What Is Modern Monetary Theory?

The crisis has given rise to a range of new ideas and theories to replace the discredited view of the economy. The newest and most imaginative of these is known as Modern Monetary Theory (MMT) and is one of the first theories to owe its growth to the internet. Without a doubt MMT is radical and completely turns established economic thinking on its head. If it is correct then it would change the way we think about the economy forever.

As surprising as it may seem to an ordinary person, economists rarely discuss money or banking, the two topics that most come to mind when one thinks of economics. This is because most of mainstream economics has its roots in the 19th century when the financial sector was tiny and money was not seen as important (to the extent that economists would imagine barter economies for simplicity). MMT is the first theory to recognise the importance of the massive growth in the financial sector and the fundamental role money plays in the economy (especially since it is no longer backed by gold). It addresses head on the idea that perplexes most ordinary people, how is that paper money with no intrinsic value of its own is so valuable and how are banks able to create money “out of thin air”?


MMT argues that money is by itself worthless and only has value due to the fact that the government requires people to use it to pay taxes. Governments can use whatever they want as money and give it whatever value they choose. This runs contrary to the common notion that money is independent of markets; rather MMT argues that without the government money has no value. As government controls money, it can also manipulate it to affect the economy. MMT views unemployment and the recession as the greatest problem and argue we should keep printing money until we reach full employment where everyone who wants a job has one.

The most rational and attention grabbing of MMT’s claims is that deficits are not a serious problem nor should they be our main concern at the moment. Instead they claim that no country that prints its own currency can ever be forced to default. If the debt grows too high, then it can just print money to plug the gap. The casual inverse of mainstream economic thought and public discussion is why MMT is such a radical theory. In contrary to the obsession in America with debt, MMT argues that this is missing the point. Not that debt doesn’t matter; just that it isn’t very high on the list of concerns. Nor are higher interest rates a worry. This is because printing money increases the level of reserves in a bank which then has to offer a lower interest rate in order to lend out all this extra money. So contrary to a higher interest rate, MMT claims it would receive a lower interest rate and cites Japan as an example of a country with enormous levels of debt and low interest rates.

But isn’t printing money just going to cause hyperinflation? Is it not childish to believe we can just print all the money we need and solve all our problems? To understand why MMT claims otherwise we need to examine Why We Print Money (a previous detailed post of mine of which this will be a summary). Firstly, hyperinflation has never occurred in stable economies. Every case of hyperinflation in history has occurred during times of massive social unrest and war. It seems that political unrest and war is a larger cause of hyperinflation than printing money alone. So it is unlikely based on the historical record that peaceful, democratic, developed and politically stable countries like America and Western Europe are likely to experience hyperinflation. After all, the policy of Quantitative Easing has lead to a massive amount of money being printed yet inflation has remained below average.

Note how the worst cases of hyperinflation in history coincide with war and political unrest
Note how the worst cases of hyperinflation in history coincide with war and political unrest

Secondly, major inflation does not occur when the economy is under capacity. That is to say, when the economy is suffering from high unemployment and idle machinery (such as right now), printing money would only boost production but not cause inflation. To understand why, let’s examine how printing money works. If money is printed it is either deposited in banks or used to directly make purchases. If the banks do not lend out the money but only use it to repair their balance sheets (as what happened with QE), then there is little effect on the economy in terms of either growth or inflation. If instead purchases are made then these businesses receive a boost. They can start using idle capital and hiring new workers which in turn boost the economy. Most economists agree on this point, the disagreement is about what comes next. Traditional it is thought that eventually businesses will hit a wall and have more orders than they can fill. Demand will be such that they can easily expand and instead their costs will start to rise. This may be because they require more overtime from their staff or a labour shortage occurs and they must offer hirer wages in order to attract qualified staff. Demand is so great that shortages occur and people would rather pay a hirer price than have to wait.

However, it should be obvious where the problem is with this logic. It assumes rising costs and full employment. In order words, higher inflation would only occur if businesses do not benefit from economies of scale and cannot easily expand. However, in a recession businesses are running far below full capacity and there are hordes of skilled workers desperate for a job. In these conditions, businesses can easily expand without incurring rising costs. MMT believes the government should spend money until we reach full employment and price stability. In order words keep printing money until everyone who wants a job has one and then stop. Western European economies have not been in a position of full employment since the 1960s and America only experienced it during the Second World War. Therefore MMT argues there is always room for expansion and to view the economy as at full capacity is unrealistic. MMT also believes people aren’t stupid and will have enough sense to stop the printing presses once inflation starts rising.

So instead of worrying about the deficit or the risk of default, MMT believes that governments should focus on ending unemployment. To do so they propose a “Job Guarantee” and that the government should act as an “Employer Of Last Resort”. They believe the government should do everything to encourage private businesses to hire people through massive spending and major tax cuts, but if this still leaves people looking for work, then the government should hire people itself. This should be done in a literal manner, as in advertising jobs at say $10 an hour and hiring everyone who shows up. People will spend these wages on local businesses giving them a boost, allowing them to hire more people who in turn will spend and help businesses, sparking a virtuous cycle. Without the threat of unemployment, employers would have to treat their employees better and be less able to crush unions and encroach on workers’ rights.

MMT proposes a Job Guarantee to eliminate unemployment
MMT proposes a Job Guarantee to eliminate unemployment

But what will these new hires do? Does the government need extra employees or are they just pointless make-work jobs? Actually the government needs more police officers, schools and hospitals are overcrowded and public transport is in a dire state. This is to say nothing of what will probably be the greatest issue of the 21st century, Global Warming. Developed economies need to entirely overhaul their energy sectors, dismantle fossil fuel plants and build wind turbines, solar panels etc. All of which will create jobs and reduce the social welfare bill. It may seem strange that everyone in the economy would have a job, but how can it make sense for one tenth of everyone who wants to work to be kept in forced idleness?

MMT also has radical view of taxes, believing that contrary to popular opinion, they do not fund the government. Let me repeat that in case you missed that. Taxes do not fund the government. Instead printing money does. MMT views taxes as money taken out of the economy and spending as money pumped in. For example imagine that at the end of every year the government took all the coins it received in taxes and melted them down and then forged new coins to be used as government spending. So budget deficits are seen as creating money and budget surpluses are destroying money. So contrary to the rest of the country, MMT does not panic over deficits nor get excited over surpluses. MMT claims the Clinton budget surpluses were not the positive everyone claimed but were taking money out of the economy and contributing to the 2001 recession. I warned you MMT would be a bit mind blowing.

But then what are taxes for? MMT argues they are just to control inflation and to make people use the currency. MMT views the economy as operating at a certain level. If it drops below this level we have a recession, the solution to which is to print money and cut taxes. If we rise above this level, we have an inflationary boom, the solution to which is to raise taxes to stop the economy from overheating. The historical record shows that taxes are the main reason why societies started using currency in the first place.

Stack Of Cash

MMT also swims against the tide of bank theory. Textbooks usually present a simple case where people deposit money in a bank which then keeps some of it (say 10%) and then lends out the rest. Hence lending is based on saving. MMT flips this story on its head. Instead it argues that banks lend out money and then go looking for savings to cover themselves. Crucially, the lending also creates the saving. If a bank lends you some money, it has effectively created money out of thin air (an important point that opponents of printing money forget). When you spend that money, the recipient either saves it or spends it. The money either goes right back into the banking system or to someone else who will eventually put it back in. The banks can always get an inter-bank loan or borrow from the central bank who cannot refuse as doing so would risk destroying the bank and with it the system.

Trying to understand Modern Monetary Theory is a bit like the first people trying to understand flying. No matter how many logical arguments are made, something in your gut tells you it can’t be true. How could an aeroplane possibly stay in the air despite weighing so much? How could it not crash despite going at such speed? Can we really trust the pilot not to make a mistake? How can the government print all the money it needs? Are taxes really that irrelevant in funding the government? Can we really trust the government not to mess up? In many ways MMT seems too good to be true. However, if it does work then it would be the miracle theory we have all been searching for. It’s so crazy, it might just work.

73 thoughts on “What Is Modern Monetary Theory?”

  1. I entertain many of the new models for economics on the world stage, and I must admit this appears to be fairly sound. What is your opinion on the resource based economy proposed by the zeitgeist movement?

      1. The Resource-based Economy (RBE) concepts propose a way to abandon money and the speculation with it; and get back to resources directly without the involvement of money as a regulatory tool. It assumes that with today’s technology it would be possible to measure and store the quantity of a certain good, and connect with the demand or requirement side and share the resources, and skip the speculative and profit aspect in the exchange.
        Granted, it is a long shot in that we are so hard-wired to our current paradigm, but with that being said the utilization of the global community in conjunction with the available technology to manage the resources of the world, abundance could realistically be achieved leaving no one behind. The main concern I have with a system change of this magnitude is the obvious one: the people profiting from the current system would be hard pressed to give it up.

        1. the Zeitgeist Moverment’s “resource based economy’, also known as ‘The Venus Project’ is communism run by computers, with robot slaves who do all the work.

          1. Perhaps, and let’s be clear-I have no loyalties to any movement, economic model, or political archetype. The question I should pose is the obvious one from where I sit. What makes the capitalist model so much better than the communist model. Both create a serious stratification of wealth, and both are outdated models that only work for a select few. Any true progress is going to come from some different, or otherwise unknown solution. I am an idealist, and I can only hope we will outgrow the antiquated system we use today.

            1. I never thought I´d ever say this, but don´t dismiss capitalism too carelessly. The importance of truely free markets, free money, free banking are hard to grasp, but it´s worthwhile to check out austrian economics and their criticism on the current system!

              1. I have to agree. The importance of a truly free market is so very important for real progress. The Austrian model is definitely an improvement over the Keynesian, as it is a more dynamic model allowing for some ebb and flow without the collapses we have come to expect from the latter. I just hope that we can somehow transition into a economic system that is regulated externally to discourage corruption and promote true freedom in the market.

                1. “without the collapses we have come to expect from the latter.”

                  What collapses were caused by Keynesian economics? Also, I’d steer clear of Austrian economics, its pretty bad at explaining either the recession or how to get out of it.

  2. Thanks for that Robert. Concepts like MMT get used so often by people in ways that assumes everyone listening understands fully what it involves. You’ve done a great job here explaining it to us “civilians” and I love the way you concluded with the analogy of flight.

    1. Yeah I had heard it occasionally dropped into conversations without explanation so I felt I ought to study it and figure it out myself. I still haven’t made my mind up on it which is how the flight metaphor came to me.

  3. Interesting article, I would agree the government should hire, train, and maintain skilled individuals to repair and better maintain our crumbling infrastructure, social services programs, educational systems, and health and wellness programs.

  4. A very good summary. Please note MMT does not consider QE money printing it is an asset swap between different types of government liabilities as they are just changing the type of net financial asset.

      1. No prob 🙂 think of it as switching some money from your savings account to a current account. Operationally its as simple as that.

  5. Understanding MMT is easy. It’s Keynesian economics on steroids. They focus primarily on the government and favor deficit spending and mass government job programs. These are very old ideas that have been advocated by statist and socialist economists for hundreds of years. There’s nothing new or confusing about any of it and the only reason it’s become popular on the internet is because amateur economists don’t understand it and the crisis convinced lots of people that capitalism was broken.

    1. The you don’t understand MMT. Firstly it does not “favor” deficit spending as deficits are considered neither good nor bad, but merely a reflection of the non-government sector’s savings desires and spending patterns. Secondly, MMT’s focus on the state results primarily from the government’s status as monopoly supplier of the national currency. When the monopolist restricts supply (as it does now) the result is disequilibrium in the real economy, unemployment and reduced national output.

      Thirdly, a jobs program is a buffer-stock recommendation based on the MMT analytical framework. Buffer stocks are used to control inflation; we currently use an unemployment buffer stock (maintaining a large pool of jobless citizens) in this role. Some of MMT’s primary proponents argue an employment buffer stock, where everyone who wishes to work may do so, is a superior method of achieving price stability as an automatic stabilizer, expanding as an economy slows and contracting as it heats up.

      Please make an effort to understand a thing before you reject it.

  6. This is a very good (and very fair) introduction to MMT. Well done, Robert.

    “Mind-blowing” is a good way to describe one’s reaction to MMT. I was introduced to the concept two years ago on a debate site (America’s Debate, where the thread can still be viewed), and I can’t overstate the effect it has had on me. Once one understands that the key to full employment and prosperity is both straightforward and very do-able, it is hard to stop thinking about it. That optimism, unfortunately, is balanced out by the frustration of seeing just how deeply ingrained the old thinking is, and how hard it will be to implement changes. But every blog helps, so, thank you.

    1. It is certainly the most ground breaking theory out there and goes against so much of what is considered conventional wisdom. Hopefully my blog adds even a little to clarifying the debate.

    1. Are you the same Mike Norman who laughed at Peter Schiff when he predicted a housing bubble in 2006? You probably thought the government could just print the bubble away, huh? Of course you’d be an MMT advocate. LOL.

  7. So, now we know why Republicans don’t want to raise the debt limit, it is so we can’t print any more money and reach full employment (which would reduce profits made by their masters). They are opposed to all of these new-fangled idears made up by the book larning crowd, you know climate change, e-vo-lution, modern monetary theory, them kinds of things.

    1. Republicans seem to rely on the idea that if its new it must be bad.

      Full employment would be a disaster for Republicans as it would lead to a rise in power of labour as the fear of unemployment cannot be used against workers. It would revitalise workers and see a diminution of corporate power. So no wonder they’re opposed.

      1. Actually the Federal Reserve System could create new money to buy up all the U.S. government debt above the debt limit, liquidate the debt and avert the need to shut down the government.

  8. MMT does understand the dynamics of banking better than the orthodox banking theories. But the notion that Deficit Spending by a government creates money is sheer nonsense. It creates credit and it’s counterpart debt. And as long as that debt is worth something, someone who is holding that debt can exchange that debt for real money.
    MMT also (wrongfully) thinks that the amount of government debt doesn’t matter.

    1. Fiat money is backed by nothing – not gold, not silver, and not debt. There is no operational reason why a government needs to issue bonds at all. What is stopping a government from simply issuing currency and being done with it?

      When you understand that, you can understand why bonds do not really represent “debt.” In the U.S., bonds are issued concurrently with deficit spending. If you have a pile of saved dollars that you aren’t going to spend anytime soon, and you want to earn a bit of interest, you can exchange them for bonds. And, since they are so liquid, you can exchange them right back for dollars. The govt. has, in its history of deficits and surpluses, created about $17 trillion dollars (net). About $16 trillion of that is now held in the form of bonds (much of it by the govt. itself). It makes little difference to the issuer which form you hold your dollars in.

      1. MMT doesn’t actually explain how the system in a country like the USA works though. They describe the government as if it just creates money and spends it without selling bonds. This creates the illusion and impression that the government creates all the money when it doesn’t. The banking system creates all the money and the government legislates money creation to them. The government then sells bonds to obtain bank money. In fact, in the USA the US Treasury cannot legally spend untll it has done so.

        MMT is a nice sounding theory to the amateur economist, but once you dive into the details there are many conflicting positions and contradictions in the theory because it doesn’t actually apply to the way the system is at present.

        1. MMT covers everything you mentioned. Maybe you haven’t looked into it deeply enough. Bond sales are covered in excruciating detail. You must have just skimmed an article or two. MMT describes the system at present – a fiat currency economy – far better than any other school of thought.

          There is a distinction made between govt.-created dollars (High-Powered Money, or HPM) and bank credit. HPM, for one, does not go away until taxed away by the govt., while bank credit is extinguished upon repayment of the loan. The fact that the government creates all DOLLARS is no illusion.

          As for your contention that the govt. sells bonds to buy “bank money” – take a close look at the currency in your pocket. You will not find the names “Wells-Fargo” or “Citibank” on any of them. Bonds are no longer used for the purpose of “buying back” or borrowing (govt.) dollars, as they were in the gold standard days. Now, they are used to sop up excess reserves and to control the overnight interest rate.

          1. I’ve looked into this much more closely than you have and there are two conflicting stories within MMT about how the government taxes and spends. One story is from Stephanie Bell circa 1999 and describes how the government obtains funding by selling bonds and goes on to explain how the central bank credits the TGA account to allow the US Treasury to spend. The conflicting story is one usually told by Warren Mosler in which the bond sales are left out and the government is consolidated into one entity in which the taxes “destroy money” and the spending “creates money”. They’re not consistent stories and explain two different systems. The Bell story is right whereas the Mosler story is a sloppy and incomplete overview of something else. But even the Bell story misleads one as to how things actually work.

            Currency is not the dominant form of money in our economy. You can only obtain those “dollars” if someone first has a bank account. The US government doesn’t actually spend dollar bills into the economy.

            And the bonds do not “sop up excess reserves”. This can clearly be proven wrong since the banking system is awash in excess reserves due to QE and the Fed is controlling interest rates by setting interest on reserves.

            You have multiple things wrong in your oversimplification. These are the sorts of inaccuracies I see commonly on MMT websites. I would recommend reading some MMT critiques more closely. MMT is highly misleading and your comments prove just a few of the ways this is true.

            1. The “two conflicting accounts” are not conflicting at all. Stephanie Bell (now Kelton) described how the govt. creates dollars *within our current legal constraints*. Legal constraints can be changed at any time by new legislation; eliminating the various hoops the govt. has made itself jump through would not change the nature of dollar creation. Warren Mosler’s was a simplification, lumping the Fed and Treasury together into a more prototypical central bank for clarity. And as I tried to explain earlier, bond sales are merely an unnecessary complication, a leftover from gold standard days. Just as I can explain how a checking account works without bothering to include savings accounts, Warren was explaining the govt./non-govt. sector idea without the complication of bond sales. But there is nothing at all incompatible between the two papers.

              Yes, the U.S. govt. uses banks as a vehicle to distribute dollars. But banks are not necessary to that equation. Theoretically, the Fed could do the banking for all of us. Commercial banks merely use HPM dollars to do their business. You couldn’t start a bank without real dollars as capital, and you couldn’t settle up at the end of the day without real dollars in reserve. Banks are dependent on the govt. and HPM, not the other way around.

              And finally, banks are awash in excess reserves *because of QE*. QE was a dollars-for-bonds swap, a misguided attempt to induce more bank lending by increasing bank reserves. (MMTers, it should be noted, think QE is a ridiculous waste of time.)

              Interest on reserves, currently 0.25%, is the floor. Overnight rates are set by bond yields.

              1. Legislation defines how the system works. That is the point you seem to be glossing over in your inaccurate presentation. If there are constraints due to laws then they are very real. They should not simply be glossed over as you’re doing here. The US government does not merely create the dollars it wishes to spend. You’re misrepresenting the actual system the USA has. Bond sales are a LEGALLY REQUIRED portion of this system as it exists today. As followers of GF Knappy you should know that “money is a creature of law” instead of simply shrugging off laws that presently exist. You contradict the state theory of money within your own thinking!

                Banks are not necessary? Again, you are creating an imaginary world of your own mind that does not presently exist.

                QE is working marvelously in Japan where GDP was reported at the highest levels in years. MMTers are just dogmatically against the use of monetary policy and so argue against it at any cost in favor of fiscal policy. Try being a bit more open minded about how things work. You might actually start figuring out how it all works.

                1. Do you even understand the difference between a legal constraint and an operational constraint? A legal constraint is self-imposed, and it can be changed at any time. Of course legal restraints are real (legal) restraints, but my point was that our legal constraints do not change the nature of fiat currency creation any more than a law requiring Ben Bernanke to sing the Star-Spangled Banner at every bond auction would. Despite our laws, and despite the way our central bank is organized, we issue fiat currency, and that fiat currency behaves as any fiat currency would.

                  You really need to recognize when simplifications are being made. This is a fairly radical concept that we are trying to explain, against the current of mainstream thought – simplifications are necessary, or else people get lost in the details. But we are not missing anything. Honestly, if your criticisms were valid, and not just based on your own misunderstanding of MMT, they would be much harder to deflect.

                  1. “our legal constraints do not change the nature of fiat currency creation”

                    This is just entirely wrong! The US government has legislated its money creation powers over to the US banking system. It is the very laws in place that define how the system actually operates. You are conflating this point to try to pass your “theory” off as a reality.

                    The details are the exact points you can’t seem to understand. I think you’ve been duped into believing this “theory” and its oversimplifications. I understand MMT and the monetary system far better than you do as is clear from our comments here. You make incorrect oversimplifications and I correct them by noting the actual details.

                    I think you need to revisit your belief in this “theory”.

                    1. Yes, you understand this stuff so well that you believed that the 0.25% interest on reserves was what determines the overnight rate. Check your own details, GLG. You have much to learn yourself.

                    2. @ John,

                      Interest on reserves does set the overnight rate! It sets the floor for overnight lending in the interbank market. Interest on reserves is the same thing as the overnight rate now and when the Fed wants to raise rates they’ll raise the IOER rate. The floor rate IS the overnight rate. And when the Fed implements their new term loan facility to the GSE’s the IOER rate will be EXACTLY what the FFR is.

                    3. Only when the Fed has dumped tons of excess reserves into the system. Before that, it was bonds, and it probably will be again.

                      Look, I recognize a troll when I see one. You are no more a “teacher of this material” than you are President of the U.S. I have interacted with many actual economics professors on these forums, and none of them act like trolls.

                      Shortly after his big MMR revelation, Cullen recognized that infighting between our two camps was not constructive, a lesson you have obviously not yet learned. You guys think that private banking is the be-all-and-end-all, and we concentrate on the vertical. But the two schools of thought are otherwise identical, and outside of the different emphases, everything that we say at MMT also holds for MMR, and vice versa. That said, you need some work on your sectoral balances big picture, and you’ll be fine.

        2. GLG34, MMT theorist know very well how the US money system actually works. It has legal features that are a hangover from the gold standard days. Operationally, bonds are issued to drain the excess commercial bank reserves created by government deficits. The commercial banks do not create all the money, most of it yes. Creation of money by the government creates net financial assets for the non-government sector. Commercial banks cannot create net financial assets.
          The goverment would not be seen dead with commercial bank money. It issues its own money.

          1. No, MMTers conflate how the system works just as you’re doing in this comment. The US banking system is awash in excess reserves today. Anyone who claims bond sales are “draining” reserves is just blatantly misleading people. There is absolutely no connection between bond sales and a need to “drain” reserves.

            Further, the importance of the idea that the government creates net financial assets for the private sector is way overstated in MMT literature. The corporate sector creates net financial assets for the non-corporate sector that play an infinitely more important role in the economy than government bonds. Why don’t you point that out as well?

            I am shocked at how many smart people have actually bought into this “theory”. As an economist with Post-Keynesian leanings I am actually appalled by the gross exaggerations this theory contributes to our overall misunderstandings. There is a lot to like in MMT, but there is also a lot wrong.

            1. @GLG34 You split the non-government sector into a corporate and a non-corporate sector. Of couse, the former can create net financial assets for the latter at the cost of creating equal net finalancial asset for itself.. N.B. no net financial assets for the two sectors combined.

                1. I agree that net finacial assets of the non-goverment sector are equal to dollars and federal bonds. But that does not prevent me from holding a corporate bond which is my financial asset. It is just that the corpoation has a corresponding liability.

                  1. So how does MMT treat corporate equity? Is that also a “liability” of the non-corporate sector because that would be a very basic accounting error. Corporate equity is shareholders equity on the corporate balance sheet and is not technically a “liability”.

                    How would you mislead people in understanding this concept? Would you try to claim that corporate equity is somehow something that constrains a corporation or that it is something inherently negative that requires government spending to sustain?

                    1. Why all the negativity, GLG? Do you have some kind of axe to grind here? Why do you think we are “misleading” people? You don’t seem very open-minded on the subject – why is that?

                    2. The negativity is due to the fact that I see you passing errors off as truths. I see this a lot on economic forums and I correct it when I see it. I usually see it coming from Austrians and New Keynesians, but this new form of erroneous thinking from Post-Keynesians is disturbing as someone who teaches this material.

                      Must run now. I hope you’ll look into these matters more before dogmatically believing that they are entirely correct.

                    3. Plus, I noticed that none of you wanted to answer my accounting question. I guess the details weren’t worth the trouble, right? You lack understanding of basic accounting, which is humorous because I constantly see MMTers talking about how strong they are on accounting. You want an accounting identity? Shareholders equity = assets minus liabilities. Look at that on a corporate balance sheet one day and you’ll notice that the MMT presentation misconstrues what a first day accounting student learns.

                    4. All assets have a corresponding liability within an economy. If you understood accounting you would know that.

                    5. GLG actually makes a valid point here. Common stock, warrants, options, etc are not listed as liabilities on a balance sheet, but instead are listed under stockholders’ equity.

                      So your comment is not correct, Ben.

                    6. Every asset has a corresponding liability whether a firm chooses to enter it on the ledger or not. It cannot work any other way.

              1. And all you did was remove the government from the economy as if we live in a closed economy. For the global economy as a whole (which is the accurate way to view the economic system) there are no “net financial assets”. You mislead people on this point in order to try to create the view that government assets are somehow more important than other types of financial assets. And this doesn’t even scratch the surface on MMT’s most glaring errors which are contained in their gross misunderstanding of the foreign sector and how this can lead to currency crisis and hyperinflation.

                1. That does not help you. Go through each currency one by one. Net financial assets of the non-government sector must equal government debt. It’s an accounting identity.

                  1. Of course you would say that as an MMTer! You don’t understand how the global economy is a closed system with no net financial assets. If you exclude the foreign sector and downplay the negative role of current account deficits then MMT can appear to never be wrong about anything. And when a currency crisis unfolds you inevitably blame something that you didn’t previously understand. The crisis in India or the hyperinflation in Iran last year are clear cases of global currency crisis that required an understanding of precisely what you say “does not help you”.

                    MMTers are so dogmatic in their beliefs that they refuse to try to understand these important concepts.

                    1. Iran was shut out of the intl banking system due to the political situation…as what we always say and proved above hyperinflation are due to external factors ie war & politics..clearly due latter. Are you Kaldorian types so dogmatic that you cant look beyond BOP issues?
                      India we will see if the rate clears.

                2. Sorry but this clearly demonstrates your confusion. A net financial asset is a net financial asset because the liability accrues to the government. The non-government sector (which includes the world economy) gains assets without gaining liabilities. ” . . . government assets being more important than other assets” is something you’ve made up in your head.

              1. There is no “normal times”. There is the system we have and that’s all. At present there is no such thing as bonds “draining” reserves. MMT is wrong on this point. Simple as that.

                  1. He’s coming in from MR, asserting (as they are wont to do) that the banking system is Everything In The Universe. Of course this results in total loss of perspective on actual macroeconomics, but that won’t stop them.

                    1. Yeh ben it’s Lars (lvg) news to me that he is suddenly a post keynesian. Honestly now i like Cullen etc but lately starting to sound like conspiracy theory loons… the fed is set up to serve the banks etc, no better than jones & co.

  9. Robert, you might also find this of interest as an independent confirmation of some of MMT’s central argument. Fed Chairman Mariner Eccles was testifying before Congress on whether legislation proposed to stop the Fed from directly buying Treasurys would limit government’s spending ability:

    Well, as I remember the discussion—and I have referred
    to it in this statement—there was a feeling that this left the
    door wide open to the Government to borrow directly from the Federal
    Reserve bank all that was necessary to finance the Government deficit,
    and that took off any restraint toward getting a balanced budget.
    Of course, in my opimon, that really had no relationship to budgetary
    deficits, for the reason that it is the Congress which decides on the
    deficits or the surpluses, and not the Treasury. If Congress appropriates
    more money than Congress levies taxes to pay, then, there is
    naturally a deficit, and the Treasury is obligated to borrow. The
    fact that they cannot go directly to the Federal Reserve bank to borrow
    does not mean that they cannot go indirectly to the Federal
    Reserve bank, for the very reason that there is no limit to the amount
    that the Federal Reserve System can buy in the market. That is
    the way the war was financed.
    Therefore, if the Treasury has to finance a heavy deficit, the Reserve
    System creates the condition in the money market to enable the borrowing
    to be done, so that, in effect, the Reserve System indirectly
    finances the Treasury through the money market, and that is how the
    interest rates were stabilized as they were during the war, and as
    they will have to continue to be in the future.
    So it is an illusion to think that to eliminate or to restrict the directborrowing
    privilege reduces the amount of deficit financing. Or that
    the market controls the interest rate. Neither is true.

    – Mariner Eccles before the Committee on Banking and Currency, 1947

    Click to access 1947hr_directpurchgov.pdf

  10. Frank N. Newman, one-time deputy Secretary of Treasury under the Clinton Administration, writes in his 6 Myths Holding Back America that
    when the Administration created a surplus by not spending tax dollars
    received, it turned around and used the surplus tax revenues to buy back the securities underlying some of the national debt. If the banks were
    continuing to lend, then that money would have gone back into circulation in the economy. The assumption that the surplus caused a recession assumes that none of the tax revenues returned to circulation. There may have been some friction, delay in the banks making loans, and that might have caused the mild recession recorded at that time. But if the govt is buying back securities with tax revenues it is returning these revenues to banks and investors, and some of that money will soon go into circulation. Surpluses create out-and-out recessions and depressions only when the government holds onto the tax revenues and doesn’t spend them on operations or buy-back programs to retire some of the national debt.

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