Modern Money Theory (MMT) essentially proposes an excessive and unlimited expansion of national debt in order to combat recession. Thus the economy can be re-stimulated at any time – in a Keynesian fashion – in order to avoid looming deflation and recession.
In contrast to the attitude of liberal and conservative economists, promoters of this approach see no rational reasons to limit national debt and even no necessity ever to repay it. The state as the legitimate representative of the body politic may run up unlimited debts in service of its own national economy. As “employer of last resort”, it may thus pursue an active employment policy to create full employment during recessionary times, without endangering monetary stability. The supporters of MMT also point out that the danger of inflation can be avoided because through its activities the state makes or increases its investments, which results in a sustainable backing for the increased money supply through increased GDP. Thus the balance between the quantity of money and the quantity of goods would always be maintained and prices remain stable. Additionally, it is precisely these net investments by the state that make an increase in productive capacities possible. Only when the economy is working at full production capacity is caution necessary before increasing the money supply again – then an increase in national debt is only permissible in proportion to the estimated potential for growth of the economy in question. According to MMT theory and its supporters, because the state is anyhow not obliged to pay off its debts, the resulting interest repayments are hardly a problem – because the state can naturally always go deeper into debt to pay off the interest. The resulting redistributive effects are not discussed within MMT theory. One of the best known promoters of Modern Monetary Theory is Prof. Michael Hudson, who writes a comprehensive blog on this topic.