There was quite a lot of discussion on this blog yesterday about modern monetary theory, so I thought it was worth checking whether the glossary entry on this subject was still relevant.
On review, I thought that the entry served its purpose, but it felt as if I had written it two or three years ago, as I had. My style has undoubtedly changed since then, so I redrafted it to add greater clarity to the arguments I had already made.
At the same time, I decided that it was appropriate to add to the glossary entry a list of myths about MMT that are commonly promoted by those who either do not understand it, or who wish to maintain the status quo, or who think that to discuss the power of the state to create money, and in the process liberate itself from the power of financial markets and the tyranny that they have created, is a betrayal of their undertsanding of the socialist cause since understanding how the economy really works today is, apparently, much less important than understanding what Marx might or might not have said 150 years ago.
This is the new entry:
Modern monetary theory (MMT) explains how a government with its own sovereign currency and central bank actually finances its activities. In essence, such a government creates money when it spends and removes money from circulation when it taxes. Spending precedes taxation. Nothing in this cycle requires prior revenue.
MMT therefore describes the operational reality of public finance, not an idealised model.
Core propositions
First, a government that issues its own currency and has a central bank acting on its behalf does not need to tax or borrow before spending. All government expenditure is made possible by the central bank crediting bank accounts as instructed by the Treasury. This is new money creation. Tax revenues and government borrowing may serve other purposes, but funding spending is not one of them.
Second, the resulting balance sheet entry – the government's “debt” to its own central bank – is simply the record of the money it has created to support economic activity. Because the economy requires a stable and growing money supply, this liability never needs to be repaid.
Third, the primary fiscal tool for controlling inflation is taxation, which withdraws money from the economy. Excessive money creation causes inflation only when an economy has exhausted its real resources. Until then, spending can expand without inflationary pressure.
Fourth, tax plays a further role in giving the government's currency value. Because taxes can only be settled in that currency, economic actors must hold and use it, avoiding the exchange risk that would arise if they attempted to operate primarily in another currency.
Fifth, once its stabilising role is fulfilled, taxation becomes an instrument of wider economic and social policy. Taxes can be designed to shape behaviour, tackle inequality, and regulate economic activity — but not to “raise revenue” for spending, which has already occurred through money creation.
Deficits, borrowing and saving
Sixth, there is no requirement for governments in this position to balance their budgets. In a growing economy, deficits are normal and desirable because they allow the money supply to expand in line with real economic activity. Government deficits are the private sector's financial surpluses.
Seventh, such a government need not borrow from financial markets. It can always borrow from its own central bank. Bond issuance is therefore a choice, not a necessity.
Eighth, the government may nevertheless offer interest-bearing savings accounts or bonds as a safe place for the private sector to store financial surpluses. This is best understood as a deposit-taking service, not a funding mechanism. The central bank can always guarantee repayment by creating new money.
Interest rates and credit control
Ninth, the government does not require interest rate manipulation to manage inflation. It can instead use:
-
changes in tax rates and tax design
-
adjustments to the size of the deficit
-
credit controls on commercial bank lending
These tools directly address inflation's causes rather than attempting to slow the economy through higher borrowing costs.
Tenth, a low-interest-rate environment can support investment, reduce financial extraction from the real economy, and limit the upward redistribution of income inherent in high interest payments — promoting social and economic well-being.
Employment and real resources
Eleventh, a government with monetary sovereignty can pursue full employment because unemployed people and unused assets are evidence of slack in the economy. Bringing idle resources into use is not inflationary so long as they are genuinely unused.
This may include some form of job guarantee, but such a programme must sit within the wider system of social security and need not be the central pillar of economic policy. What matters is using real resources productively, not restricting spending to arbitrary financial limits.
Common Myths About Modern Monetary Theory (MMT)
MMT attracts persistent misunderstandings — often because critics attribute claims to it that it does not make. These myths usually arise from those who cling to the household-budget analogy or assume that government must behave like a currency user rather than a currency issuer. What follows corrects the most common errors.
Myth 1: “MMT says governments can print money without limit.”
This is wrong. MMT is explicit that the real constraint on government spending is inflation, which arises when real resources are exhausted. The question is never “Can we afford it financially?” but “Do we have the labour, skills, energy, technology and ecological capacity?” MMT simply recognises that money is not the binding constraint — real resources are.
Myth 2: “MMT denies that inflation matters.”
This is also wrong. MMT treats inflation as central. It argues that taxation, credit controls, and strategic public investment are the most effective tools for managing inflation. It rejects the idea that raising interest rates to create unemployment is morally or economically acceptable when better tools exist.
Myth 3: “MMT claims tax is unnecessary.”
This is a false claim. MMT says tax is essential — but not for funding spending. Tax withdraws money from the economy to manage inflation, gives the currency value, shapes behaviour, tackles inequality and regulates markets. It is essential to macroeconomic stability. It simply does not fund government expenditure because the government issues its own currency.
Myth 4: “MMT says deficits don't matter.”
This could not be further from the truth. Deficits matter a great deal — but in the opposite way from conventional economics. A government deficit is a private sector surplus. The issue is not the size of the deficit but whether it reflects appropriate levels of public investment, inflation control, and private saving. Balanced budgets can be actively harmful in a growing economy.
Myth 5: “MMT says government debt never needs to be repaid.”
Yet again, this is wrong. MMT notes that a government's ‘debt' to its own central bank is just the record of the money in circulation. Attempting to repay it would remove the money supply altogether. The government can and should redeem bonds issued to private savers when they mature, but this is a banking operation, not a funding requirement.
Myth 6: “MMT abolishes the need to borrow from markets.”
This is wrong in its implication. MMT says governments do not need to borrow from markets. They may still choose to issue bonds to provide a safe savings vehicle for pension funds and others. This, though, is a service to savers, not a funding mechanism. The choice is political, not financial.
Myth 7: “MMT promises free public services without consequence.”
MMT says no such thing, not least because MMT is not a manifesto; it is a description of how money works. It does not prescribe any particular spending level. It simply removes the artificial constraint of “how will you pay for it?” and replaces it with the real questions, which are:
-
Do we have the resources?
-
Is inflation under control?
-
Is this socially, economically and ecologically justified?
Myth 8: “MMT is just quantitative easing by another name.”
This reflects a profound misunderstanding of MMT. QE creates bank reserves but does not increase spending power for households or businesses because it swaps one financial asset for another and does not raise incomes. Government spending, by contrast, injects money directly into the real economy. MMT distinguishes the two clearly.
Myth 9: “MMT assumes full state control of the economy.”
MMT says no such thing. MMT works with any mixture of public, private and cooperative sectors. It simply clarifies the monetary framework within which those sectors operate. It removes false financial limits so governments can support full employment and stable conditions in which private enterprise can thrive.
Myth 10: “MMT is untested.”
This myth might be the biggest of all those told about MMT. MMT is a description of what already happens in every country with its own currency and central bank, including the UK. The only question is whether policymakers acknowledge this reality or pretend the government is like a household.
Comments
When commenting, please take note of this blog's comment policy, which is available here. Contravening this policy will result in comments being deleted before or after initial publication at the editor's sole discretion and without explanation being required or offered.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Under “Core Propositions” shouldn’t there be a 12th one which points out only the government has the power to create debt-free money to deal with emergencies as well as its day-to-day regulation of demand in the economy. Examples of such emergencies are financial crashes, pandemics, wars both internal and external, and negative effects of global warming. In addition to this power the government has the ability to claw back what it creates by other means than taxation and saving means such as government bonds it can temporarily nationalise companies especially in the financial sector.
You are moving into politics. At this level, I will not.
For me the core of MMT is that in the ultimate analysis the rich will lend to the government in times of emergencies, particularly wars, precisely because the government has the power to create money debt free and tax. Without the rich would it no longer have this power? The answer is it would still have it.
Thanks. 🙂
I think that is the clearest succinct summary of MMT that I have read.
I particularly liked the paragraph starting “Thirdly”, about inflation, because this is seldom, if ever, stated elsewhere and is important. But it is all good. 🙂
Thanks
It juat revamped the earlier one but was worth doing
Cracking redefinition Richard, I wish some of those who describe themselves as marxists would come to understand MMT (like those over at SEB (https://socialisteconomicbulletin.net/)
…or Richard Wolff (rdwolff.com) etc
There will be more on that….
When I have recovered from today.
“What matters is using real resources productively.” That is the goal, the object, of economics. To help bring about systems of thought that aid such a project without saying which projects are politically necessary. Constructing a mathematical equation does little to achieve this. Such things drag us down and distract us with arguments about ‘efficiency’ and ‘value for money’. Supposedly GDP is a measurement of productivity. We are supposedly meant to be growing by learning to produce more with the little that that we have. What we can’t do is infinitely grow the inputs and have infinite efficiency. The earth is small and we have to learn to live within its means.
Very, very good.
I’ve checked the myths section and I do not think I have fallen into any of those traps myself, but you have provided more clarity (happy to be put right).
But the problem with how to describe MMT still remains. I would call it ‘functional’ in practice the ‘functional finance’ of what we need. All you have to do is compare it to speculation in finance. MMT results in tangible things – good services, good roads etc., whereas all the speculation leads to is more money to do what with exactly?
And the only tangible things from that are an increase of wealth for an already engorged capital class, supporting the corruption of democracy, increasing and maintaining inequality, public squalor verses private opulence.
MMT is a democratic and fair allocation of resources in a democracy.
Thanks
Many thanks for this Richard. This is great! One aspect that I always struggle to understand is the prevention of inflation. You say that inflation is caused if there are not enough resources – please can you explain further when or if you have time? As a simple example, if £100m was created by the BoE and the Government put it into infrastructure which resulted in the employment of 50,000 people, don’t those 50,000 people now have money to spend which could lead to inflation? Continuing with the example, if the infrastructure work actually needed 80,000 but the UK only had 50,000 people available – how would this lead to inflation? (These are genuine questions, not challenges – its just these are the sort of Qs those who are wedded to the household analogy ask).
One more Q, if a Fiat currency is not backed by anything. The government/BoE can create money to spend – I understand that it doesn’t need to be paid back but when governments talk about interest on debt – is this the debt that they mean? In the same vain, if there is debt using a currency like the pound – doesn’t it mean that the Govt/BoE has to create even more money so that the debt can be paid? In order words, it suggests that the govt will always be in debt. Again, apologies if these appear to be incoherent ramblings of questions – but I ask with genuine curiosity to better my understanding.
Thank you,and apologies for the delay.
These are appropriate questions to ask.
First, inflation does not arise simply because people have more money. It arises when total spending exceeds the economy’s ability to produce goods and services at existing prices. If there are unused workers, unused buildings, idle machinery, or spare capacity in supply chains, then new spending simply brings those resources into use. No inflation is required.
Second, in your example: if the government creates £100m and employs 50,000 people who were previously under-employed or unemployed, you have not increased demand beyond capacity — you have expanded capacity by putting people to work. Their spending will mostly be absorbed by existing productive slack. Inflation appears only if demand rises faster than production can respond.
Third, suppose the project needs 80,000 workers but only 50,000 are available. That is where constraints show. The project cannot be delivered without bidding workers away from other employers. Wages rise. Suppliers are stretched. Bottlenecks appear. That is inflation — not because money was created, but because the real resources were not there. The solution is planning: training workers, sequencing projects, managing supply chains. Inflation is a capacity problem, not a financial one.
On your second question: government “debt” is simply the total of money the government has created that has not yet been taxed back. Some of it is kept in the form of gilts because politicians choose to pay interest on it. Some of it sits as bank deposits and reserves. None of it is like household debt. Yes, the government is always “in debt” — because the private sector holds its money. That is not a problem; it is how the monetary system works.
And when interest is paid? The government simply creates the money to pay it. It cannot run out of its own currency. The only constraint is the real economy, not the financial one.
Has the government always borrowed in order to spend?
I’m guessing this was a requirement of the Gold Standard, after which there was no necessity to do so?
Even in the gold standard era it was questionable whether they really had to borrow. The idea of convertibility was loosely applied.
I was thinking this morning MMT could be called the Modern Monetary System knowing the issue “theory’ incurs. Or even the Modern Money System using everyday language.
Thanks
Thank you – I am (at last) really beginning to get my head around MMT – and I speak as someone who has never studied economics except informally.
I adore the way that you challenge the central tenets of Neo-liberal economics (Monetarism?) – especially the household budget analogy which was always deficient! (I never got why Thatcher used this approach all the time but then never explained how this approach also meant that if a budget was not fully spent in a year – it could be removed from the assets for the following year. What housewife (sic) says “As I only spent £95 this week out of my budget of £100 – I will throw the ‘spare’ £5 away…” And people just seemed to accept this!)
One question – maybe for another blog – what does MMT have to say about Universal Basic Income? Thanks.
UBI is on my agenda – with proponents.
https://www.youtube.com/watch?v=UtUi-nNrQLE
In the context of bond markets this was pretty good – starts with Polanski & Kunesberg but then moves to an interview with Daniella Gabor (?) and mostly covers bonds. She unviels a deeply horrible picture @ the BoE. Most of the top bananas need to go – asap.
Good stuff.
Excellent and succinct. It would be useful and could be eye opening for you to debate this with Martin Wolf, perhaps chaired by Michael Walker.
🙂
I bet he would not do it.
It occurred to me when reading this that those who adopt the heterodox economic position that our economy functions like a household budget should, in theory, agree that there would be no functional difference to us if we decided to use US dollars instead of sterling.
We would tax in US dollars, use those dollars to fund spending, issue dollar bonds to borrow, and agree to pay interest in dollars on that debt (and it would be debt). We are truly functioning as a household in this economic environment.
I suspect that economists accepting the household analogy would not accept that running our economy with US dollars is the same as doing so with sterling, but surely they must implicitly accept elements of MMT to make that argument? I suppose there might be some impact on private banking?
I just found it an interesting thought experiment to grasp some of they economic differences by thinking about how the national finances would run if we only taxed , spent and borrowed in US dollars rather than sterling starting tomorrow…
I am not sure that helps – because it will not happen.
I don’t consider it remotely possible, hence the phrase “thought experiment”.
It helped me grasp some of the differences between the household analogy and reality of a fiat currency. Thought it might help others.
That is why I shared it.
Might it be worth adding something about what MMT says about trade? I know Steve Keen is highly critical about what some MMT’ers say about international trade, that a trade surplus is bad and a trade deficit is good. Are there any other areas that you feel MMT has got things wrong and might be worth mentioning?
I have always concentrated on MMT and money, and not MMT as politics.
As money it says something very simple on trade: float your exchange rate. We do that. And that is it.
Spreading the ‘story’ of MMT is, I think, hampered when we use terms that have been long associated with the ‘domestic finance’ model.
‘Deficit’ just sounds bad, so trying to explain that it can be a good thing is hard because it’s counterintuitive. Would it not be better to reject the term whenever it is encountered and insist on replacing it with something more positive and accurate? Maybe ‘increase in money supply’?
Similarly, ‘government borrowing’ sounds imprudent however you explain it (which you do really clearly, of course).
Watching Zak Polanski’s performance on your Channel 4 clip, I felt he did a great job but still didn’t have the *perfect* phrases to instantly reject and reframe ideas like ‘government borrowing’.
Would it be worth developing such a set of succinct rebuttals?
Yes.
All this requires more thought.
It sounds to me as though Zack needs to do some work on the mechanics of sovereignty and ownership factors in order to make his position more robust?
The BoE does create money for the State, which I suppose looks like a loan. But really, the government actually owns this bank (since 1946) and the updated Exchequer and Audit Departments Act 1866 means (if I remember correctly) that the state/government will never get any final demand letters through the post – the BoE will not ‘send the boys round’ like a loan shark. In other words, the state borrows without the sanctions that households have to endure if they run into liquidity problems? In fact – what liquidity problems? Governments problems are things like keeping an eye on inflation and capacity to deliver.
As an extreme example, think about what would happen if the BoE told a government that there was no more money to be printed to fund a completely justifiable war? I mean who is in charge here? You cannot have the BoE and Parliament – it would be like a two headed animal, and they do not live.
One thing that led to the optimism of the post world war II era was that it revealed the power of the war economy. The post war period decided to take the war economy ethos and apply it to building a peace.
Somehow, we are forgetting those lessons right now. Never mind not wearing a poppy – this is the biggest insult to those who died to protect us and our ideas of who we are.
We are living at a time of mass betrayal. That is what disgusts me about this Labour government.
I find it hard not to see mmt as politically charged in light of Steve Keens insights on the extent of fiat money creation being so limited compared to credit money creation. The latter funds the “good inflation” of asset bubbles that facilitates rent seeking that sucks wealth from workers and forces the state to fund the speculation further by helping pay the rents and wages. By framing fiat money creation as “bad inflation” the wealthy and powerful stifle the ability of the state to drive investment that aids growth and lowers costs for all effectively by expanding the asset pool. I fear eventually the lower income workers and the government just won’t be able to afford the rents leading to deeper and deeper austerity or we get a repeat of 2008 only this time due to inequality and easy credit for rent seeking.
If we were start with a clean slate – no money in existence. Then one day the BoE created £1m to “lend” to the government. Then they charged interest on this £1m – wouldn’t the BoE then have to create more money to enable the government to pay this interest? Is this why governments are always expected to be in debt? I really want to understand the meaning of government debt – I’ve read your previous explanations but I just can’t get my head around this.
I will try to do a blog post to reply to this. It’s a good question – and I am afraid the answer is not straightforward. Get ready for some mind bending. But I like the challenge.
I seem to be running a day behind lately. Must be age. Anyway, belatedly, here are some thoughts from another angle.
If tax really funded government spending, the law on tax evasion would say so because criminal statutes always lean on the strongest moral justification available. But it doesn’t. Nowhere do the offences claim that evasion “deprives public services of the money they need.” Instead, the law is built entirely around dishonesty, breach of statutory duty, and protecting the integrity of the system. The harm is defined as breaking the rules, not preventing the state from spending. That silence is telling: legally, tax isn’t treated as the source of government funds, but as a mechanism the state enforces for currency control and economic stability. Yet more evidence that the funding story is political rhetoric, not the basis of the law.