the MMT FAQ

Part I

 

THE ESSENTIALS

 

Q. What is this?

 

A. The MMT FAQ is a gentle and concise introduction to MMT for those with no background in economics, finance, or accounting.

 

 

Q. What is MMT?

 

A. Modern Monetary Theory (MMT) is a lens for viewing macroeconomics – i.e. the interrelationship between the players in an economy: the private sector -- composed primarily of industry, households and financial institutions,

the public sector -- the national government and the central bank, and other players e.g. state and local governments, trading partners, et al. MMT also describes money itself – what it is and where it comes from.
 

MMT attempts to explain real world economics, while suggesting there is widespread ignorance, misunderstanding, and misinformation on the subject, with much of the confusion stemming from gold-standard era (pre-1971 in the US) theory, which does not apply to “modern money” – the fiat-based currency systems found in most of the world today.



Q. What is the first thing anyone should know about MMT?

 

A. MMT challenges the widely held misconception that governments must tax (or borrow) to obtain money to spend, specifically in the case of “monetarily sovereign governments”. Monetarily sovereign governments are governments that issue their own fiat currency with a floating exchange rate. This currency must not be pegged to any external entity e.g. a foreign currency or commodity e.g. gold. There are a few other circumstances that can undermine monetary sovereignty, e.g. carrying significant debt in a foreign currency, particularly so for smaller countries whose local currencies may have low value on foreign exchange markets.

 

Examples of monetarily sovereign governments are the national governments of the US, UK, Japan, China, Australia, Canada, et al. Excluded are countries in the Eurozone, state and local governments, et al.


For our purposes below, we will refer to “monetarily sovereign governments” simply as “government”, (and specify exceptions).


 

Q. What does monetary sovereignty enable government to do?


A. Monetary sovereignty permits government to purchase anything that is for sale in the currency it creates. Government cannot “run out of money” nor “go bankrupt”. More here.


 

Q. What does this mean in practice?


A. In practice, this means the only limitation on what government can purchase is determined by "real resources". For example, if a country does not have arable land and must import its citizens’ food, that is a real resource constraint. On the other hand, government can for example, always purchase (i.e. employ) all available labor the private sector does not. 

Federal Reserve Chairman (1987-2006) Alan Greenspan explains.


 

Q. How does government issue currency?


A. Government creates money “de novo” (as new) by spending into the economy.

In MMT it’s said “money is created by keystrokes”. When government spends, it credits the reserve accounts of private banks held at its central bank. Reserves are similar to the national currency, used for transactions between government and financial institutions. The banks then credit the deposit accounts of recipients of government spending e.g. defense contractors, disability recipients, and others who receive government funds. More here.

 


Q. Why does government tax if it can just create the money it wishes to spend?


A. In the first instance, government taxes to “provision itself”, i.e. to establish demand for the currency it issues. Citizens will work for a currency they must use to pay their taxes. More on this here.


Subsequently, MMT identifies three goals of taxation:

  • Managing inflation. Just as government creates money by spending, it destroys money by taxing. Taxed money is removed from the economy and “reduces aggregate demand”, i.e. when people have less money to spend, prices consequently drop.

  • Encouraging or discouraging behavior. For example, solar energy tax credits make solar panels cheaper to purchase.

  • Redistributing income. A progressive tax system that imposes high taxes on the wealthy and offers tax credits to the poor is a tool for reducing inequality.

MMT suggests these are effective uses of taxation. Whether it is the best tool to achieve these goals depends on many factors. 

More here.


 

Q. What does MMT say about budget surpluses vs. deficits?


A. MMT emphasizes the concept of “sectoral balances”, an accounting definition which states the total

public sector balance (taxation - spending), private sector balance (income - costs),

and a country’s trade balance (imports - exports) always sum to zero. 


Trade is a relatively small part of the equation; in most cases a public sector deficit implies a private sector surplus.

Thus, MMT suggests that continuous public sector deficits maintain private sector surpluses and consequently a growing economy.

More on deficit spending and sectoral balances here.


 

Q. Don’t continuous public sector deficits result in an ever-growing national debt which must be paid off sometime in the future?


A. No. Continuous public sector deficits imply a continuously growing economy as the private sector runs surpluses year in and out. Conversely, public sector surpluses imply ever-increasing private sector debt – which has historically led to recessions.


Public sector deficits do not imply debt. As explained above, government creates money de novo, it does not need to borrow.


 

Q. If that is the case, why do countries have massive “national debt”?


A. National debt is a policy choice. Governments issue and sell debt securities, a.k.a. treasury bonds, which are interest bearing financial instruments very similar to the national currency, but with an expiration date.


Typically there is a loose correlation between government deficit totals and bonds issued – an anachronism from gold-standard days when governments held a limited supply of gold and needed to sell bonds to raise money. In the post gold-standard

“modern money” era, treasury bonds are sold at the behest of financial markets.

 

 

Q. What happens when government sells bonds?

 

A. When bonds are purchased, the government debits the reserve account of the buyer and credits their treasury account at the central bank. Treasury accounts are simply records of bonds held and their terms. The reverse transaction takes place when bonds mature, as well as when central banks buy back their country’s own debt in what is called “Open Market Operations”, or when performed on a large scale, “Quantitative Easing” (see Part II).


 

Q. If all of these bond operations by national treasuries and central banks are just moving funds between accounts, how is the macroeconomy affected?


A. History has shown these operations have little effect on the macroeconomy. MMT refers to such operations as “asset swaps”, because that’s all they are: Private sector investors exchanging one asset (central bank reserves) for another (treasury bonds),

or vice versa.


 

Q. Where does the money come from to pay the interest on government bonds? Taxpayers? Their children? Their grandchildren?


A. No. Interest payments on government securities, like all government spending, comes from government de novo money creation. The bond holder’s account at the central bank is marked up.


 

Q. So there is no macroeconomic impact?


A. There may be no macroeconomic impact per se, but there are socio-political societal impacts in the form of widening inequality, increased political influence by the investor class, and perhaps most importantly, the exploitation of the public’s widespread misunderstanding of public deficits and debt.

 

 

Q. Does MMT have a political orientation?


A. Some progressives support the MMT lens, finding an economic foundation for government social spending in MMT’s assertion that government can never run out of money. But one MMT tenet that’s made it unpopular with some on the political left is its rejection of the justification for taxes on corporations, the wealthy, and stock trades to “pay for” social programs. MMT does not advocate for or against such taxes, but states unequivocally that taxes do not fund government spending. (See above.)

MMT supporters include conservatives, libertarians, et al.
 

 

Q. Given its stated observations regarding government spending, does MMT advocate governments should or may spend freely?


A. MMT states that monetary sovereignty opens “policy space” for government spending. However, MMT holds to the position that what and how much government spends should be determined by the democratic process.


 

Q. Does MMT claim there are no risks to government spending?


A. MMT gives credence to the widely held principle that government spending, like consumer spending, can lead to inflation if an economy is operating at or near “full productive capacity”. 


But MMT thinkers point out that governments have been spending at unprecedented levels for the past several decades – US budget deficits are on the order of $1 trillion/year, while the Federal Reserve remains unable to hit its 2% inflation target, like its central bank counterparts in Japan and elsewhere. If budget deficits (or government spending generally) was going to deliver runaway inflation, we should have seen it – worldwide, and many years ago.

 


Q. So MMT does not advocate any specific government programs?

 

A. There is one exception, the federal Job Guarantee (JG). MMT’s developers argue:

  1. Government imposes taxes in its state currency.
  2. All citizens must therefore work to earn the government’s currency to pay their taxes.
  3. This creates unemployment for some percentage of the population the private sector has no need (or is unwilling) to hire.
  4. This then, places an imperative on government to offer jobs to those workers.

 

 

Q. Why is this better than letting the market determine who works, (possibly with benefits extended to the unemployed)?

 

A. MMT contrasts these two options as maintaining a buffer stock (i.e. a reserve) of unemployed workers,

(today’s approach in most countries) vs. maintaining a buffer stock of JG workers. Buffer stocks maintain price stability, 

(i.e. control inflation).

 

MMT argues there are many macroeconomic and socio-political advantages to the JG approach, including providing labor for infrastructure projects and other needs, setting wage and benefit minimums, maintaining worker employability, et al.

For more on the JG, see here and here.

 

 

Part II

 

THE DETAILS

 

Q. Where did MMT come from?

 

A. MMT developed in the early 1990’s from discussions among economists, financial analysts and others on

the "Post-Keynesian bulletin board". The initial driver of the theory was analyst and trader Warren Mosler, who published a free pamphlet, Seven Deadly Innocent Frauds of Economic Policy, containing the genesis of MMT thought, and later a book,

Soft Currency Economics. The academic leader was Prof. William Mitchell, University of Newcastle, followed shortly by

Prof. Stephanie Bell Kelton, Prof. L. Randall Wray and Prof. Mathew Forstater, all who teach or have taught at

University of Missouri, Kansas City. Wray published the first book on MMT.

Mitchell, Wray and Martin Watts have published an MMT-based macroeconomics text.

 

 

Q. Are there other ways money can be created and destroyed besides government spending and taxation respectively?


A. Yes. Governments worldwide have nearly universally granted the right to create their state currencies to private banks when they make loans. Conversely, when loans are repaid, money is destroyed. If new bank loans outpace repayments (in total), the national money supply increases.

 

While bank lending does represent new money in the private sector, it differs from government spending in that private debt is increased in tandem.

 

 

Q. Banks do not lend out their deposits?


A. No. Banks create money de novo when they make loans. There may be regulations requiring banks to hold deposits and/or reserves with compulsory ratios or percentages in relation to loans.

But banks themselves are concerned with market conditions and the availability of creditworthy borrowers when making loans, not deposits on account.



Q. What is the MMT position on Central Banking?


A. Central banks’ primary operation is “monetary policy” -- the targeting of interest rates. MMT points to the historical failure of such operations to influence key macroeconomic factors, (central banks are typically charged with controlling inflation). MMT argues fiscal policy, i.e. adjustments to government spending, taxation and regulation, (banking regulation in particular), is a far superior tool.
 

MMT is also critical of central bank Open Market Operations (OMO) – the repurchase of government bonds which is intended to encourage bank lending by increasing their stock of reserves. MMT points out that banks do not lend reserves, and history has shown that OMO has no appreciable effect on lending. This is even more apparent with Quantitative Easing (QE) -- large scale OMO, which has resulted in little more than a widespread increase in reserves held by banks. More here.

 

Many MMT thinkers endorse the proposition that central bank accounting and banking functions, (e.g. clearing payments authorized by the national legislature) could be absorbed by treasury departments/ministries.

 

 

Q. Wouldn't government face political hurdles to managing inflation via fiscal policy?

 

A. Again, MMT supports the democratic process, which is absent in central bank decision-making. If there is public resistance to policy, that policy does deserve extra scrutiny. And it's by no means a given the public would object to well-crafted fiscal policy whose intention is limiting inflation -- a popular policy.

 

 

Q. What about governments that are not monetarily sovereign? How do they operate?

 

A. They either cannot issue currency or are heavily constrained in their ability to do so. This limits their spending capacity to what they can raise (from taxes, fines, sale of public assets, etc), or borrow (from international lending institutions, banks, et al).

 

 

Q. Is MMT really anything new?


A. There does not appear to be a theory, economist, or text prior to MMT that clarifies the correct sequence of action:

Government spends first, and only then, when the currency is available in the private sector, can it be taxed or borrowed,

(where “borrowed” refers to the sale of government securities, see above).

 

But much of MMT is built upon past work. Antecedents include economists Abba Lerner, Hyman Minsky and Wynne Godley,

and the economic theory Chartalism.

 

 

Q. Besides the founders listed above, who are the other important MMT scholars, thinkers, writers, etc?

 

A. These individuals have made invaluable contributions to MMT. Their work is well worth checking out: 

Marshall Auerback

Raúl Carrillo

Scott Fullwiler

Rohan Gray

Steven Hail

Fadhel Kaboub

Nathan Tankus

Pavlina Tcherneva

Eric Tymoigne

Ellis Winningham