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Modern Monetary Theory and the Gold Market

After the great recession threatened to collapse the global economy, contemporaneous economic theories were scrutinized greatly and deemed unfit. As a result, various new theories emerged that aimed to tackle economic backsets in more efficient ways that would prevent history from repeating itself. Modern Monetary Theory (MMT) is one of them.

According to Investopedia, Modern Monetary Theory is defined to be a “heterodox macroeconomic framework that says monetarily sovereign countries like U.S., U.K., Japan, and Canada, which spend, tax, and borrow in a flat currency they fully control, are not operationally constrained by revenues when it comes to federal government spending”. In other words, governments cannot go bankrupt if they issue debts in their currency. This is because more money can be printed to settle their burdens. Consequently, it takes away all meaning of budget deficits and renders tax revenues needless- the implication being that all expenditures can be taken care of when the government has a monopoly over printing its currency.

Nevertheless, increased money supply through MMT should not be confused for capital or capital economic gain. Banknotes and bank deposits are simply mediums of exchange. These debt instruments value is determined by their purchasing power i.e., the number of goods and services that can be bought using that currency. The government can create money ceaselessly but the supply of goods and services that actually increases the standard of living cannot be handled in the same way.

Many question the effect of the introduction of the modern monetary theory on the gold market. As gold is a precious metal, known to be a great store of value that previously served as the basis of money but is now employed to serve as a hedge against inflation, it is deemed to receive top benefits from the implementation of MMT. Evidence from the stagflationary 1970s and speedy debt pile up during the 2000s and 2010s only supports the aforementioned statement.

Alongside this, this yellow metal is globally seen as a safe haven asset whereby although it is categorized as a commodity, it is predicted to retain or even increase in value during times of economic downturns. Increased money supply causes increased inflation which in turn causes increased investment in precious metals like gold, which then go up in value. In the 1970s, the price of gold increased with inflation.

This was further reiterated by Goldman Sachs who stated that because Modern Monetary Theory calls for a looser fiscal policy, even the idea of it encourages people to begin investing in gold in fear of increased inflation as protection. Currency debasement through MMT is an ideal setting for the gold market.

Modern Monetary Theory has mixed support, however, with the concept constantly being suggested as a solution to sluggish economies, it is worth monitoring.