Simple Explanation of Modern Monetary Theory (MMT)

This post originally appeared at Seeing the Forest.

We dropped the Gold Standard some time ago and don’t have to round up gold to pay for things anymore. Hence the “Modern” in Modern Monetary Theory. MMT just explains how money works in a modern economy. Government “spends” money into the economy and taxes it back out. The amount not taxed back out (“deficit”) is the amount left circulating in the economy. The total over the years (“debt”) is a measure of the money in the economy. “Balancing” the budget means not putting new money into circulation. “Paying off the debt” means removing all the money from the economy.

Also, selling government bonds is a choice, not “borrowing.” There are good reasons to do it, but it is not “borrowing.” There are good reasons to tax – balance distribution, address inequality, fight the influence of accumulated fortunes, behavior incentives – but it is not “raising revenue.”

Application of MMT: Look at what the US govt did when Covid hit. It kept businesses from going under, kept the economy from the worst crash ever, dramatically cut child poverty, etc, followed by the fastest recovery ever. Compare that to what happened after the 2008 crash when Summers kept the “stimulus” low. It was almost 10 YEARS before things recovered completely – leading to Trump.

Simplest way to understand modern money: learn where banks get the money from to give out loans. (Hint: They “create” it.)

Unfortunately certain well-to-do influential interests benefit greatly from the old ways of understanding money and will do anything to keep it that way.

One More Thing

One more thing about MMT – it meets stiff ideological resistance from certain vested interests because the “gold standard” “kitchen table budgeting” thinking keeps the system working for the wealthy. If government could just spend money without “borrowing” from the wealthy to solve problems, then what do we need the wealthy for?

The conservative game since Reagan/Thatcher has been to cut taxes at the top in order to create deficits, and then demand budget cuts and privatization to get rid of the deficits they created. This is a strategy for gutting government – democracy – and moving wealth upwards. Get pesky government out of the way of the oligarchs and their corporations.

Remember the resistance to solving the 2023 debt ceiling “crisis” by “minting the coin”? Minting the coin was completely legal, and made the problem disappear. The problem was, if people could just mint a coin to pay off wealthy bondholders then why can’t government mint a coin to … you name it.

See Why Minting the Coin Is A Threat To The Established Order:

Minting platinum coins with a face value of $1 trillion and depositing them with the Federal

Reserve is Constitutional and solves the problem. But it brings up questions that shake the foundations of neoliberalism. If we can “mint coins” to pay bondholders, why can’t we mint coins to do things that people want and need? Instead of just relying on private capital (the rich) to make investment decisions and get things done in our economy?

So Biden can do the right thing and just … pay our bills. But then the neoliberal order breaks down. If We (through Congress) can decide to … you name it, then why are we depending on “the investor class” (capital) and “market solutions” etc to decide where to invest, allocate resources, do the planning and everything else?