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Modern Monetary Theory - How it Could Answer All Of Our Economic Problems

Apr 09, 2020
Let's say you go to your local bank and talk to the manager about getting a housing line. You have a good job, a 20% down payment, and you've always been very responsible with your credit card and car loan, so you get approved to borrow. Four hundred thousand dollars to buy that new house is a good invitation for you and for most people this is where they would end their inquiries at the bank, they would get their four hundred thousand dollars to pay off their new property and they would be very happy, little gummies, but What really happened here, a lot of people have a lot of assumptions about where that money really came from and most of them are probably not true.
modern monetary theory   how it could answer all of our economic problems
If you really open the hood of the

modern

monetary

system, you will find something far removed from what most people would expect, and even something that is quite different from what existed just 100 years ago, cash is something very important to a society because It's the opposite asset of almost every transaction we make: we buy houses, cars, and avocado toast with cash. They pay us in cash and we pay our taxes in cash. Modern

monetary

theory

is a highly controversial macro

economic

idea that goes a long way toward explaining how money works in a

modern

economy and then, by extension, how cash, fiscal spending, and monetary policy can be used.
modern monetary theory   how it could answer all of our economic problems

More Interesting Facts About,

modern monetary theory how it could answer all of our economic problems...

To benefit the common good of society, some people go so far as to say that the proper utilization of modern monetary

theory

will mean that

economic

slowdowns or recessions like the one we are probably going through right now can be eliminated, and if so, it is not. It's enough for modern monetary theory to make sense of how huge public debt like the trillions of dollars owed by the US government right now isn't necessarily a big deal, but of course, as with any new economic theory, There are critics with genuine criticisms, but In the meantime, you can address them later or get everything you think you know about money and prepare to learn it all again.
modern monetary theory   how it could answer all of our economic problems
Let's go back to that example: the person requesting a residential line for a second, a very limited understanding of how this transaction would occur. The work would be to assume that the bank simply lends money that other people deposit and therefore for every $400,000 line they write, they would have needed someone else to have deposited $400,000 and, you know, a long, long time ago, this would have really been how things worked when the world used gold as currency, banks

could

only really lend what they really had, whether it was their own personal wealth or they would lend it on behalf of people who trusted them to make credit decisions responsible. and they would share the profits, I suppose in many ways, similar to how you receive interest today for leaving your money in a high-interest savings account.
modern monetary theory   how it could answer all of our economic problems
It seems very simple, but of course, these days that simplicity is not true, this type of banking was extremely limited. and it was really only reserved for governments and nobility and we just don't have the same limitations today. There is a good chance that most of you watching this video today have never even seen a gold coin, much less used it to exchange for something. Since the times of ancient civilizations, we have gone from transacting in gold on pieces of paper that were transferable to gold, to just regular pieces of paper and today most of our transactions are done with digits on a computer screen and that's exactly what happens to your money.
Today, when you go out to borrow four hundred thousand dollars, the bank basically opens a very secure Excel spreadsheet and types in four hundred thousand dollars and voila, you have that money in an account that you can use to buy your house at the bank. You can't do this infinitely in most countries, they still have to have some genuine cash on hand to back this imaginary money, but still a vast majority of current monetary credit is not printed; literally just written in credit form, this is such an abstract concept that many people don't understand its crude simplicity, so I think it's often easier to explain it like this, let's say you're playing a video game like World of Warcraft or runescape war or my favorite, leave it online.
Of these games have some type of currency, whether it's gold, credits or esque, it doesn't matter, it works effectively just like the cash we know and love in our everyday lives, now the developers of this game effectively have the power to log in. the backend of the server and write whatever cipher they want to the server memory related to their wallet, if they wanted to write a trillion gold to their wallet they

could

be really limited by how long they want to stay there. pressing zeros, this sounds simple enough, but the exact same is true for real money, but in the same way that a game developer would probably get fired and also completely ruin their game if they just maxed out people's wallets with the same type of rule.
Applied to banks today things like reserve requirements and responsible lending standards mean that there is an effective limit on the bank's money generation, but the process is still no different now, once this is understood, The next logical question is what makes money worth something and whether it can simply be created out of nothing. Now the

answer

to this is complicated. People often incorrectly assume that currency actually has no value, it is just what we decide it is worth. okay and a lot of smart people even point out that it's there in the name fear in fiat currency is Latin for "let it happen" or basically because I said so, this money is worth something because I said so and a lot of people use this as proof that these rectangles or paper digits in my bank account really aren't worth it. everything, but the truth is that money has value just like any other type of asset and I really want to delve into a lot of the nonsense that people say about money in the modern world, a common anecdote that you may have heard. is that if you were trapped on a desert island with a briefcase full of ten million dollars in cash, this money would have no value to you and while this is true, it does nothing to demonstrate that money has no value of the Likewise if you were stuck on a desert island with a $10,000 gaming computer or a first edition of Spider-Man comics and Bitcoin or a Rolex, they would also be equally worthless to you, but that doesn't mean they're worthless, even If you think the other way around, a desalination station, a barbecue lighter, and a bow and arrow would be very useful on that desert island, but would be completely useless to you in the middle of New York City, well, for now, at least just because Something not being universally useful in every situation doesn't mean it has no value, so I don't ever want to hear any of you use that terrible anecdote when talking about cash because the truth is, of course cash has utility value. in the sense that it facilitates trade on an individual level nationally and globally, it can be used as a store of wealth even if there are probably better options available and most importantly it is the only way you can pay your taxes so Remember this for later, okay, so money is really worth something.
That may be news to some, but it's not the big reveal here, what is true is the fact that this thing of value can be created from nothing, just as we saw when making this video, we are in the middle of a financial crisis. They are closing around the world and people are turning to governments to increasingly pick up the slack for a failing economy. Many governments around the world today have quickly announced huge stimulus packages amounting to hundreds of billions or trillions of dollars and this has involved The government is taking on a lot of debt, as you and I know, it's probably pretty bad if you have a debt of hundreds of thousands of dollars and you do not have a good income to pay this debt.
Well, this may start to have a serious impact. your quality of life you may have to give up things like going out with friends or going on vacation or whatever and this is all because you are a currency user, you work or run a business to make money and then you spend it. money into goods or services to maintain your quality of life money is more or less a means to an end as it goes in and out of your bank account, some governments like the US, although a little different, are the source of this money.
They are not users of money, they are creators of money if they want to build a new school or a road or whatever, they just call the central bank and tell them to turn on the money printers and you know, there you have cash to build that new school and the other distinction here is that this is real currency, not credit like banks can create. I'll leave a link in the video description for a lecture on the difference between those two, but for the sake of this video, they're pretty much the same. Likewise, everything is just money now, so the theory goes, because of this almost unlimited ability to create money, there really is no reason why the government couldn't hypothetically finance anything, and to some extent this is almost true. , we have policies like arbitrary debt ceilings and public opinion that dictates that debt is bad, surplus is good and this means that many times governments cannot fully flex the power of their currency to really bring maximum potential prosperity to their economy , but modern monetary theory dictates that if policymakers really understood their power to throw cash at any problem they encounter, they could create a much more prosperous economy, sounds pretty good, right, unlimited cash flow for unlimited prosperity, well Of course, there are limitations and it is just as important to understand them as this whole weird and wonderful world of money creation.
The first and most obvious floor of this theory is that if countries can create something from nothing, why would anyone want to keep this money that has no inherent scarcity? Why would anyone accept US dollars instead of these cheap dollars that I've written down here in my little Excel spreadsheet, ultimately they both equal the same thing, digits on a screen and look, there's only a billion of these dollars Explained from economics, if anything they should be more valuable, well of course this is not the case, partly because US dollars are much more. universally recognized, but most important of all is that if you are a citizen of the United States, you have to pay your taxes in US dollars, you cannot pay federal taxes in stocks, bitcoins, chickens or even Australian dollars.
The good old freedom dollars are your only option, so if you don't want to go to prison you need to get some of these dollars and this creates a demand for dollars even when all other commodities are effectively ignored, so Just as governments tax people, the US government doesn't need your dollars to fund schools or roads or military or public welfare, if anything it's the other way around: the government creates this money to give us the currency that then we need to collect to pay our taxes almost anywhere. year they are likely to spend more money than they tax and this is fine, remember they are the source of this currency so it is something to keep in mind but not necessarily a problem now the next logical question is whether governments like the US?
The US can just print so why do they need to issue government bonds or go into debt or pay interest? This is another fair question: the reason all the extra money is created with some kind of underlying debt, whether it's Treasury bills or a mortgage or whatever, is due in part to the relationship between the federal government and the Reserve Bank, but it is mainly because the government wants to create demand for this extra currency. If you can earn one percent interest by holding US dollars, it actually becomes an attractive asset to have on hand and quite the opposite.
It is also true that if you need to pay five percent interest on your home loan, you need US dollars to pay it and this encourages natural demand for this currency. Now the next problem, of course, is inflation. We have seen nations like the Republic of Venezuela. o Zimbabwe printed more and more money and all that caused inflation during the wars and this is really the big limiting factor here, if governments just go crazy and print all the money they want, the supply of that money will increase enormously and therefore Therefore, the real value of money will decrease, you will very quickly reach a point where the feedback loop of printing money to keep up with inflation will cause more inflation and then your money will actually become worthless, just as we saw in all these other countries.
To make matters worse, the money that banks createPrivate banks vastly outweigh the currency created by the world's federal governments, meaning they are not necessarily the only ones who hold the key to the kingdom over the money supply and control of supply and demand. In reality, money is makes it much more difficult to control the supply of cash in the economy and by extension inflation is the primary function of a central bank and it has to be very careful with this, to put it simply imagine an economy is a dam and the water . in the dam there was cash in the economy there are things like government spending that fill this dam and there are things like taxes that release the cash out of the economic dam the role of a central bank is to make sure that the dam does not overflow of cash causing hyperinflation and also not running out of currency completely for those of you who play MMOs like World of Warcraft and all the other examples I gave before you may know this as a currency faucet and a currency sink again .
It's true for these virtual economies it's more or less true for the real ones, so yeah, there you go, it's still important, it's one of the big reasons we book our crazy spending four times over, like saying well, I don't know in this moment.The bottom line of modern monetary theory is that, unfortunately, some countries cannot learn much from its teachings. Almost all countries in Europe, for example, use the euro, which means that the sovereign nations that make up the European Union are not free to carry out their own monetary policy in any capacity, this is what makes things like the Greek debt crisis is so bad, if this debt were still denominated in Greek drachmas, the Greek government could simply print more money to keep up with these payments.
Italy, for example, had a debt-to-GDP ratio of around 120 percent in the early 90s and no one really cared because the debt was indicated on mirrors, so it was not a problem for them to keep up these payments for the same reason than US government debts in Japan today, and it's actually not just a problem. Household and corporate debt is, but if you're a nation that doesn't use its own currency, sorry, all this fun stuff doesn't really apply to you, the other people that get overlooked are countries with currencies a both incomplete, like the Democratic Republic. of the Congo, for example, would like to raise money from the international community to build a new port, it would need to go into debt, but almost no rational financial institution is going to accept payments or, except for three payments in Congolese francs, the currency is too volatile and not widely accepted and that means that normally these debts are denominated in some type of reserve currency, most of the time in US dollars, which is not good at all for the Democratic Republic of the Congo, which is a very, very poor country that probably I could use all the help, but it's great for the United States, the richest and most powerful economy in the world, because it suddenly has even more demand for its currency and its national debt is a little less significant, so I guess the theory Modern currency is something It's so simple yet so complex at the same time that it really involves a divorce in your mind from how you personally interact with money to ultimately understand how cash works on an economy-wide level.
Many supporters of the theory promote it as a cure. all to any economic ailment and you know what, with the money printers working the way they are now, we may finally have a chance to find out if they are right, but it's not really a recipe for fixing a broken economy as much as it is. just an idea of ​​how modern economies work and mechanics can't fix a car if they don't know what an intake manifold is, a doctor can't perform surgery if they don't know the difference between a fibula and a defibrillator and governments can't They will not effectively manage an economy if they do not understand how cash works in the modern world.
Will you personally ever have the opportunity to act on the principles of modern monetary theory? Probably not, unless you want to become a world leader or on the board of a central bank. member, but it is still important to know so that you can be a good citizen who understands that money has value and that the government surplus is not the be all and end all and, perhaps most importantly, you have no right to complain about money of your taxes. I'll fund anything Karen, if you've been completely cut off from what currency actually means, consider giving me something like these lovely people on Patreon did, beyond that a like and subscription would go a long way.
I'll leave a link in the video description for a t-score server, so feel free to head over to it to participate in our Q&A session that will take place after this video and also to enjoy other peer-to-peer discussions economics nerds, thanks guys, goodbye.

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