MMT describes how government spending and taxation work in fiat currency economies: no more, and no less. In this video, I explain why critics often get it wrong, why some fans overstate it, and why understanding it could change how we think about jobs, services, and growth.
This is the audio version:
This is the transcript:
Modern Monetary Theory, or MMT for short, is not something a government chooses to do.
There's a great deal of nonsense talked about Modern Monetary Theory, mostly by its opponents, but sometimes, unfortunately, also by its proponents, and they talk a lot of nonsense about what MMT means with regard to policy.
But Modern Monetary Theory isn't about policy. Modern Monetary Theory isn't even a very good theory. It's simply an explanation as to how money works in a modern fiat currency country like the UK, the USA, and just about every country in Europe, Australia, New Zealand, and even Japan, if you like. Those countries all already use Modern Monetary Theory because they are fiat currency countries.
So the point of this video is to explain why that is the case and to help you identify when people are talking nonsense about MMT. So let's just be clear.
MMT describes how money works in what I call a fiat currency economy, and a fiat currency economy is one where you have your own central bank, a functioning tax system, a currency that can be used for international exchange and be borrowed in, and a legal system that enforces contracts because that's quite useful when it comes to collecting taxes owing. In those situations, MMT simply describes how the money system of an economy works.
There's nothing more to it or less to it than that. It is a description of the way in which, when a government spends money in such a country, it simply asks its central bank to create that money, which it then spends into the economy, with taxation then being used to reclaim as much of that money as the government thinks desirable, running whatever deficit it thinks necessary to provide the necessary stimulus to the economy and to leave enough government created money in the economy to meet the demand for growing money supply as a consequence of inflation and a growing population and a growing economy. And that's it.
That is what MMT describes, as well as providing a description of what national debt is, where it makes clear that national debt is not as such debt at all, but it is, in fact, the saved money of those who end up with the benefit of government money creation. So MMT is a description, and it is not a political programme.
Let me be unambiguous, both left and right-wing governments actually operate MMT now because what I've just said is what they actually do. The fact is that there isn't a political bias to what Modern Monetary Theory says.
But let me be clear about this, once people get to understand that what Modern Monetary Theory makes clear is that a government has the power to deliver full employment, to deliver growth, to create opportunity, and to supply the services that people want from the government if the resources are available to be put to use to supply to them, then the pressure is created for people to demand those policies.
So people think that there is something left-wing about MMT because it empowers people to ask for policies which are identified as such, but that doesn't mean to say that MMT is left-wing. That's not the case at all.
What MMT does is simply make clear what is possible. And what is possible is that the economy of a country can be run at full employment without finding the money first. That is what MMT says. And therefore, what it makes clear is that if there are underutilised resources in an economy, and I promise you, there are in the UK economy, they can be put to use without a risk of inflation.
That's MMT's insight, but it isn't MMT's policy.
So don't be confused. MMT describes how the monetary system works. It describes what is possible. It makes clear what governments can do, but nowhere does it say governments should do these things, and anybody who conflates those two and says, the MMT says the government must run full employment, it must provide a job guarantee, it must maximise the opportunity for government services, or anything else, is imposing on MMT their own political choice. But that isn't what it says, and I think that distinction's really important, and when you're involved in debate on this, you need to differentiate those two, or people will misunderstand you, and that would be a big mistake.
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That is the clearest, most succinct definition of MMT that I have read. Now all I have to do is memorise it!
Thank you
M. M. T= Description not prescrition?
OK, but how have we ended up with doctors unable to find jobs, and public services starved of funds? (Answers please from our elected government!)
Sometimes I think it would be better to call MMT “Modern Liabilities Theory” since it gets closer to what using money actually involves doing creating liabilities and settling them over various time periods. It also I think takes some of the emotion out of our use of money as in “money is the root of all evil” for example.
Governments and their licenced banks create liabilities as in the government’s “I promise to pay the bearer on demand the sum of “x” pounds” written on their physical liability tokens. Of course governments and licenced banks have a “liability” within their liability that of refluxing or destroying all or part of what they create.
Most households and businesses don’t actually balance their books because they usually run liabilities in the form of mortgages, bank loans, shares, corporate bonds, derivatives, etc.
Government’s usually have a liabilty to make good the demand lost by private sector saving or the usual failure of the market to maximise use of resources because of profit uncertainty.
Governments also have the liability of taking liabilities out of circulation both permanently and temporarily if both it and the market over bid real resources.
Obviously there are other liabilities to add to this list for both the public and private sector.
I am not convinced by the name
It feels negative.
Fair point “liability” does have double meaning. I simply think it important to emphasise the continuous processes that do occur with money of which entering into liabilities is obvious. Of course on reflection the opposite process ought to be included which is the cancelling of liabilities so probably “Transactions” is better than “Theory.”
Reactions might include:
I believe that having a ‘small state’ is better so what you have said can’t be right.
Or
You mean that there is no reason why the government couldn’t nationalise water – and other companies – or require Local Authorities to build decent quality houses to be rented at a fair rate, and have higher taxes on the most wealthy, cut child poverty and generally spend more on public services and give the poorest a better chance, etc.
But those are all things the 1945 Labour government wanted. They are what most people want now.
“Labour” shows no sign of doing them now … so what you said can’t be true
Thus: if Reeves says she wants the Uk economy to grow whilst at the same time saying that she wants to balance the govs books (=reduce gov debt) in MMT terms, this is an impossibility. A growing economy demands more gov money – and given the timing difference (gov spending vs gov money collection via tax) this means ipso facto growing debt. “To be a Reeves” to be cluless on the political economy of a country.
Richard. Thanks – crystal clear on MMT. Of course we’d like to harness this idea that available spending money is not limited by tax income, in order to make a difference.
Let’s assume we now want to print money in order to invest in infrastructure. We get the “can’t do that because the city will generate a run on the pound” – (because the city spivs don’t want an end to austerity). It seems to suit them fine….
These arguments against choosing to use MMT for progressive change are heard constantly. How valid are they? …. What is the limit before inflation would undermine money generation? Could city finance undermine the political decision to harness MMT to cut austerity and make progressive change? What are the limits?
I am making a video on this…
Very good, easy to get my head around and no difficult concepts or ideas
I think there’s a mistake in saying that putting underutilised resources to work doesn’t carry a risk of inflation. MMT does say that additional spending can be done without finding the money (e.g. by printing), that spending can indeed put underutilised resources to some kind of work, but if the output of that work is less than the amount spent, then the money supply has gone up greater than production. And that’s inflation risk.
You are completely misrepresenting hat MMT says. Why do that?
It quite explicitly says putting underutilised resources to use does not crete infaltion risk, and of course it does not. Your logic would suggest we should never do anything because everything is inflationary. Politely, that’s absurd, or just wrong.
@Alfred Stark
You say, “if the output of that work is less than the amount spent, […] that’s inflation risk”.
You have, I think, completely missed the point. You are equating “output of work”, which is a real thing, a product or service, with “the amount spent”, which is a quantity of money. These are two entirely different things, which cannot
be equated, a classic category error.
MMT is all about focusing on the real outcomes of economic transactions rather than focusing on money which is merely (with apologies to Richard) accounting.
In the case you suggest real products or devices are produced, at low marginal cost (in real resources) because real resources (machines or manpower) are not otherwise being used. The “amount spent” is largely irrelevant since fiat currency costs nothing for the government to create. With underutilised resources the margin cost of production (in money) would usually a lot less than the current sale price. So using underutilised resources will tend to be anti-inflationary.
Of course, one could envisage a scenario, where the real resources used to create a product were more than the (real, not monetary) value of the product, and which “printed” money was used to subsidise this loss making product. That might be inflationary, but it’s a very silly thing to do and not what is being discussed here.
As Richard said, MMT is a description of what happens in a fiat economy. It offers no policies per se and no protection from incompetent politicians. It is quite possible for a government to cause inflation by implementing incompetent policies. But they would have to be very incompetent to do so with the positive opportunities available once MMT is understood.
Thanks
I agree with all of that, although I have heard many MMT economists say that the only prescriptive policy is the job guarantee as it acts as a price stabiliser though I don’t have the knowledge to agree or disagree with that. I would say though that it must inherently appeal to those on the left, or perhaps rather, annoy those on the right because it puts the government front and centre in economic policy and by breaking the link between taxation and spending reduces the relative importance of the private sector.
I have never bought the idea of the JG: it is not deliverable in practice, IMO. It is a possible policy, but it is not about money.
An interesting question to ask fellow omnibus passengers (incidentally, there is a version of this technique in the New Testament, during a discussion about tax, religion and colonial/imperial politics, between Jesus and his opponents – Mark 12:13-17)
https://www.biblegateway.com/passage/?search=Mark%2012%3A13-17&version=CEV
“Where does the money I pay my tax with, COME from?”
Produce a fiver, then settle down for a long discussion, which eventually will take you and your audience to Threadneedle St. (or in Jesus’ case, Rome). Because money comes FROM government, before it finds its way BACK to government.
The discussion works best if you avoid politics, all references to economic theory, even resist double-entry book-keeping, and just follow the money a bit like a game of snakes and ladders till you reach your inevitable destination. Don’t get diverted by nitpicking pedantry.
Once you’ve arrived at Andrew Bailey’s doorstep, THEN you can start discussing politics and economics. Austerity is a good place to start the political bit of the discussion with the question, “Why austerity?”.
Austerity is very difficult to justify, after you have had that first “money” discussion.
Almost everyone hates austerity but many believe it is “necessary” because they never had the “money” discussion.
This method may not work if you are discussing money with a Labour MP. I don’t know why. They seem to have something missing in their heads.
I like it.
Many thanks.
I’ve had very similar conversations with colleagues on the odd occasion when the topic of the economy has come up. It’s much easier to explain how we can afford more nurses/doctors etc when you’ve already laid the groundwork that the money comes from the government and then moves around. I think I used a circle of life analogy, which is something we were taught in school biology classes.
People more often than not start off very bemused/confused but by the end I almost always have them quietly nodding along in agreement and understanding.
Thanks
A really useful clarification. Much needed.
When I first learnt about MMT I couldn’t figure out why, some said, that certain policy options were a necessary corrollary of MMT. It took a while for me to realise that policy prescriptions simply aren’t a part of MMT despite what some say.
As you say, MMT describes how fiat currency works and that covers many countries. I think clarification would be helpful about the status of Eurozone countries. Of course they do use a fiat currency the Euro. Your description says that fiat currency countries have their own central bank. And Eurozone countries do have central banks but not banks that can issue the Euro currency that they use. In some ways this makes them, monetarily, like local authorities in the UK, or States in the USA. I appreciate that the situation is nuanced, and unusual for a group of developed countries, but the Eurozone countries are different. So I think it is potentially confusing to lump them with countries like the UK, USA, Canada, Australia, and New Zealand. Perhaps some explanation and clarification might be useful sometime to avoid confusion.
Every EU central bank can and does issue euros. They are not as such issued by the ECB, IMO. The powor is devolved. That is why they can run varying fiscal balances. So they are not like local authorities.
I think more clarity would help.
Yes, national central banks issue Euro notes, but only the ECB can authorise the issue of those notes. I believe that Eurozone nations have to restrict their deficits and are forbidden by international treaty from directly funding their governments. The UK was similarly constrained by the Maastricht Treaty. Whatever people think of Brexit, one silver lining is that the UK is now in control of it financial and monetary policy, whereas it wasn’t when in the EU.
So the Eurozone member nations may be more than local authorities or US States but they are, in some ways, less in control of their finances than, say, the UK
Sadly this is amply demonstrated by the appalling way Greece was treated and the resultant long lasting recession, or should that be depression.
Still, perhaps this is all a subject for another day. Many thanks, once again, for raising this important matter.
You are still confusing theory and practice, in my opinion. Fiscal control does not work like this in practice.
But it comes at a cost to their local economies competitiveness in comparison to other EU countries eg Germany keeping inflation low disadvantaged Italy (Italy cannot not now devalue its Lira to remain competitive) see Wynne-Godley [1992 ] Maastricht-and-all-that https://www.lrb.co.uk/v14/n19/wynne-godley/maastricht-and-all-that
EU countries are bound by the Maastricht Treaty to keep to arbitrary targets :
– 3% deficit-to-GDP
– 60% government debt-to-GDP limits
– achieve and maintain their country-specific MTOs, which are defined in terms of the structural balance
Countries’ medium-term budgetary objectives (MTOs).
https://www.ecb.europa.eu/press/economic-bulletin/articles/2019/html/ecb.ebart201903_02~e835720b96.en.html
ECB state central banks do not have a (reserve) account at the ECB but they do issue bonds which can be subject to pressure from bond markets eg see Greece unless the ECB steps in (and that is subject to politics / religious belief / lack of knowledge in how a FIAT currency operates).
Please correct if inaccurate.
But, as you well know, those targets are not met. That is why the claim does not stack. I am talking about the reality, not the theory.
I did a bit of self-examination of myself because of this post and I’m not quite sure about the point you are making.
I think that the issue is that MMT faces a tsunami of indifference, ignorance and outright refutation as the message is always that we have ‘no money’. So, maybe some of us over state the case (I do not think that I do although I am from the ‘Kelton school’ – that is I see MMT as an expression of state sovereignty – and I do mean sovereignty in terms of power).
I understand that by decoupling MMT from Left, Centre, Right politics etc., it is an attempt to help MMT stand up as a cold, hard fact (devoid of ideology?).
But, I am still somewhat uncomfortable with this. We’ve seen what happens when we go down the rabbit holes the likes of which Giddens provides for us with his Third Way and any number of Tufton Street tossers.
The point I suppose I am making – as I rather too publicly process your post (forgive me) – is that the MMT process with our pound sterling must have come out of some political thinking at some time when it was acknowledged, created, whatever. It would have done so with some objectives and opportunities in mind and also in the context of certain problems society was facing. The origination of MMT still has that politics, ideology (the decision to do something) in its DNA. I’m thinking about what Christine Desan wrote about in ‘Making Money’.
On the opposite side of the coin, we have those who deny that MMT exists, tell us there is no money, have decided to do nothing or too much of the wrong thing. That too is a political decision, creating a different set of opportunities, defined problems.
Man created money – not God. And so it follows that it and the way it will be provided will imbue it with the strengths and weaknesses of its creator (us).
I’m not sure that it is possible to make MMT politically neutral (if that is one of your goals). You are also risking making MMT be without some sort of ethics for example the Tory Help to Buy policy helping rich people buy a house! That was MMT.
Be careful is all I’m saying I think.
Once MMT is understood the potential within it follows: there is no excuse for not delivering any more. I am not worried that I am undermining my case.
Well, having reached the 400 word limit in my first response, I would have gone onto say that your post to strangely actually serves as an affirmation of the reality of money creation and that you were not undermining yourself at all.
However, there us duality there in your assertion, a door that has been left open and as we both know, we live in age in which the abuse of language and where cultural appropriation of ideas is rampant. I just cannot put my finger on it and enunciate it, but there is something not quite right. Maybe because MMT has no innate agency of its own; it does not care if the money goes to house built for affordable rent or to some rich guy who does not really need a help to buy subsidy. This world we live in prints money for the rich, but not enough for the rest of us. But both those are a political act, not the money creation bit.
As Hobbes I think observed, people allow themselves to be possessed by words and MMT is no different – myself included. I agree with a later post saying that the word ‘theory’ should be dispensed with.
Thanks
Noted
A bit confused by the inclusion of most countries in Europe in “modern fiat currency country like the UK, the USA, and just about every country in Europe, Australia, New Zealand, and even Japan”
AIUI, MMT excludes pegged currencies like the Euro from sovereign currencies. So while the ECB might issue its own currency, surely Italy, for example, does not have the same sovereign rights?
Or am I missing something?
They are all represented in the ECB
I think they in practice do have significant control.
It is all so straightforward, so I just wonder why so many get MMT so wrong? What is so difficult about understanding how our system works?
I suspect it’s because, for whatever reason, they cannot cope intellectually, or emotionally, with the implications. It is this that I find so maddening. Whatever their motivation, and understanding it, is necessary to convince them of the truth. Then, just maybe, we could have a vastly improved country and they could live an intellectually honest life.
The anti-MMT narrative is well funded.
The reasons is MMT makes actve government possible – and neoliberals hate that.
Yes, and so they live a dishonest life.
I would find that really difficult.
I don’t understand traditional economics, never mind MMT, so please explain this! If a central bank prints more money, that means more in circulation (or whatever) and so dilutes the value of each monetary unit because the total value of its currency is determined by the totality of a country’s assets, or perhaps just its gold reserves. Or is it, as you have just suggested, how the printed money is spent, or perhaps just wasted (there, I’ve answered my own question). As Julian Assange said, paraphrasing…’the function of government is to take money acquired by taxation and give it to big business’. Which normally isn’t used for the benefit of the country, but just to line the pockets of those whose pockets are very well lined already.
I’ve often wondered why countries seem to have a 2% target for inflation. Could this be to reflect the amount of created money, balanced through taxation (my first exposure to the concept of MMT in one of your recent videos, Richard)?
Be gentle with me, and please explain in words of less than one syllable if possible, why this may be fallacious, or indeed just point me at some resources for further reading.
So many of your assumptions are wrong it is hard to know wyere to start, so I suggest reading this.
https://www.taxresearch.org.uk/Blog/wp-content/uploads/2021/04/Money-for-nothing-and-my-Tweets-for-free.pdf
This is my free e-book. A hardcopy version is available on Amazon.
MMT is the fiat currency view without the gold rimmed glasses hangover!
What does that mean?
Agreed. Could you perhaps comment on the topic of the “labor market” from the perspective of MMT? The significance of wages for the economy as a whole? Is wage policy ignored from the perspective of MMT? Thank you.
No it isn’t, but noted.
Perhaps it would be better if people started calling it “Modern Monetary Practice” or “Modern Monetary Reality”, or “Modern Monetary ” something else other than theory…
Agreed
I know neoliberals like the idea of small government, but they are also quite violent. If they suddenly realise the truth of MMT, my concern would be they go on a spending spree on the military and intelligence services with a view to empower the state verses the people.
Another concern is whether politicians can exercise self-restraint, if the populace accept MMT as the correct way of how money works, and then start demanding more is spent on everything. The pressure on them from their constituents to fix everything would be immense, and way more than the available unused resources.
Really?
Why do you have such little faith?
Do you think political competence is impossible now?
Policing has already become paramilitary. Look at their armour, their surveillance, their personal equipment.
Gov’t has already had its military spending spree. (Trident, useless aircraft carriers).
Politicians already KNOW that taxes don’t fund spending (2008-9 crash, and Covid19). Ever noticed how spending (but not tax) goes up just before an election?
It’s the voters that don’t understand these things yet. But that is changing.
The status quo is actually so dangerous it could reasonably be considered terminal.
So no, I don’t share your worries about living in the honest light of day as far as money and Gov’t are concerned.
Another person who doesn’t understand the implications of MMT!
MMT doesn’t mean that the government has unlimited spending opportunities – we can see how the current government approaches, which have led to higher public spending and higher taxes have resulted in long-term interest rates increasing to their highest levels for almost 30 years.
This reflects a lack of confidence in the UK economy and how it is being managed.
Should it not better be called MME (Modern Monetary Explanation)?
Yes
Hello Richard. Do you think there is any role for the Bank of England in trying to control inflation? (Via interest rates)
I take it that as you believe there is productive capacity in the economy, increasing public spending WITHOUT higher “govt borrowing” will not lead to inflation? Would that be a fair summary?
What I am not clear on is, notwithstanding the huge economic and societal benefits any negative impact of higher public spending if this is not mitigated by tax rises or gilt issuance?
With respect, your posting has all the appearance of being deliberate time wasting trolling, and not genuine enquiry. So, you are banned. The answers to all your points are readily available in my work – and your claims are absurd. For example, only a fool or sociopath would claim solving child poverty is massively negative for society, and so I cannot be bothered engaging with you.
Good article. Has anybody provided you with a technically coherent explanation of how the government spends money that is counter to MMT, if not they must be accepting of the theory. In my mind they just need to ask themselves about the accounting mechanism used by the govt to spend. Spending comes from the Consolidated Fund which has an intraday negative balance therefore the BoE must be providing credit or an overdraft otherwise it would not be possible for the CF to have a negative balance. If taxes paid for spending then the CF would also have a positive balance reflecting the taxes transferred into it.
There is no such statement. But the BoE effectively agreed MMT works in 2014. See the first of their Quarterly Reviews that year.
Thanks. I was aware of that article but it is more to do with how commercial banks operate and effectively create deposits when they make loans. It would be very useful if the BoE did a similar paper on how the government accounts at the BoE function when it comes to making payments to government departments. I asked them if they had any interest in doing so and they said no. So I have to rely on the paper prepared by UCL called the self funding state. This psper should be compulsory reading for all economic degree classes. I would love the BoE to confirm whether the mechanisms in the UCL paper are actually correct. Why are they loathed to do so.
I think they are more interested in preserving their image than in explaining what they really do.
Hi Richard,
I was fascinated by MMT for the reason you explain so well in this video: if enough people can simply understand what money is and how the government controls it then pressure will automatically grow for the government to take action (because the “we can’t afford it” excuse won’t work anymore!).
I stopped being fascinated by MMT in 2014 when Richard Werner published “Can banks individually create money out of nothing? The theories and the empirical evidence”. Actually 2015 because that’s when a friend told me about Werner’s empirical proof that private banks, not the government, create most of the money. I then gave up on MMT because it is based on what turns out to be a misconception – the misconception being that the government creates and controls the money supply.
Can you change my mind again? I would be delighted to change my mind – when the facts change I change my mind 🙂
If you think that private banks created the new money supply which is commonly prescribed to quantitive easing, although that is not true, then you are seriously mistaken as to the source of money inside the UK economy.
Try this https://new-economicsf.files.svdcdn.com/production/files/b847162e8c996d5e26_fam6bqdx4.pdf
And this https://www.ucl.ac.uk/bartlett/publications/2022/may/self-financing-state-institutional-analysis
Thanks a lot for the reply, Richard, and for the references. I will read the UCL paper. The book I bought back in 2013 – Mr Werner is one of the authors 🙂 Reading the paper will take me some time and there’s no point me blabbing on further without doing my homework.
I will permit myself to respond to the precise point: I confirm that I do not think private banks created the new money supply commonly prescribed to quantitative easing. I don’t think you really thought I think this, but you likely regularly get trolls and other mischief-makers trying to catch you out with a ‘gotcha’ here in the chat so your tactic to slightly misrepresent my question and go on the attack makes good sense. I gave up on MMT in 2015 because I am a mathematician and one of the axioms of the theory (government creates all money) was proven incorrect. At least that was my understanding at the time.
Thanks again,
George
George
You ignore a simple fact.
Banks can only make money under government licence and with access to Bank of England facilities.
They are agents, and not in many ways principles, in this process.
Richard
george
how about – the state/government authorises the creation of money into the economy,but licences it out to the commercial banks so they came make loans, and “licenses” its own central bank as authority to make payments for government expenditure.
NO No No
That is the gopld standard in all but name
It would be utterly disastrous
but surely in a gold standard system the amount of money available to a country is dictated by how much gold it has in its reserves, which is nothing to do with MMT?
But limiting the money supply – as ou are suggesting has the same result
Money is credit – or promises to pay
The government cannot dish them out – it has no idea who is going to make the promises
Please do some reading – you have this all wrong
Money is not something government can create – excepting by its spending. The rest is by banks and people interacting.
sorry to be a pain
but by “authorises” i did not mean “limit” i meant “allow to happen”
I was trying to answer george’s post and your response
i’ve been self studying monetary economics for ten years now .There’s always a gap
Thanks
Thanks Richard & Rob for the follow-up responses. Richard is absolutely correct that I have been ignoring that simple fact, which is more than a little embarrassing for me! But I’d rather know the truth of something and feel an idiot than be ignorant. I’m going to start reading the UCL paper this evening.
Irrelevant anecdote. This reminds me of the following conversation back in 6th form – so last century. I think you can work out which is me 🙂
“And so time goes slower. Do you get it now?”
“No. But I know it’s been measured using a clock.”
“Yes. Why are you making this so hard?”
“OK, sorry, but like how does the clock know that time has slowed down?”
“It takes time for the clock to tick.”
“….Ah….Right….Good point.”
Great explanation.
Intereconomics.eu seem less than trustworthy despite appearances, “In the last few years, the so-called Modern Monetary Theory (MMT) has been gaining prominence in the media and the public. This article presents the MMT approach to money and monetary policy, and discusses its recommendations regarding fiscal policy and aggregate demand management, the structural policies it advocates as well as the international aspects of MMT. Overall, it appears that MMT is based on an outdated state of economic science and that its claims regarding economic policies are much exaggerated: The meaning of MMT is more that of a political manifesto than of a genuine economic theory.”
https://www.intereconomics.eu/contents/year/2021/number/6/article/modern-monetary-theory-a-wrong-compass-for-decision-making.html