ChatGPT explains the differences between MMT (Modern Monetary Theory) and MS (Monetary Sovereignty

If you use ChatGPT and ask it, “What is the difference between Modern Monetary Theory (MMT) and Monetary Sovereignty (MS),” you might be told something like this direct quote from the AI:

Modern Monetary Theory (MMT)
Inflation Causes: MMT posits that inflation can be caused by excessive federal deficit spending, which increases aggregate demand beyond the productive capacity of the economy.
When too much money chases too few goods, prices rise, leading to inflation.

Inflation Control: MMT advocates for using fiscal tools, such as taxation and government spending adjustments, to manage demand and control inflation.
It also supports the use of monetary policy, including interest rate adjustments by the Federal Reserve, to help control inflation. By raising interest rates, the Fed can dampen borrowing and spending, reducing inflationary pressures.
Mitchell’s Monetary Sovereignty
Inflation Causes:

According to Mitchell’s concept of Monetary Sovereignty (MS), all inflations are caused by shortages of key goods and services, not merely by aggregate demand exceeding supply.
This perspective emphasizes that inflation results from supply-side constraints, such as disruptions in production, supply chain issues, or shortages of essential commodities.

Inflation Control: Mitchell’s approach argues that federal spending should be directed at alleviating these shortages to control inflation. For example, investing in infrastructure, technology, and education can increase productive capacity and address supply constraints.
It opposes the use of interest rate hikes to control inflation, arguing that increasing interest rates raises business costs (e.g., higher borrowing costs), which can exacerbate inflation rather than cure it.

Key Differences
Source of Inflation: MMT: Focuses on demand-pull inflation due to excessive spending.
Monetary Sovereignty: Emphasizes cost-push inflation due to supply shortages.

Policy Tools for Inflation:MMT: Uses both fiscal policy (taxation and spending adjustments) and monetary policy (interest rate changes) to manage inflation.
Monetary Sovereignty: Advocates for targeted federal spending to address supply shortages and improve productive capacity, rejecting interest rate hikes as counterproductive.

Implications for Economic Policy
Fiscal Policy: Both MMT and Monetary Sovereignty agree that the federal government, as a monetary sovereign, can use fiscal policy effectively to manage the economy. However, the focus differs:
MMT: Balances between managing demand and supply.
Monetary Sovereignty: Focuses more on addressing supply-side issues directly.

Monetary Policy: MMT: Supports the use of interest rate adjustments alongside fiscal measures.
Monetary Sovereignty: Criticizes interest rate hikes, suggesting they increase costs for businesses and can worsen inflation, advocating instead for supply-side interventions.

Practical Examples
Supply Shortages: During the COVID-19 pandemic, supply chain disruptions led to shortages of key goods, contributing to inflation. Mitchell’s approach would advocate for targeted investments to resolve these shortages, while MMT might consider both demand management and supply-side measures.

Interest Rate Policy: In periods of high inflation, MMT might support interest rate hikes to cool down demand, whereas Monetary Sovereignty would likely oppose such measures, focusing instead on increasing supply through strategic spending.

Conclusion
Understanding the nuanced differences between MMT and Mitchell’s Monetary Sovereignty can lead to more informed and effective economic policies.

While MMT incorporates both demand and supply considerations and supports a combination of fiscal and monetary tools, Mitchell’s Monetary Sovereignty places greater emphasis on addressing supply-side constraints and rejects interest rate hikes as a tool for controlling inflation.

Both perspectives offer valuable insights into managing modern economies, highlighting the importance of context-specific approaches to economic policy.

What is your opinion?

Rodger Malcolm Mitchell

Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell; MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell; https://www.academia.edu/

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MONETARY SOVEREIGNTY