The Dangers Of Printing Money

Sandy McGregor, portfolio manager at Allan Gray, debunks modern monetary theory and examines if it provides a solution to economic woes.

Modern monetary theory, or MMT as it is often called, is a new term for an old idea. Its proponents argue that a state, which issues fiat money does not have to resort to taxation and borrowing to pay its bills. It can fund itself simply by printing money. While there are numerous historical examples of unfunded fiscal spending being followed by hyperinflation and economic collapse, the modern supporters of what would previously have been regarded as economic heresy, say this time it is different.

The simple truth is that central banks in the US, Europe and Japan have been applying the precepts of MMT for the past decade and in responding to the Covid-19 pandemic have abandoned any sense of traditional financial prudence.

The US Federal Reserve (the Fed) has been the most aggressive, increasing its balance sheet from $4tr to $7tr over the three months following the market meltdown in March. Most of this $3tr of new money has been used to fund an exploding federal fiscal deficit. The balance sheets of the Fed, European Central Bank and Bank of Japan have collectively increased by $6.3tr this year. MMT has arrived almost by accident. Its longer-term unintended consequences pose a grave risk to the financial stability of the global economy.

The political allure of unconstrained government spending