Modern Monetary Theory (MMT)

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US Sector Financial Balances @ % of GDP, 1952 q1 to 2019 q3
US Sector Financial Balances @ % of GDP, 1952 q1 to 2019 q3

Work in Progress

This is a work in progress. I still have an incredible amount of work to do on this and so I understand this complex topic. I will update this when I get time.

If you have important or useful links or corrections please feel free to send them to me.

Introduction

Warning! There is NO Going Back!

Once you understand Modern Monetary Theory (MMT) you will NOT be able to look at federal government spending the same again… and that will be a great thing. =)

My Journey into Modern Monetary Theory

I had heard about Modern Monetary Theory several years ago. I cannot remember specifically where, but I am pretty sure it was through Facebook and I was just enraged about the very idea of it. I had also heard about Federal Jobs Guarantee (FJG) around that time too and I was livid about this as well.

Both of my issues with MMT and FJG comes from my background with Resource Based Economies (RBE). Read my article The Cancer of Capitalism and It’s Antidote for more info on this topic. MMT, from the perspective of my experience with studying and promoting RBE, is just a rebranding of horribly broken monetary systems which happens every several decades as a way to keep people from rebelling and burning monetary systems down. We went from feudalism to capitalism to socialism to communism to democratic socialism, and now to Modern Monetary Theory. Also, around the time I heard about FJG I also had heard about UBI which I felt was far superior to FJG, especially with the tremendous amount jobs we will be losing to the automation and AI apocalypse. I was soooo pissed about both of these (MMT and FJG) from the RBE perspective that I even started to research a post to tear both of these apart. I still have that post sitting in my drafts.

Then I heard somewhere in the last few years that Alexandria Ocasio-Cortez (AOC), whom I love with all my progressive feels, supported MMT I was like fuck, now I have to really reconsider this. I also found out that she supported FJG too. I also found out that Bernie Sanders’ economic advisor during his 2016 campaign was Stephanie Kelton who is a bigwig in the MMT world. My rage filled world was crumbling at least as far as contemporary economics is concerned. =)

So, here is what sold me on both:

FJG: AOC had this amazing video created with the Intercept which was talking about the Green New Deal: A Message From the Future with Alexandria Ocasio-Cortez (Video). In there she specifically talks about how the FJG fits into the Green New Deal and then I understood it. I was amazed. I was sold so much I added FJG to my policies. Seriously, watch that video. It is not that long and it is powerful.

MMT: So, with AOC supporting MMT and Bernie Sanders’ economic policy advisor was an MMT bigwig that cooled my anger towards it and had me ready to start to consider it, but I did not have the time to research it.

However, a little over a month ago I had someone on my live stream where I talk politics ask me about my thoughts on this and I could only say what I said above, but that had me spend the next few weeks researching it – watching many videos and reading many articles. After all of that I was sold on this and started this page. I even purchased the macroeconomic textbook which was written by some of the other MMT bigwigs to really get into it: Macroeconomics 1st edition (2019).

An Amazing and Quick Introductory Book

Money from Federal Government being poured into the Public Sector through government spending (Diagrams and Dollars: Modern Money Illustrated)
Money from Federal Government being poured into the Public Sector through government spending (Diagrams and Dollars: Modern Money Illustrated)

Seriously, go buy and then read this book: Diagrams and Dollars: Modern Money Illustrated. It is only $1.50 on Kindle and is only 41 pages long. This is a simple and amazing resource which gives an amazing intro to this topic through visuals.

I think these may be the posts from which the book came from – same author:

Page Overview

So, this page is here to act as a primer on MMT so that I can help you understand this idea, but also so that I can understand this topic myself. They say that you do not truly understand a topic until you can teach it to others, so here is my attempt at that like I always try to do.

This page is broken down into these major sections:

  1. The Basics of Modern Monetary Theory – We will first go over the very basic bullet points and concepts to get you started.
  2. Explaining Modern Monetary Theory Then we will jump in a little more in depth.
  3. Relevant Quotes – Check out the quotes, especially from Federal Reserve Chairmen.
  4. Learn More – More links to learn about MMT

The Basics of Modern Monetary Theory

Where Modern Monetary Theory Began

AKA (Also Known As)

Here are the other names that MMT is also referred to as:

  • heterodox economics
  • post-Keynesian economics
  • neo-chartel economics

The MMT Five

The people that originated the Modern Monetary Theory movement are:

  1. L. Randall Wray
  2. Bill Mitchell
  3. Stephanie Kelton
  4. ??
  5. Warren Mosler

It started with Randall, Bill, Stephanie, ??, and ?? in ??. Eventually Art Laffer, a right wing economist of the infamous Laffer Curve which is used to justify supply side economics, told Warren to go talk to the Post Keynesian group. Warren joined them and shared his views and they worked together to promote what would eventually become Modern Monetary Theory. Things did not really start moving forward for MMT until after Warren joined the group and created his blog – Mosler Economics.

Key Points

Note: An important thing to understand here is that, in this context, when we say Government we are specifically referring to Federal or National Governments which issue their own sovereign currency, and we do NOT mean states or municipal governments which operate significantly differently.

About Government

Governments are NOT a Household or a Business – Governments are NOT a household or a business. They do NOT operate by the same rules because…

Government is a Monopoly – … government has a monopoly on their sovereign currency and can print or create currency at will; whereas state or municipal governments, and your household cannot and, therefore, they are revenue constrained.

Government Cannot Go Bankrupt – As long as government owns their own sovereign and are the currency issuer then there is no chance of bankruptcy or not being able to pay their bills.

Governments Must Spend First – Government has to spend money first to add money to system so that there is money present to be taxed. Then you tax. (see the Monopoly game example below)

About Taxation

Taxation is NOT Revenue – Currencies received through taxation are NOT spent to pay for government expenses. The government is NOT revenue limited. It is resource limited.

Taxation is Used to Create Unemployment – ??

Taxation is Inflation Control – Governments tax as a method to reduce available money which acts as a primary control for inflation because it reduces availability of money which reduces or controls prices.

Taxation as Inequality Control – Increase taxes to reduce inequality which also is as form of price control.

Videos

Here are some great intro videos to get you started:

Stephanie Kelton

This video is 1 hr and 26 minutes: Stephanie Kelton: The Public Purse @ UCL Institute for Innovation and Public Purpose

Stephanie Kelton: The Public Purse @ UCL Institute for Innovation and Public Purpose

L. Randall Wray

This video is ~48 minutes long – Everything You Want to Know About Modern Monetary Theory with L. Randall Wray with Bloomberg:

Everything You Want to Know About Modern Monetary Theory
L. Randall Wray with Bloomberg

Explaining Modern Monetary Theory

MMT Overview

Shift from using the word Federal or National Budget for Federal spending to Fiscal Position to shift the conversation and to talk about it correctly, because a Nation which creates its own sovereign currency does NOT technically have a budget, although businesses, state, and municipal governments, and households do because they are revenue constrained.

Progressive Taxation is a automatic economic stabilizer.

Fiat base currency that is floating and not fixed to some other value such as a currency or specie. The US shifted in 1971.

Surplus Bad – Paying off debt through surplus results in depression because of private section deficits.

US Debt – US Debt is Treasury Bonds which are purchased with US Dollar.

Monopoly, the Game

Kelton’s video @ 29 min

Talk Deficit to Me

?? heavy exporting countries can run a balanced or even a surplus, all other countries must run a deficit

chart of countries and deficits

Sectoral deficit balances between private sector, government, and foreign sectors.
Sectoral deficit balances between private sector, government, and foreign sectors.
US Sector Financial Balances @ % of GDP, 1952 q1 to 2019 q3
US Sector Financial Balances @ % of GDP, 1952 q1 to 2019 q3

Federal Reserve Accounts (Checking?) vs Federal Reserve Treasuries (Savings)

A deficit in one area is a surplus in another area.

What About the Debt! Dear God the Debt!

The US debt which takes the form of US Treasury Bonds and can only be bought in USD and therefore removes USD from the economy to reduce chance for inflation and acts as a savings account for bond holders.

charts of countries and debt

But what About…

China

China – 2 trillion in savings with the Fed due to trade disparities

Weimar Republic

Destruction from war and reparations from war, they lost their ability to produce

Zimbabwe

over spent the farming sector’s capacity to produce therefore inflation

Venezuela

??

Greece

Joined EU and no longer has a sovereign currency. If they were not a member of the EU they would be fine.

High Unemployment

EU

austerity measures and deficit limits due to countries no longer having access to their own sovereign currencies relying on the EU Central Bank

Japan

?0% interest rates, 0 inflation – has NOT been able to increase inflation, low unemployment, and yet has a deficit @ 250% GDP?

Relevant Quotes

Beardsley Ruml, Chairman of the New York Federal Reserve (1946)

The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government.

Beardsley Ruml, Chairman of the New York Federal Reserve (Taxes for Revenue are Obsolete, pg 35 in American Affairs, Jan 1946)

Paul Samuelson (1995)

The reaction to our post on the nine myths also reminded me of an interview Nobel winner Paul Samuelson gave to Mark Blaug (in his film on Keynes, “John Maynard Keynes: Life/Ideas/Legacy 1995”). There Samuelson said:

I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say “uh, oh what you have done” and James Buchanan argues in those terms. I have to say that I see merit in that view.

Paul Samuelson (1995) from Paul Samuelson on Deficit Myths

Alan Greenspan, Federal Reserve Chairman (1997)

… a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.

Alan Greenspan At the Catholic University Leuven, Leuven, Belgium
January 14, 1997

Dick Cheney (2004)

Reagan proved that deficits don’t matter.

Dick Cheney (January 9, 2004)

Alan Greenspan, Federal Reserve Chairman (2005)

more MMT quotes: https://mmtincanada.jimdofree.com/essential-quotes/

Pulled from MMT Explained:

Alan Greenspan: “There’s nothing to prevent the federal government creating as much money as it wants”

In 2005, in testimony to the US House Committee on the Budget, former Fed chairman Alan Greenspan was asked by then-US Rep. Paul Ryan about the “solvency” of the Social Security system, which Americans rely on for retirement payments. Many Americans worry that Social Security will become insolvent before they retire. Greenspan told him:

I wouldn’t say pay-as-you-go benefits are insecure in the sense that there’s nothing to prevent the federal government creating as much money as it wants in payment to somebody.

Alan Greenspan (2005)

He went on to explain that the real problem is whether there will be enough resources or assets in existence to support all the purchases the extra cash would demand. You can see a video of the exchange here.

Ben Bernanke, Federal Reserve Chairman (2009)

It’s not tax money. the banks have– accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. so it’s much more akin to printing money than it is to borrowing.

Ben Bernanke (Federal Reserve Chairman, 60 Minutes interview in Mar 2009)

St. Louis Federal Reserve (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 bills. 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 (by virtue of never facing insolvency and paying interest rates over the inflation rate, e.g., TIPS—Treasury Inflation-Protected Securities).

Why Health Care Matters and the Current Debt Does Not ( St. Louis Federal Reserve (2011) )

Purpose of a Tax

Learn More

Books

Videos

Links