Some have asked what is the difference between Monetary Sovereignty (MS) and Modern Monetary Theory (MMT). Others use the terms interchangeably. Actually, while both share many features, there are differences....
The more important difference between MS and MMT is the handling of inflation. MS suggests increasing interest rates when inflation threatens. MMT holds that increasing interest rates exacerbates inflation by increasing costs, and that the correct prevention/cure for inflation is to reduce federal deficits, with higher taxes and/or with reduced federal spending.
1. Deficits have not been related to inflation for at least 40 years. Instead, inflation has been related to oil prices. Since deficits have not been the cause, reducing deficits is not the cure.
2. Reduced federal deficits lead to recessions and depressions, meaning the MMT approach leaves a poor choice between inflation and recession, or a very difficult balancing act between the two.
3. Reducing federal deficits cannot be done quickly or incrementally. The questions surrounding which taxes to raise or which spending to cut are slow, difficult, cumbersome and politically charged, as witness the repeated battles over the debt ceiling. Deficit control is ill suited to inflation fighting, which needs fast, incremental action.
4. Interest is a minor cost for most businesses, and an increase in interest rates represents a minuscule increase in business costs – not enough to affect pricing significantly.
5. Money is a commodity, the value of which is determined by supply and demand. Demand is determined by risk and reward. The reward for owning money is interest, so when interest rates increase, investment tends to flow to money (i.e. bonds, CDs, money markets), increasing the value of money. When interest rates fall, investment tends to flow to non-money (stocks, real estate), reducing the value of money. Increased money value is the prevention/cure for inflation.