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‘Verdict is in’ on modern monetary theory, strategist says

Tick ​​off a loss for modern monetary theorists amid rising inflation, said Jay Hatfield, founder and CEO of InfraCap.

Modern monetary theory (MMT) is a macroeconomic lens that dictates that monetary sovereign countries such as the US are unaffected by financial constraints as long as they control their currencies. With roots dating back to the early 20th century, MMT was first popularized in its modern form by Warren Mosler, an American mutual fund manager.

Under MMT, inflation risk is considered minimal, as governments that fully control their fiat currencies are believed to be able to control price levels, provided they can meet consumer demand.

In recent months, inflation has skyrocketed to a 40-year high, with the latest consumer price index report showing an annual price increase of nearly 8%.

WASHINGTON DC, USA – MARCH 21: Jerome Powell, chairman of the United States Federal Reserve, speaks at the National Association of Business Economics (NABE) economic policy conference in Washington, DC, United States on March 21, 2022. (Photo by Yasin Ozturk /Anadolu Agency via Getty Images)

“The Fed’s policy… has been extremely erratic, dating back to the time Powell took over and nearly caused a recession in 2018,” John Kicklighter, chief strategist at DailyFX, told Yahoo Finance Live. “But the 82% increase in the monetary base was an experiment to see if we could effectively get away with modern monetary theory. And now the verdict is in. That is not possible.’

The money supply has been rising steadily since the early 21st century, but growth accelerated amid the $2.3 trillion and $1.9 trillion stimulus bills passed by President Trump and President Biden, respectively. The Fed increased M2’s monetary base from just over $9 trillion in April 2011, to over $15 trillion in February 2020, to over $21.8 trillion in February 2022, two years after the start of the coronavirus pandemic. The M2 base consists of both money in circulation and short-term term deposits.

†[Increasing the monetary base has created] near double digit inflation, if you mark rents to market or housing to market,” Hatfield added. “And so obviously they have a problem. The only problem is how much patience [the Fed will] have. We are optimistic that they will have that patience.”

Story continues

Hatfield is part of a camp of economists and economic strategists who view the ongoing struggle in the country as caused in part by MMT’s intrusion into mainstream Federal Reserve policies in recent years. The impact on economic theory has long labeled high inflation and emerging deficits as weights on economic well-being.

SAN FRANCISCO, CALIFORNI – MARCH 31: Shoppers shop while walking through the Union Square shopping district on March 31, 2022 in San Francisco, California. Inflation is taking its toll on the economy, according to a report from the Commerce Department, with consumer spending rising a weak 0.2 percent in February, compared to a 2.7 percent increase in January. (Photo by Justin Sullivan/Getty Images)

Still, a growing number of economists support MMT and view its recent historical record as evidence of its success.

When answering the question “has MMT failed?”, “the answer is an unequivocal no,” said Stephanie Kelton, a professor of economics and public policy at Stony Brook University and one of the leading experts on modern monetary theory.

“MMT provides a descriptive framework — a lens — to evaluate fiscal and monetary policy,” she wrote on her website in January. The specific policies taken by certain administrations are made in a framework that does not consider deficits as important as was common even a few years ago.

“The point is, you can’t blame MMT for fueling inflation, any more than you can blame an optometrist if her patient goes off the road while driving without wearing their prescription lenses,” she wrote. . “MMT does not tell us that the world is an open road, free from danger or the need for caution. It doesn’t reject fiscal responsibility, it redefines it, keeping our eyes focused on the real limits on spending.”

Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.

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