How Will Modern Monetary Theory (MMT), Reserve Currency Status And Central Bank Digital Currency Impact You

The IMF has called for a new Bretton Woods, and the Fed Chairman Powell spoke on Central Bank Digital Currency. We have already embarked on the Modern Monetary Theory journey, and actions after the election could only hasten the adoption.

What Is Reserve Currency Status

It is used as a settlement currency when goods and services between various nations are exchanged.

A reserve currency is a foreign currency held in significant quantities by most world governments via their respective central banks.

How Did The U.S. Dollar Become The Reserve Currency The United States has been a lucky beneficiary of the two World Wars. It was geographically far away from the actual destruction happening to various countries in both the World Wars. The USA also entered both the Wars later in time, namely 1917 for World War 1 (1914-1920) and 1941 for World War 2 (1937-1945).

Is The Dollar Losing It’s Reserve Currency Status In the last few years, there has been more talk about the U.S. dollar losing its status as the reserve currency. In 1960, the U.S. represented about 40% of the world economy, but that has shrunk to less than a quarter. The U.S. sanctions on various countries have made them realize that they need to move away from the U.S. dollar.

While we may not agree with everything he says, there are nine decades of wisdom buried in Warren Buffett’s quotes.

What Is Modern Monetary Theory (MMT) Having the U.S. Dollar as the world’s reserve currency has significant benefits to both the U.S. government and the U.S. consumer. Foreign governments and central banks are more likely to buy U.S. government debt.

The critical points of MMT are 1. The U.S. dollar is a public monopoly. 2. The U.S. government is not like a household. The U.S. government cannot face a solvency problem. It never has to worry about finding the money to spend. 3. Deficits are not a sign of fiscal irresponsibility. We do not need to eliminate deficits.

Risks Of Modern Monetary Theory If you are wondering whether MMT causes inflation; the answer is – it depends. Traditional thinking says such high deficit spending would be fiscally irresponsible as the debt would balloon, and inflation would skyrocket.

Proponents of Modern Monetary Theory acknowledge that there is a potential limit to printing money to finance government deficits.

At some point, increased government spending facilitated by MMT could lead to increased inflation. But, countries like the United States can sustain much more significant deficits without cause for concern.

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