Some people seem to think that modern monetary theory (MMT) is a set of policy options a country might adopt. It isn't. It's a description of how the economy of the country we live in really works. What's powerful about it is that it describes actually happens – and so leads to better decision making.
This is the audio version of this video:
This is the transcript:
Modern monetary theory is not a policy. It is an explanation of how money works in a modern fiat currency economy. Let me explain.
A modern fiat currency economy is one like the UK, the USA, all those countries in Europe that have their own currencies, even to some degree the Eurozone, And, of course, many other countries around the world, like Australia, New Zealand, Canada, South Africa, oh, and most of South America, plus Japan, who actually are countries that issue their own currency from their own central bank, and there is precisely no asset backing for that currency.
It is purely money because the government of the country in question declares it to be so, says it's the legal tender of the country in question and that currency gets its value because the country in question is able to collect tax to give it that value. That's what a modern fiat currency is.
And when a country has a modern fiat currency, then what modern monetary theory says happens.
There isn't a choice about whether it happens. It does happen.
So, in the UK, for example, when the government wishes to spend, it passes a legal budget. How do we know it's legal? It's been approved by the House of Commons. Once it's been approved, the government can spend against that budget. So, all they have to do is tell the Bank of England to make a payment on their behalf.
As I've said many times before on this channel, and no doubt I will say again, the Bank of England doesn't, in that case, look to see if there's any money in the government's bank account on the day when the payment is to be made. It simply makes the payment because, under an Act of Parliament of 1866, basically it has no choice but do so; that is its job as the central bank.
So, in that case, what modern monetary theory does by saying that governments create money by their spending, and they do so before taxing, is a matter of fact. It's not something that a government suddenly decides to do.
A government doesn't one day say, “Oh, let's spend, and then we'll tax.” No, ever since governments began to work as fiat currencies - and that transition happened across the world basically between the 1930s when countries like the UK abandoned the gold standard to 1971 when the USA finally abandoned it - over that period of adjustment, everybody moved from being a gold standard currency to being a fiat currency, and during that period of transition gradually everyone moved to this point where the central bank simply always created money whenever the government issued an instruction for it to do so.
So MMT is not a choice, it's a description of what actually happens.
And that's true with regard to the fact that tax then cancels the money spent. This isn't some form of choice that a government would make. As a matter of fact, that's what the role of tax is. Because if tax isn't used to fund government spending, and it can't be, because government spending is funded by money creation by the central bank, then what else does tax do?
Well, it cancels the money that the central bank created. That's the obvious corollary of the first situation.
And therefore, tax acquires, as I've explained before in other videos, other social purposes - to redistribute income and wealth, to reprice market failure, to support a fiscal policy, to support democracy, and so on.
But when it does those things, it is simply doing what a government decides to do. Now those are policy, but they are all the almost inevitable policy consequences of understanding MMT.
What MMT does not do, is require that a country have a job guarantee.
It could be said that full employment is the goal of economic policy. It could be that anybody who wants a job who has not got one could be provided with a job by government, which is what the job guarantee process does. All of those things are possible when you have MMT.
But I make a very clear distinction that I don't think everybody who talks about MMT does. Those are policy consequences of understanding how a monetary system works in a modern fiat economy. They are not necessary consequences. They are choices. There might be good choices in some situations, and they might not be in others. But I'm going to dispute with those in MMT who say that they must be part of an MMT policy, because I don't think they are. I think they are choices.
The same is true with regard to those who say that the government can always spend to meet its policy goals. Well, MMT does say that, but actually it also doesn't say that. Let me explain that one.
A government can always spend to achieve its social goals, so long as there is something to be spent upon. In other words, the government cannot achieve its social goals if there is no resource available to deliver on its social goals. There are no, for example, people to be employed. Or there are no physical resources with which to build a road. Or they cannot be afforded for any reason whatsoever. Then, you cannot just create money to achieve that goal because money by itself doesn't deliver social goals. Money is only an enabler.
So, MMT doesn't say the government can spend without limit.
It can spend more if it wishes, and MMT rightly says that, but it must, in that case, as a corollary, increase the amount of tax that it charges because the increase in the tax, first of all, cancels the inflationary effect of that spending and, secondly, if you have more tax paid by those who are in the private sector economy they will do less in the private sector economy and that will free resources for the public sector economy to use.
Now that is an appropriate balance on which a government must decide: how much of this economy is going to be state; how much is going to be private, that is a decision that can be made, but that's a decision that is enabled by a proper understanding of MMT. It is not an MMT policy.
So, let me go right back to the start of this video. I said that MMT is not a policy choice. Modern monetary theory is a description of how money behaves in a modern fiat currency economy. But that description is powerful because, as a consequence of it being understood - and I think it is only a matter of it being understood that is in dispute - then we have options made available to us to do things that other understandings - wrong understandings as it turns out of the way in which money behaves at present, which are based upon old gold standard thinking, and the gold standard hasn't existed for over 50 years - if we replace that wrong thinking with right thinking which MMT provides, then we can make appropriate choices for the modern economy.
That's what's modern about modern monetary theory. It lets us manage the economy in the way that is required now. But it isn't because of MMT itself. It's because it empowers us to make better decisions about how to manage the economy. And that's what needs to be understood about this very powerful economic idea.
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Absolutely right. Because Modern Monetary Theory (MMT) is a description of how the economy really works, it does give you policy options that you might not have considered before.
☑️Understanding MMT tells us that you NEVER need to “find” the money, because taxes do not pay for government spending.
☑️Spending is constrained by available resources (material, energy, people).
☑️You could have a job guarantee.
These options then become political decisions. Austerity is a choice. Public services are a choice. etc
Agreed
As I understand it, in the UK, all Sterling has to be issued by the Govt or banks that are licensed to do so (by the Govt.). It is unlawful to create Sterling any other way, so PE firms cannot create it, nor can billionaires – no one other than the Govt can create it.
Others can redistribute it, and hoard it in order to become “wealthy” but they cannot create it.
The balance between creation and removal (taxation) maintains the relative value of Sterling. Therefore the Govt can spend more and tax more, or spend less and tax less, to maintain that balance.
On that basis, everything a Govt. does, is a policy decision. It is is a policy decision for the state to build a new road, or build a wind farm, or replace a bridge. Equally, it is a policy decision to not repair a crumbling school building, or not employ nurses or cut the number of police, or fund armaments. None of these are constrained by “lack of money”.
So we can look around at the state of the UK and say with certainty that what we see is by design, not circumstance, and we should bear this in mind when listening to, and voting for, politicians
Again, this cannot be said enough.
Although a comment one might make is that although the opening paragraphs are redolent with the concept, the word ‘sovereignty’ is not mentioned?
I only drone on about sovereignty because I feel at least that that knots the Reeves-cividist is tying herself up in are created by the false counter argument that government spending is created by ‘loanable funds'(?) from the private sector. So for me, the concept of sovereignty – conferred on MMT for me by Stephanie Kelton – is key because it also confirms what we know about government controlled central banks that was reified (and too quickly forgotten about) in the 2008 crisis.
I see the negation of MMT as simply a big fight over who runs the money supply – the state or the private sector. The truth is that the money is made legal and even created by the state but they work with the private sector to distribute it. The private sector simply claims the opposite, supported by dodgy economists of the Neo-liberal bent who pretend – conveniently – that money just comes from no where.
I think that sovereignty is a key concept. Had we known more about it, maybe we might have avoided or had a better debate about BREXIT. Producing you own legal tender is perhaps the best and only sovereignty a country needs? It is a major source of power and self definition.
But apparently only private corporations and the rich are allowed these attributes created by their government.
It stinks if you ask me.
Do credit cards create money?
How about a company invoice for a service?
a) Yes – a bank is involved
b) No – that’s the same as a personal IOU
And the central banks – not just the Bank of England but also in other countries – agree that this is an accurate description. Or at least more accurate than the intuitive but entirely misleading “tax and spend” household analogy.
And yet all politicians talk about policy objectives being limited by available funds, and the imperative to be careful with “taxpayers money”. To be sure, there are policy choices and doing one thing can prevent you doing another, and all government actions should be directed at achieving impact for the effort expended, but not because the Treasury might run out of money. It is just an excuse for inaction.
Much to agree with
But MMT also says that, in order to control inflation, the government has to raise taxes, so public spending is constrained by taxation.
Whether you argue that taxation happens first and then that money can be spent, or he converse, the result is the same.
There are constraints on government spending and there isn’t a magic money tree.
Blue nun – a cheap and sickly wine that only vaguely approximates to a wine, rather like your comment only vaguely approximates to any understanding of any sort of the economy.
And if you think MMT changes nothing you clearly are way out of your depth here, not least because MMT does indeed say there are very real constraints on government spending – but they are not money – and that changes a very great deal.
What is going on here Blue Nun? This is getting tiresome.
No one in favour of MMT is advocating that there are no constraints OK? MMT is discussed realistically here.
You have to tax the injection of cash by MMT or it may cause higher inflation. MMT without tax is potentially a disaster – look at what the all too regular optimistic market over valuation of assets does in a low tax regime like ours for a start. But we don’t like tax do we in the UK?
The capacity of the economy is another constraint – skills, supply chains, raw materials.
And no-one has ever here said here that MMT operations should last in perpetuity. MMT is an objective driven policy option – it is done to make things we need happen – and when it has achieved its objective(s) it can moderated and managed.
The only thing we have in perpetuity at the moment is austerity and clap trap about the government spending money and then having to give it back. To whom exactly? Who is sending the red letters? Who is sending the bailiffs around?
Well, I’m sorry to break it to you Blue Nun but the Tories spent fuck all since 2010, so this notion of paying money back is a joke. They had loads of time to pay down Labour’s ‘debt’ and it is still there – apparently and according, it seems to you.
And that can only mean one thing: that the debt was a lie. Because the ‘debt’ was money just spent and invested that they would spend anyway on its ongoing commitments since 1945, plus the huge bailout to the private banking sector it bailed out in 2008, and then spending money to get us through Covid – albeit badly.
What you and your detractors call ‘debt’ is actually just legitimate state funding of its obligations to its people.
Now Blue Nun – you seem keen on consequences, so lets consider the morons in private sector banking who brought about the crash in 2008 which cost the UK central bank hundreds of billions of pounds of its money to bail out.
So where’s the consequences to that then you oaf? All I saw was that the payback was managed by the Government selling shares of the banks it bailed out at lower rates back to the very market that created the problem in the first place to make nice profit. I bet not one of the banks paid any thing back to the Treasury. In fact they were rewarded with a nice big fat juicy Central Bank Reserve Account to play with the likes of which those of us the public sector can only dream of.
‘Consequences’ Blue Nun? I don’t think you have a clue mate.
Now, this ain’t my blog and I cannot use the language that I think you are worthy of with rhubarb like this, but I’ll put it this way, you and those of you who talk and lie like this are beneath any ‘beneath of contempt’ I have.
I hope that is clear. Your lying has got to stop. You are peeing in the wind. And you know what the next line is don’t you? But then again maybe you don’t. Tough.
‘Consequences’ – my arse.
🙂
PSR – a good rant and (as Richard would say) much to agree with!
Just one quibbble, if I may. You say ” [MMT] is done to make things we need happen …”.
As I see it you don’t choose to ‘do’ (or not do) MMT – it just the normal system for all government spending. The government has a) to decide what spending is needed,b) to ensure that the money it spends is appropriate and is used wisely & efficiently and c) to determine the appropriate taxation policy.
Spot on. Every government bond trader knows MMT is a correct description of money; most are not on the left (although there are quite a few). There is no reason that a Tory shadow Chancellor should not embrace MMT.
It does scare the wealthy because it opens up policy options they fear and it’s much easier to say ‘can’t afford it ‘ than ‘I don’t want to share my wealth’.
For me, the interesting issues are how do we get the right policy making processes in place to ensure inflation control? How do we balance use of tax and interest rate policy? What happens if we get it wrong? Etc.
Indeed…
Clive
I like the direction you are going in but I think the questions need to be more fundamental especially around the ‘I don’t want to share my wealth’ bit of the wealthy. The things you have mentioned whilst being relevant are more technical. Let us look at philosophy a bit more, perhaps.
A book I’ve raved about on here is John Gray’s ‘The New Leviathans: Thoughts After Liberalism’ (2023).
Gray – building on the intellect of Thomas Hobbes – hones in on where liberalism has gone wrong.
According to Gray – and I have not read Hobbes myself but read around him – Hobbes believed that one of the Leviathans (the imagery being like a huge animal under the sea, stirring it, disturbing and breaching it) – one of the things driving events in the world, stirring life, disturbing it, breaching it – was human self preservation.
Gray raises the question as to whether we really as a species take the opportunity to understand this self preservation drive in ourselves and others and their causes – he sees this as a failure of liberalism and I interpret that as a failure of politics as well.
Gray sees the conferring of rights through legal means as a major mistake of liberalism. To me, this applies to (say) as much to the definition of corporations as ‘persons’ as to equalities legislation, or legislation putting stock holders first – the argument being that once in law, the debate is ‘over’ and it is no longer a political issue.
The trouble is that this is really false, because such issues are never really settled and can only go forward through ongoing discourse through politics because what is not settled continues to develop and change and the power relationships also change. If we take politics out of it, then neither side can have its say, no compromises can come about and one side self-realises at the cost of another, or the planet.
So my interpretation of your post Clive is that we need to talk to the wealthy more and understand what they fear and also seek to reassure them that what we (say,) in this blog would like to see is not a threat to them really other than paying some tax and curtailing their private jet use.
We must also consider that the self interest of the wealth services market – from accounting, law to executive jet and yacht builders and political parties may well be helping to sustain the lies and disinformation – fears – that give the wealthy a distorted view of a fairer world and sustain this mess we live with presently and far too long already.
You are right, why the wealthy won’t share is, perhaps, THE most interesting and important question….
I guess what I meant was that that the “is MMT true or not?” is not interesting – MMT is is self evidently true….. I want to move the technical discussion on the execution.
“…. I want to move the technical discussion on the execution.”
It seems to me the place to start are the fiscal rules, which are on wheels and as a contribution to reliability and stability, do not survive close inspection
Here is a list of fiscal rules that have been in or out of fashion since 2002 (there are ten so far in the ‘pick-and-mix’):
Total deficit rolling target: Total deficit target for specific year: Current deficit target over economic cycle: Current deficit rolling target: Debt as a share of GDP – Falling in specific year: Debt as a share of GDP – Rolling target: Debt as a share of GDP – Keep below certain level: Welfare cap: Net investment below certain level on average: Debt interest below certain share of revenues.
The ‘Debt as a share of GDP’ is probably the most critical; but with an arbitrary 90%-100% ceiling that no economist has ever been able to justify (Reinhart-Rogoff with a spectacular blunder in their attempt). Even the IMF (certainly not the cutting-edge of monetary radicalism) said this:
“Although the debt-to-GDP ratio cannot grow without limit, there is no magic number for the debt target. Macroeconomic theory does not prescribe a specific debt target; nor is there a clear threshold above which debt might become particularly harmful to economic growth (Eberhardt and Presbitero 2015) because this association depends on country-specific factors and can change over time” (IMF, ‘Strengthening the Credibility of Public finances’, October 2021).
Eberhardt and Presbitero, “This Time They Are Different: Heterogeneity and Nonlinearity in the Relationship Between Debt and Growth”; IMF Working Paper, actually dated 2013: “We find some support for a nonlinear relationship between debt and long-run growth across countries, but no evidence for common debt thresholds within countries over time” (from Abstract)
Japan runs a ratio of 250% to remind us that monetary orthodoxy in our backwater is blundering around in the dark (it ain’t science).
Thanks
The ‘pick-and-mix’ fiscal rules (and that characterisation is exactly how ‘smart’ and precise the rules are), from 2002 on, were sourced from the Institute for Government, 2022.
Thanks for the reminder about the gold standard. I’ll go and read about that. I wasn’t aware the UK abandoned it so early.
Given that MMT is an explanation not a theory, shouldn’t it be titled MME – Modern Money Explained?
I wish it was…
A timeline regarding the UK and the Gold Standard, together with further reading, can be found on my web site:
https://www.mmt.works/money-from-gold-standard-to-labour-standard/
I’ve always felt the same way about the unfortunate choice of the ‘MMT’ to name something which not a theory but a fact. It gives an easy let out for those who wish to deny it.
MME would have much been better or perhaps better still MMS – modern money system.
Anrigaut
In response to your response to my post about MMT, I concur that MTT does in fact reflect the reality of money creation but the choice that is being made to how to portray it by successive governments is anything but. And also, the market reaction to it is not helping it to reach any goals except its own.
So, I stand by my assertion about choosing to ‘do MMT’.
Because the choice being executed now is to lie about it, deny it and call it derogatory names like the ‘Magic Money Tree’.
A theory is an explanation of how things work, often backed with evidence. (Eg Einstein’s theory of General Relativity for which there is considerable empirical evidence)
Unfortunately, some lay people think a Theory is just a collection of conjectures that may or (perhaps more likely) may not be true. This latter, is more correctly called a hypothesis.
Until someone falsifies MMT it should be considered “a [true] description [ie theory] of how the economy of the country we live in really works”
Not having the best understanding how the system worked, thanks to your very clear explanation Richard, I now get to fully understand.
Yes – ‘MMT’ can be portrayed as some kind of cult – so it maybe best to refer to the relevant sources where all central banks explain how money is created .
Well said, and definitely useful to think about the resource constraints. I like Nate Hagens’ quote “money is a claim on energy, then debt is a claim on future energy” https://www.sciencedirect.com/science/article/pii/S0921800919310067 and asks what happens to the masses of claims on future energy when energy and material limitations become apparent.
If money were a claim on energy then we’d be living with an energy standard (as opposed to a gold standard).
But fiat money does not correspond to any physical resource. It a way of accounting.
At least that’s my understanding.
The KwHr as a unit of international currency, substituting for the petro-dollar, could be world changing. and is an interesting if ‘off the wall’ proposition.
Unlike gold, energy has a direct impact on the global economy and geopolitics, and an intrinsic value.
Energy drives both GDP growth and global wealth distribution. It has a use value.
Those nations with the largest fossil fuel reserves would be the most wealthy in theory, as oil states are today, but the externalities of carbon emissions would need to be fully covered in any sustainable global economy, and the current climate crisis is entirely down to ignoring resource exploitation costs.
Gas flaring (some 3% of oil/gas output in the N Sea alone) would literally be burning ‘wealth’, like KLF’s ‘art’ gimmick burning £1m on Jura.
Although there wouldn’t be a magic money tree, there would be magic money turbines, PV arrays and geothermal power stations.
Iceland would be very wealthy indeed, as would any nation like Norway with massive HEP. Sub Saharan PV arrays would literally be licenses to print money.
The Bay of Fundy, Severn Estuary and Pentland Firth would be energy gold mines, given the sustainable and predictable tidal stream potentials there.
Scotland would have several sources of permanent wealth as we already export surplus renewable energy to the hungry south of England. .
The means of exchange, and investment might actually correlate to growth potential..
Top cyclists produce 450 – 500 watts over extended periods and sprinters at maximum can reach 1000 – 1200 watts, well over 100m anyway….
A minimum wage might then be appropriate at a wattage rate.
The real ‘value’ of labour could then be calculated in energy outputs in production.
Of course, there would be unintended consequences as high energy foods would also have an intrinsic value, well beyond their dietary values.
Smarties and even sugar cubes could be a means of satisfying tax dues.
Great video! I had another good discussion on the Omnibus today (a men’s outing minibus actually) because s/o asked me what I thought about the upcoming Reeves budget. Having checked that they really wanted to hear, & that I had quite a lot to say, I talked about mythical black holes. About where gov money comes from and what taxes are for. Next question was about the national debt – whoopee – you did s/thing about that recently, so off we went, debt as savings, the need for it to be invested in projects, not just put on a Treasury spreadsheet, the difference between Sterling nat savings & borrowed dollars, quick trip to USA & FDR, & post-1945 Atlee gov.
Then the “wot about Liz Truss?” question. Got as far as saying it wasn’t Kwarteng’s “unbalanced” budget but what BoE did to bond market the day before. At that point omnibus wheels got bogged down in soft mud (boggy gov bonds, & my omnibus hasn’t got 4 wheel drive).
A great discussion but I’m still weak on the Liz Truss question and it ALWAYS comes up on the omnibus. Can we please have a video devoted to answering the popular version of the “Liz Truss/Kwarteng’s unbalanced budget crashed the economy myth” by explaining what happened to the bond/pension market, in language I can use on the Mile End Road (real) omnibus? Thx & keep up the good work, so I can keep telling my friends, family, neighbours and friends.
Noted…..
What puzzles me a little is when the Government decided to come off the Gold standard in the 1930’s and adopt a Fiat currency they, the Bank of England and Civil servants in the Treasury they MUST have understood how it worked ie MMT or they would surely not have done it? So how have we ended up all these years later with politicians, Treasury officials and leaders of the Bank of England who don’t appear to have any understanding of it at all?
In essence, they came off but adopted a fixed exchange rate to the dollar that remained on the standard. It was only in 1971 that they came off and no one had a clue what to do then. The meltdown of the 70s resulted.
Excellent video Richard. I came across MMT mostly thanks to you (though we do also have Keltons book). My wife often says I am obsessed by it. Not sure about that but we could do with trying some. Thanks Les
Thanks
Your wife should meet mine
The more I get to grips with MMT as a descriptor of how a modern fiat economy actually works the more I realise how obvious and simple it is, and that my difficulties with understanding it are the result of having a degree in Economics and Business Education combined with over half a century of sociopolitical and economic conditioning!
A query I made rather clumsily on an earlier blog:
Since ‘borrowing’ involves selling bonds to the value of the fiscal ‘deficit’ spending, this appears to remove from the economy exactly the same sum as the ‘deficit’ spending. So does not that mean that ‘borrowing’ has the same anti-inflationary effect as tax – but, being precisely equal to the ‘deficit’ spending, more efficiently? But if so does that mean that inflation is actually being fought on two fronts – via tax and also via ‘borrowing’?
I accept borrowing has some of this effect, but there are caveats.
First, it’s reversible, and second interest is paid.
This may criticism of James Meadway by Peter May might also be of interest to readers:
https://www.progressivepulse.org/society/why-modern-monetary-theory-mmt-doesnt-provide-the-answers
Meadway once told me MMT is not of interest to the left because there is no theory of class inherent in it.
I have always considered him a decidedly mediocre economist, and politically very naive.
Did you see the Novara Media discussion of MMT with Stephanie Kelton?
https://www.youtube.com/watch?v=cyXfr11g7So
On the blog this morning, thanks