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?

MMT Explains What Governments Can Do. It Is Not A Proposal.

At Business Insider, Jim Edwards and Theron Mohamed do a good job explaining MMT in, “MMT: Here’s a plain-English guide to ‘Modern Monetary Theory’ and why it’s interesting.”

They begin with these bullet points:

  • MMT is a big departure from conventional economic theory. It proposes governments that control their own currency can spend freely, as they can always create more money to pay off debts in their own currency.
  • The theory suggests government spending can grow the economy to its full capacity, enrich the private sector, eliminate unemployment, and finance major programs such as universal healthcare, free college tuition, and green energy.
  • If the spending generates a government deficit, this isn’t a problem either. The government’s deficit is by definition the private sector’s surplus.
  • Increased government spending will not generate inflation as long as there is unused economic capacity or unemployed labour, MMT proposes. It is only when an economy hits physical or natural constraints on its productivity — such as full employment — that inflation happens because that is when supply fails to meet demand, jacking up prices.
  • MMT proponents argue governments can control inflation by spending less or withdrawing money from the economy through taxes.
  • Needless to say, traditional economists have some issues with all this.

Just ONE quibble with that, where they write, “It proposes governments that control their own currency can spend freely.” They should have written It EXPLAINS, not that it “proposes.” Big difference.

MMT EXPLAINS that governments that control their own currency can do a lot of things.

David Dayen: The Left Is Taking Aim at Pelosi’s Deficit Obsession

David Dayen writing over at The New Republic: The Left Is Taking Aim at Pelosi’s Deficit Obsession,

There’s also one major hurdle left to topple: the “pay as you go” rule, commonly known as “pay-go,” which demands that all new spending get offset with budget cuts or tax increases. Progressive critics argue that this creates an unlevel playing field, where Republicans blow giant holes in the tax code, as they did last year, while Democrats must pay fealty to the deficit. These critics are now mounting a fight to unshackle a future activist government.

[. . .] Obviously, Pelosi and her allies on pay-go consider the rule good politics, allowing them to rebut charges about “tax and spend” liberals by insisting that every new program is fully paid for. If anybody actually cared about the deficit, instead of habitually using it as a weapon to rein in the opposition party, maybe that logic would be compelling. But even if the politics make sense, the rule leads to bad policy, …

Democrats have fallen for deficit-scare politics for too long. Republicans understand money, and understand that they can spend (or cut taxes) to deliver for their constituents. And they understand that they can trick Democrats into not delivering for their constituents (We the People.) It is time for that nonsense to stop.

Why Health Care Matters and the Current Debt Does Not

After taking note of a slide in this 2012 Randy Wray video, I chased down the source for this much quoted statement from the Federal Reserve Bank of St. Louis, from Why Health Care Matters and the Current Debt Does Not Oct, 2011

As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bill. In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar denominated assets.

After a lifetime of feeling vaguely gaslighted, it’s a relief when economists help me understand how things work. In looking for the source, I came across a group of interesting quotes in this post from economist John Harvey (@John_T_Harvey):

“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”
— Alan Greenspan

“In the case of United States, default is absolutely impossible. All U.S. government debt is denominated in U.S. dollar assets.”
— Peter Zeihan, Vice President of Analysis for STRATFOR

“In the case of governments boasting monetary sovereignty and debt denominated in its own currency, like the United States (but also Japan and the UK), it is technically impossible to fall into debt default.”
— Erwan Mahe, European asset allocation and options strategies adviser

“There is never a risk of default for a sovereign nation that issues its own free-floating currency and where its debts are denominated in that currency.”
— Mike Norman, Chief Economist for John Thomas Financial

“There is no inherent limit on federal expenses and therefore on federal spending…When the U.S. government decides to spend fiat money, it adds to its banking reserve system and when it taxes or borrows (issues Treasury securities) it drains reserves from its banking system. These reserve operations are done solely to maintain the target Federal Funds rate.”
— Monty Agarwal , managing partner and chief investment officer of MA Managed Futures Fund

Our growing collection of quotes are here.

There Are No Real Republican “Deficit Hawks.” Here’s Why. Part 2

This posts changes a few words from a previous post.

Democrats are making a terrible mistake fighting the Republican tax cuts spending increases by saying they add to the deficit, that they will “blow a hole in the budget,” etc.

Why are Democrats saying this? They are using the “increase deficits” line because they think they can appeal to a few “deficit hawk” Republicans who spent the Obama years complaining about government sending and “deficits.”

It is a mistake for Democrats to think they can “get Republican votes” by mouthing Republican deficit-fear rhetoric without understanding the strategy behind their rhetoric.

Strategy: Republicans Create Deficits, Stoke Deficit Fear, Then Campaign Against Government Spending

Here’s the thing. There are no real Republican “deficit hawks.” Republicans stoke deficit fear, and then say they are opposed to budget deficits. But they always, always increase deficits. On purpose. There’s a reason.

Continue reading

There Are No Real Republican “Deficit Hawks.” Here’s Why.

Democrats are making a terrible mistake fighting the Republican tax cuts by saying they add to the deficit, that they will “blow a hole in the budget,” etc.

Why are Democrats saying this? They are using the “increase deficits” line because they think they can appeal to a few “deficit hawk” Republicans who spent the Obama years complaining about government sending and “deficits.”

It is a mistake for Democrats to think they can “get Republican votes” by mouthing Republican deficit-fear rhetoric without understanding the strategy behind their rhetoric.

Strategy: Republicans Create Deficits, Stoke Deficit Fear, Then Campaign Against Government Spending

Here’s the thing. There are no real Republican “deficit hawks.” Republicans stoke deficit fear, and then say they are opposed to budget deficits. But they always, always increase deficits. On purpose. There’s a reason.

Continue reading

Should Government Balance The Budget?

We hear a lot that government budgets need to be balanced “like a household budget” that is decided “around a kitchen table.”

To balance the budget government has to either tax us more or spend less on things that make our lives better. That takes money out of circulation and does us no favors.

With less money in circulation businesses and households have to turn to the banks to borrow. And they have to pay interest to those banks.

Balancing the budget causes the private sector to turn to the banks and go into debt? The “financial sector” makes big bucks from that while the rest of us have less? Hey, wait a minute… who is pushing this “balance the budget” nonsense?