The following article is a very brief overview into the highly debated economic theory called Modern Monetary Theory. A contentious and current-events topic, we hope to give you a peek into what is being discussed around the world – and more specifically how it relates to you in the Trinbagonian context.
This article is a 16 minute read.
Have your attempts to purchase foreign exchange from our local financial institutions been met with consistent ‘we don’t have’, but you think it should be as simple as the government printing more Trinidad & Tobago dollars (TTD) and exchanging them for foreign dollars?
Do you think you are entitled to your proportional share of the country’s monetary pie?
Though you may not know it, your thoughts are aligned with the economic concept of Modern Monetary Theory (MMT).
Before we dive in, please note that MMT is a theory and is not actively or publicly practiced by any country.
Modern Monetary Theory is a macroeconomic framework that suggests any monetarily sovereign country, through their Central Bank, can adjust the money supply to manage inflation and economic activity without consequence. The premise of this model is if I can print what I tax, spend and borrow, I can, in theory, never be in debt.
Monetarily Sovereign is described as the power of the state to exercise legal control over its currency having exclusive authority to designate the legal tender forms of payment and control the issuance and retirement of said legal tender. For example, the United States issues the USD, the United Kingdom issues the Pound/ Sterling and Trinidad & Tobago issues the TTD. Nineteen (19) of the twenty-seven (27) Eurozone countries like France, Finland, Germany and Greece are not monetarily sovereign as they all adopt the Euro as their main form of legal tender.
A floating exchange rate is a regime where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies The Euro and United States Dollar are examples of currencies with floating exchange rates. In April 1993 Trinidad & Tobago adopted a Floating Exchange rate regime but it is under a managed float foreign exchange system in which the Central Bank of Trinidad and Tobago (CBTT) intervenes in markets to prevent significant spikes in inflation and other economic volatilities.
To implement MMT, monetarily sovereign countries like the United States of America, the United Kingdom, Japan and Canada will have to spend, tax and borrow in fiat currencies that they issue. Though most economies are monetarily sovereign, they are not all equal in ascribed value. A double coincidence of wants is an economic phenomenon where two parties each hold an item that the other wants. Using our earlier example, let’s say the USD represents Julie Mangoes (the best (?) mango) and the TTD represents Mango Vere (the ‘meh’ mango). You would much rather have an abundance of Julie as they are more valuable relative to the Mangoes Vere. Ideally, the perceived value is favored more to one item leaving the other less valuable.
The TTD is not traded as rapidly and internationally as other currencies, rendering its comparative value on foreign exchange markets notably low. If the CBTT was to increase the money supply, it could only increase TTD and not foreign currencies. Consequently, all business transactions conducted will only be serviceable with TTD. Local business owners cannot go directly to Foreign Financial Markets to purchase goods and services, financial instruments like Bonds, Treasuries or ETFs with a non-international sovereign currency.
The CBTT Economic Bulletin for January 2022 shows the Adjusted General Government Debt to GDP ratio in 2021 at 83.3%, a provisional increase, of which Central Government External Debt is at USD 4.729 billion and Internal Debt at TTD 77.68 billion (USD11.4 billion equivalent), or 70% of the total debt in issuance.
Using the conditions for the proper application of MMT, T&T doesn’t sufficiently meet two of the conditions: a fully floating currency and most of its debt being in domestic currency.
So why can’t we ask the major sovereign currency countries to print more and open the supply to foreign countries like T&T? Well to some extent they do. The USA, as the world’s major currency, issues sufficient currency to facilitate international trade outside its borders, particularly for oil. Occasionally the US Federal Reserve has to arrange swap lines with other Central Banks to facilitate international liquidity in times of global financial stress like in 2008.
The underlying question remains, what of value are we exchanging for these currencies?
According to the Central Bank of Trinidad & Tobago (CBTT), 86% (US$ 8.85 billion) of 2018 T&T Export Earnings were from energy sector exports, the highest level of export concentration in this industry since 2011. This shows that instead of becoming more diversified, our economy has become more energy dependent for earning USD. This suggests that any extended obstruction to energy production or exporter pull-out would leave us in desperate straits. Without conscious movement to become a diversified economy, we continue to solder the shackles of a finite non-renewable commodity to our feet.
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Inflation is defined as the general progressive increase in prices of goods and services over time in an economy. When the general price level rises, each unit of currency buys fewer goods and services, thus, inflation corresponds to a reduction in the purchasing power of money. Fiat currencies now function as a gauge of consumer confidence in the government that backs it.
Brazil in the past and more recently Zimbabwe, experienced hyperinflation – where prices of goods and services rose uncontrollably over a defined time period; Zimbabwe recorded the second highest incidence of hyperinflation in history at an approximate 98% daily inflation rate! The cause of this was due to numerous economic shocks and the government’s response was to print more money to help stimulate growth. Amidst political corruption and significant declines in economic output and exports, hyperinflation spun out of control.
These countries are not the only to have experienced the effect of money printing and inflation; in fact, the reason why MMT is a current topic is because of many countries’ responses to the economic whiplash caused by the 2020 Coronavirus pandemic. These include the fiscal policies put in place by the UK and US governments – which are being argued as the reason for the inflation woes being experienced in both countries right now.
In the UK, the Bank of England printed around £500 billion during the pandemic, and called it ‘quantitative easing.’ In May 2022, former governor of the Bank of England, Lord Mervyn King, stated, “Governments stepped in and put in a lot of money for furlough schemes or raising unemployment benefits. That was very sensible… The problem was that central banks also printed a great deal of money and that wasn’t needed…it put a lot of money into the system.”
In economics, the classical theory of inflation links a sustained price inflation to an excessive increase in the amount of money in circulation, aka the more money you suddenly put into the system, the higher inflation will rise. In the US, the Federal Reserve printed US$4.8 trillion during the pandemic for their stimulus packages and they are now being targeted as to being a major contributor to the inflation woes being experienced across the US now.
Interest rates become largely irrelevant under MMT as the supply of money would outweigh the value of money. Imagine you are the owner of the sole avocado tree, which bears only once a year. The economic value and return of owing the tree increase over time since it is a rare commodity and who wouldn’t want your avocados!? If every local farmer started planting avocado trees, the market in time, will become over-supplied and the rarity and value of avocados would decrease – supply outweighs demand.
Governments may issue Bonds, Treasuries and Taxes, under MMT, to function as Contractionary or Expansionary Monetary Policy tools to control the supply of money in the economy, as they can print money as needed or withdraw money to sterilize and reduce the money in circulation.
However, persuading investors to find value in an economy where there is no true demand for their products bears no long-term benefit.
The amount of money a government can create is limited by the spare productivity capacity of the economy. Otherwise, the amount of goods in production remains the same and is only met by inflation to balance supply and demand.
MMT detractors claim the application of this theory can only thrive in struggling economies. It cannot do well in a thriving economy, suggesting it encourages tunnel vision only on its economy or currency. It doesn’t leave much room or provide much guidance for how international politics would thus impact the world economy. If the USA adopted MMT and over time, the international economy stopped relying on the USD as a main form of legal tender, the USD will trend to being worthless.
Currently, T&T’s lion share of foreign income comes from the energy sector and the need for diversification is about as strong as our love of long weekends. We need to not only reduce our dependence on foreign currencies but consciously increase and diversify our non-energy sectors to increase our international financial strength. Through each economic cycle over many years, repetitive moral suasion proposals to “buy local” are not enough given our small size and the need for imported content in most local manufacturing. This in itself is not a fatal flaw as most manufacturing across the world requires some foreign inputs but the local value added must be significant enough to make monetary sense as it would otherwise consume the money supply via foreign money outflows putting devaluation pressure on the local currency.
Considering the above, we ask the questions, would MMT benefit Trinidad & Tobago and if yes, to what extent? How will we over-time reduce our import bills? Having transitioned from King Cocoa to King Sugar, what is the next big money maker after Oil and latterly Gas and Petrochemical production for T&T? Are we willing to risk our managed Foreign exchange rates to reduce our TTD National Debt? The world’s perceived value of the TTD will be based on our ability to bring value to the global economy and not what we alone think we’re worth.
MMT definitely has its place in the world of economics and we ought not discount its benefits but, are we truly ready for all its possibilities given our small, open, historically monoculture economy?
In concluding, we note the following:
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