I know a lot of people dunk on Modern Monetary Theory (#MMT), but it’s actually quite good and illuminating (as opposed to its application).

The theory came about in the early 90s when Warren Mosler was trying to understand central bank monetary operations, during a time when fully fiat currencies were still relatively new (since 1971). He discovered that no one really understood what was going on, much less the implications.

Mosler was looking to purchase Italian government bonds that had a higher interest rate yield than what the Italian loan rate was (pre-Euro, lira). It was about a 2% spread, reflecting the fear that the Italian Government would default on its bonds. So he decided to pay a visit to discuss the issue with the Italian Treasury Secretary. He asked the question of the Secretary, what if you can’t pay for the bonds? He Treasurer said, ‘we just credit the account, that’s it’. They both realized that if you issue your own currency, there is zero risk of default, because you just issue more. So the market, fearing a default put a 2% risk premium on the bonds. Mosler borrowed what he could from the banks, bought all the bonds, and made 100s of millions over the years on the 2% risk premium that was no risk at all.

The moral of the story - if you are a currency issuer (like the US) you have lots of power and are immune to certain risks. It’s not unlimited though, I’ll explain that in a subsequent post.

#MMT