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”.
Virtually every country in the world has a central bank at which its private banks all hold accounts. When government spends, it credits these accounts on behalf of those banks' customers, who are the recipients of government funds. The banks then credit the deposit accounts at their institutions of these recipients of government spending, e.g. defense contractors, disability recipients, and others who receive government funds. Private banks make a profit on all such transactions acting as middlemen. 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.
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.
As explained above, government creates money de novo, it does not need to borrow. The effect on the public sector of annual budget deficits is accounting only. Monetarily sovereign governments always have the real-world capacity to spend.
Public sector deficits do not imply debt.
Q. If that is the case, why do many countries have large “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. A nation's national debt is the sum total of these treasury bonds held by the private sector at any given time. More here.
Treasury bonds are largely an anachronism of the gold-standard era when governments held limited supplies of gold and needed to raise money in order to achieve their spending goals. In the post gold-standard “modern money” era, wealthy countries sell treasury bonds at the behest of financial markets, who receive a guaranteed income on their investment, at virtually zero risk. Developing nations sell their riskier bonds as a means to raise foreign capital.
Q. What happens when government sells bonds?
A. Bonds are typically issued by the national Treasury and sold at auctions. When bonds are sold, the government adjusts the books at its central bank: It debits the reserve account of the buyer and credits their treasury account.
"Reserves" are funds held in accounts at central banks in the national currency. Governments typically require all financial transactions be conducted via transfers in and out of their central bank's reserve accounts -- enabling the central bank to simply credit and debit these accounts as directed by any government authority, e.g. Treasury Department, IRS, etc.
Treasury accounts are records of bonds held and their terms. When bonds mature, as well as when central banks buy back their country’s own debt in what is called “Open Market Operations”, government debits the bond holder's treasury account and credits their reserve account.
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, 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 would 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:
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 multiple macroeconomic and socio-political advantages to the JG approach, including setting wage and benefit minimums, maintaining worker employability, et al. The JG is not a general replacement for public sector jobs, particularly not skilled labor. JG jobs are transitional jobs to enable workers to rejoin the private sector workforce. For more on the JG, see here and here.
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,
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. Banks create money 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 when a bank issues a loan it creates both a new asset on its books, (the loan) and a new liability (the I.O.U.) for the borrower. "Banks can only lend, not spend". Government spending creates a new asset for the recipient of its spending, without a corresponding liability, (until and unless government decides to tax, which is stictly optional).
Q. Banks do not lend out their deposits?
A. No. Banks create money de novo when they make loans. There are various regulations requiring banks to maintain capital, deposits, and/or reserves, with compulsory ratios 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.
Q. Wouldn't government face political hurdles to managing inflation via fiscal policy?
A. MMT thinkers argue that inflation-throttling policy works best in the form of automatic stabilizers, which do not require ad-hoc policy decisions by elected officials.
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. What is the MMT position on central bank Quantitative Easing (QE) operations?
A. MMT is critical of central bank Open Market Operations (OMO) – the repurchase of government bonds and purchase of other financial assets which is intended to encourage private 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. QE is large scale OMO, and has resulted in little more than a widespread increase in reserves held by banks.
In addition to its lack of efficacy in spurring bank lending, QE hasn't had the deliterious effects e.g. hyperinflation, many predicted when such operations were initiated 30 years ago. MMT has pointed out from the beginning that such operations do not change the level of net assets held by the private sector, only their composition. More here.
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. Some countries e.g. the US have regulatory limits on government spending such as the "debt ceiling", while certain government programs are said to be financed via special mechanisms e.g the "Social Security Trust Fund" and its associated payroll tax. How do these schemes jibe with MMT?
A. MMT thinkers have consistently emphasized the distinction between the fiscal policy space monetary sovereignty bestows on government, and the imposition of overlaying regulations that government may choose to self-limit its own capacity. Legalisms and regulations of this kind are best thought of as "accounting fictions". Such self-limitations inevitably serve political interests, maintaining programs e.g. Social Security in a state of perceived jeopardy, and hence, prime for takeover by private interests. All such self-limiting legal structures can be modified or repealed, but as long as government remains monetarily sovereign, it has the capacity to spend.
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 back,
(where “borrowed” refers to the sale of government securities, see above).
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: