you will ever have

In 2016, something happened that was supposed to be impossible. It sent shockwaves through the world’s financial markets and left almost all economists at a loss to explain it.

When a government sells you a bond, it’s supposed to pay you interest for however many years, and then give you your money back. In 2016, that interest rate went negative: you had to pay the government to hold on to your money. It wasn’t supposed to ever happen, and it had economists confounded.

But that was only the latest in a growing list of things economists couldn’t explain and I was becoming more and more frustrated that, one after another, the economics principles I’d learned at school and uni were at a loss to account for what was going on. How could a country have government debt more than twice the size of its GDP and yet the currency wasn’t falling through the floor, its bond yield wasn’t sky high and investors still lined up to buy them? Why was inflation stubbornly low when unemployment was also low? And why was wealth inequality continuing to widen?

I went in search of an explanation, and found it. An economic framework that’s firmly rooted in the real world and based on the iron clad rules of accounting and logic. Unlike the economic models I studied at uni, it doesn’t cling to ridiculous assumptions to make up for the gaps between it and what actually happens.

Most importantly of all, it has completely transformed my understanding of how our economy could and should work; what could be achieved if only we weren’t held back by fundamentally flawed conventional wisdom.

The model I’m talking about is called Modern Monetary Theory, or MMT for short.

You may have already heard about it since its popularity has exploded over the past year or two, especially post the pandemic. There’s also a chance you’ve heard people bag it, typically economists and politicians whose life work is challenged by it. There is no doubt, MMT is such a radically different way to look at how an economy functions that a lot people struggle to get their head around it, and there are others where the simple logic of it helps the penny drop straight away.

I think MMT is so transformative, and its potential benefits so far reaching, that everyone needs to at least be aware of it. So I’m going to write a blog post every couple of weeks, each one looking at a different angle of MMT and its implications. I’ll do my best to keep them short and sweet. Here are a few of those radical sounding ideas that I’ll explain:

  • A government that controls its own currency, like Australia, can never run out of money
  • Government spending is not funded by taxes
  • A government never needs to borrow
  • Government debt is not a burden on future generations
  • The real constraint on government spending is inflation
  • Taxes are a tool for controlling inflation
  • A genuine plan for maintaining a zero unemployment rate

Once MMT is clear, you’ll realise the classic government excuses for not doing something – it will cost too much/we can’t afford it/it will blow out the budget – are wrong. You’ll also realise the power to address things like climate policy, infrastructure, social security, education and healthcare is enormous and virtually untapped.

Let me also be clear, MMT is politically agnostic. You may have heard it linked to progressive politics, and certainly a few of that list above are favourites for them, but its implications are just as profound for the conservative side: the ability to reduce taxes, especially company tax, and build out infrastructure to help business. What I intend to write is not about politics, but to help you appreciate what could be achieved at a time when the world needs all the help it can get.

I expect some of the posts will spark questions, and I’m happy for you to ask them: I’ll try to answer them, otherwise, if there’s a common theme, I’ll write a response.

This information is of a general nature only and nothing on this site should be taken as personal financial or investment advice, or a recommendation to buy or sell a particular product.

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