Trump's war is exposing the truth in one of the central insights of modern monetary theory (MMT).
The United States is not running out of dollars as a result of Trump's war. It is, it has now been revealed, instead running out of weapons, production capacity and military resources.
That distinction matters because it challenges one of the biggest myths in economics.
Conventional economics tells us governments are limited by money. MMT says something very different. A government that issues its own currency can always create the money it needs. The real constraint is whether the economy has the people, skills, factories, materials and technology required to deliver what that money is meant to buy.
Trump's request for another $65 billion from Congress to fund his war illustrates the point perfectly. More money cannot instantly produce missiles, factories or skilled workers. Real resources always come first.
The same lesson applies far beyond war.
The NHS does not simply need bigger budgets. It needs doctors, nurses and equipment. Housebuilding needs land, labour and materials. Climate policy needs engineers, factories and infrastructure.
That is why governments should stop asking, “Where will the money come from?” and start asking, “Do the resources exist to deliver what we need?”
In this video, I explain why Trump's war has unintentionally demonstrated one of MMT's most important insights, and why that changes how we should think about inflation, public spending, economic policy and the role of government.
This is the audio version:
The Debate Ammunition for this video is available here.
This is the transcript:
Donald Trump's war on Iran is proving what really limits governments.
He's running into problems. But Trump isn't running out of dollars. What he's doing is running out of weapons and military capacity. That's the real lesson from this conflict.
And what that does is something quite curious. It confirms exactly what modern monetary theory says.
As MMT makes clear, money is never the real constraint in an economy. A currency-issuing government can always create more dollars. Trump has asked for $65 billion from Congress to continue this war. He knows where the money comes from really, but that does not necessarily solve his problems.
Money organises resources, but it doesn't create them.
The real limits on activity anywhere are people, skills, factories and materials, and Trump's war is exposing this reality more clearly than just about anything else of late.
Weapons cannot be created by spending alone. Missiles require factories, supply chains, and raw materials. Military equipment depends on skilled labour. Production capacity takes time to expand, and no amount of money can remove these constraints.
And this is exactly what MMT always says. You can only spend when there is something to buy. You must stop when there isn't. If you don't, you will get inflation.
And this is true of every part of the economy. It's not just true for this war economy that Donald Trump is trying to manage. It's also true in the UK. The NHS needs doctors, nurses, and equipment. It doesn't just need budgets.
House building needs land, labour and materials.
Climate action needs engineers and infrastructure.
Every policy depends upon the availability of real resources. We can always find the money if they exist. There's no point creating the money if they don't. And that's the key point.
Conventional economics, and all our journalists, always ask the wrong question. They always ask: “Where will the money come from to pay for something?” But their first question should be something quite different. It should be: “Do the resources exist for money to buy?” If they do, finance can always be arranged. Those resources can be put to use. And by putting them to use, we will almost invariably create the value within the economy to recoup their cost. Political choices determine how resources are used. Money should follow the resources.
In that case, what Trump is proving is that war is an exercise in political economy. Governments must decide what resources matter most to them. They must direct production to meet national priorities, and markets alone cannot solve strategic shortages of the sort that this war is exposing.
It is power, in this case, government power, that determines economic outcomes. And in fact, what this war has proven is that the USA has been wrong to try to outsource warmongering to the private sector, which is what it has done. They've tried to run it on a just-in-time supply chain basis, and that, as we now know, does not work. Money is not the issue. Resource management is. They got their priorities wrong. The US government has got their priorities wrong. They can no longer run a war as a consequence.
And I stress the real limits are always physical and not just when it comes to war. This is true of any activity anywhere, whether in the state or private sector, and it's just that we don't seem to understand that.
We also don't understand that when we try to buy resources with money that we've created for a purpose, but there aren't resources, we get inflation. Good government then has to manage real capacity and not arbitrary budgets.
Prosperity depends on expanding productive potential, and economics should always begin, whatever the issue, with resources and not money.
This truth has been demonstrated during the course of this war. It's an ironic fact that modern monetary theory has been shown to be right by Donald Trump, who would never embrace the ideas within MMT, but has in fact exposed the fact that money is never the problem when it comes to war; real resources are.
So, real resources are the foundation of every economy. That's the central insight of modern monetary theory. That's the insight that our generals should be adopting. That's the insight that our politicians should be adopting. That's the insight that our journalists should be taking from this exercise.
We always need to ask the question: “Are the resources available to do something?” Not, “Is the money available?” Because asking if the money is available is putting the cart before the horse. And as we all know, the horse has to go before the cart, and the horse is the real resource that we need in this case to achieve anything in our society.
That's what I think. What do you think? There is, of course, a poll down below. Let us have your comments. Please share this video if you like it. Please do subscribe to this channel. Ring that bell as well, because that means you're notified when we put another video out. And if you'd like to buy Tom and me a coffee, that would be great.
Hat tip: Thanks to RobertJ for a comment on this blog that resulted in this video.
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I voted for real resources, however, the second two get in the way long before real limits are reached. You could add vindictive cruelty to the list – what many politicians say, in particular on Twitter/X, gives a flavour of the regard that they actually have at times for their constituents, alongside austerity, of course, and the number of deaths recorded by Prem Sikka, for instance, as a direct consequence, is shocking. All incredibly sad. As you frequently promote, a politics of care would make all the difference.
Thanks to all for a hinge moment article.
What might aid the current cartel of disinforming/malinforming political parties and the main stream media to give this so fundamental truth its appropriate exposure?
What do political parties and M S M journalists gain from peddling the “Money Matters Most Myth/Lie”?
They seek to maintain small government. That is the agenda of the wealthy.
Does that make sense for the wealthy though, given the MMT perspective? As you have shown, the sectoral balance chart shows that Government deficits necessarily end up in private hands (the wealthy) or overseas. Surely the wealthy would want a big Government so they can capture more money?
Partly because its idealogical, see
https://en.wikipedia.org/wiki/Neoliberalism
I have voted for political decisions on the grounds that if a decision is taken not to fund public investment it never gets anywhere near hitting real resource issues.
It should probably go without saying that the availability of essential resources is dependent on continuous planning with regular reviews of short, medium and long -term projects for provision of the resources necessary for the well-being of current and future generations.
Does any of our current crop of self-serving jacks in office give a flying fart about anything other than finding themselves a comfortable billet when they are voted out of office?
If you think I’m being unfair, please name someone in the present government who is worthy of their position.
I first studied macroeconomics in 1974, with a simple text book bearing the title ‘Economics Made Simple’ by someone called Whitehead. As I recall, it was focused on the use of scarce resources; the concept of money wasn’t introduced until later chapters and the author was at pains to emphasise what he refered to as ‘the veil of money’. I’m fairly sure he was drawing on the Keynesian approach. In the 1980s, I studied the subject more formally at university. The emphasis was the same, although the thoughts of ‘the Chicago School’ were creeping in.
By the time I qualified and began teaching BTEC and A level, the curriculum asked students to be able to explain the two main approaches in macro. I had to leave teaching in the 1990s due to health problems. I presume that students are now taught macroeconomics without much reference to Keynes. Or, is it just the financial establishment that ignore the facts that economics is really about resources, not money per se?
Keynes has essentially disappeared
We can’t have FTF running out of videos! 😉
We won’t. Another one and a podcast being recorded today…
An article in The Times newspaper last Saturday further illustrates your point Richard. A retired Admiral (forget his name) was bemoaning the poor state of the nuclear submarine fleet. He said that the problem was that the current fleet of nuclear submarines is poorly serviced due to a lack of skilled labour and also that there are insufficient personnel with the right skills willing to sign up to man the subs.
Lord West, no doubt.
Supposedly Labour, but very right wing. And right on this: we have people, we have not given them the skills.
Something similar seems to be unfolding here as regards social care. The government is aware of the crisis, but they are treating it as a financial budgeting problem instead of a real-resource mobilization problem. The consequences will be chaotic.
Agreed
And they’ve cut off overseas staff, hoping somehow to persuade more people in UK now to take what are mostly minimum-wage jobs. People left care after Covid because they needed better pay – experienced carers, many of them, reluctant to go. Madness.
“Do the resources exist to deliver what we need?”
As far as the crisis in social care is concerned, this is the question nobody wants to ask because the answer would expose the true extent of the crisis.
I have had to navigate the system for many years on behalf of my elderly parents. On no occasion has lack of funds been a major factor in the many issues we encounter with the system. Lack of real resources, well where do you start!
But those resources do exist – but not in the right place.
My argument is we could deliver, but we choose not to.
Agreed.
My point is that for those currently needing to use the system it is not resourced to meet their needs. All you hear on MSM is how expensive it is and what can we do to help people pay for it without having to sell their homes. All the money in the world is not much use to you when there isnt a suitable care home bed available to spend it on.
The government could do all of this but no politician seems to have a clue how to rearrange the resources to make this happen. Yes it is all about political choices bad ones.
Agreed and noted.
So it our job as well to make sure resources are allocated.
Superb video Richard. If Trump understood it he would probably explode on the spot.
The Navy has brand new frigates in dock and can only provide one aircraft carrier because they haven’t got the men and women to crew them. They didn’t want two aircraft carriers but Gordon Brown wanted to keep Scottish shipyards working. So the navy got two aircraft carriers. I don’t think they have ever been operational at the same time (though someone might correct me). So we had the resources (shipyards, materials, skilled workers), money was plainly no problem – as we know – but the highly skilled workforce needed by the Navy does not exist. Money cannot magic it into being.
Thank you
Richard you are hitting on the key issue.
In the NHS the Treasury not only rations money but ensures the estate deteriorates, training is cut and staff numbers are short of what is required. It will take years to recover even if money is found.
On social care the UK has about 470,000 in care, including about 13700 per day in hospital beds; in france the comparative figure is 697,000 and in germany 918,000.
People will mistakenly focus on funding but the reality is that it will take a long time to build and staff the extra beds required, and if the focus is on helping people live at home it will be even more labour intensive.
If sufficient funding is automatic based on needs then a market or locally funded alternatives can flourish but if the focus is on a rationing bureaucracy based on what people or the country can afford the UK will continue to lag. Which is what the Treasury want.
Agreed
Thank you Roger.
This relates to exactly the issue wIth social care I was trying to highlight from the end user’s perspective. Really helpful to get an insight into the details driving the experience. Sadly, it conflrms much of what I suspected.