References to a 'maxed-out credit card' are a part of the ‘household analogy' beloved of many politicians who like to claim that the affairs of a state must be run in a fashion akin to the way in which a household might be managed.

In this case the reference to the ‘maxed-out credit card' is supposed to imply that the state has run out of credit from its lenders and can borrow nothing more. The implication, which is heavily emphasised by those making use of the claim, is that the state must as a result cut its spending whether it likes it or not as its creditors will supply it with no more money. The claim is used to justify austerity requiring spending cuts by a government.

The claim, like all aspects of the household analogy, makes no sense.

A country cannot, for a start have a credit card.

In addition, a country with its own central bank and currency never needs to borrow: it can (and as a matter of fact, does) create all the money that is required to fund its spending by asking its central bank to create all the money required to fund that spending at the time that the spending in question takes place (see money creation).

The decision by a government to provide savers with the facility to save with it is an option, but not one that they need provide since the end of the gold standard era. During that era a government was supposedly only allowed to issue money if it had gold to back it. Without that gold to back new money creation a government supposedly had, if it wished to spend more than its receipts in the form of tax, to borrow to withdraw money from use elsewhere in the economy so that it might use that money instead to fund its own activities. With the artificial constraint of the gold standard having been removed, there is now no theoretical limit on the amount of money that a government can create. Nor need it borrow to fund its activities if its spending exceeds it tax revenues: it can simply instead run an overdraft at its central bank (called the Ways and Means Account in the UK).

As a result, the concept of government borrowing now makes no sense: instead the government now provides savers with a place of safe deposit for the funds that the government has already created by spending in excess of its tax revenues.

By definition, in that case government spending creates the funds available for those deposits (that some people still erroneously call government borrowing) to take place. Government spending can never be constrained by them as a result.

Nor is it possible in that case that those wishing to save with the government might constrain its spending plans: the government can either run an overdraft with its central bank to fund that spending or use quantitative easing (see separate entry, with all the caveats noted there).

The ‘maxed-out credit card' is mythology wholly unrelated to any economic reality in that case.

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The memorandum of association of a company is part of its constitution.

The memorandum of association sets out the purpose of the company and the powers it has to fulfil that purpose.

In recent decades companies have been allowed to adopt an all encompassing purpose stating that they will undertake a generic activity as a trading entity. This has reduced the significance of the memorandum of association but not eliminated it.

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See modern monetary theory.

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MNC stands for multinational corporation.

For an explanation see transnational corporation.

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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.

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The Bank of England monetary policy committee (MPC) has nine members, five from the Bank and four external members who are usually academics or representatives of the financial services community. The committee has a very narrow focus of expertise as a result.

The MPC is responsible for decision making with regard to the Bank of  England's management of the UK's conventional monetary policy and unconventional monetary policy.

The notional independence of the MPC is controversial. See central bank independence.

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All money represents a promise to pay denominated in the fiat currency of a particular jurisdiction. The UK pound sterling is a fiat currency, as is the US dollar, the euro, the Japanese yen, and all other major currencies in the world.

Fiat money is created by the acknowledgement of a debt and is destroyed by the settlement or cancellation of that liability (see money creation).

In a fiat currency system there is no asset backing for the money that a jurisdiction creates. This has been true in almost all jurisdictions, and all major ones, since the final abandonment of the gold standard by the USA in August 1971.

It is commonplace for people to think that money has a tangible existence, mostly because of the existence of notes and coins. This is not true. Notes and coins are simply tangible and transferable representations of the government's promise to pay which it redeems by accepting them in payment of tax.

As a result, the idea that there is ‘money in the bank', as many people commonly state, is not true. No one has ‘money in the bank'. The only thing that a bank has is a general ledger (see double entry book-keeping) that records the money owed to it and the people to whom it owes money.

Banks are as a result just giant exercises in book-keeping, whatever mystique they like to create around the process.

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In a fiat currency system , which system is now used by almost all money-creating jurisdictions in the world (including the UK, USA and eurozone) all that money represents is a promise to pay, which is otherwise called debt. All money creation must, as a result, recognise the creation of new debt between the parties who give rise to that new money creation.

This process is not as complicated as it sounds. Only two types of organisation can be involved in transactions that create money.

One is the government of a jurisdiction that creates a fiat currency. A government can create new money at will by demanding that its central bank make a loan to it to finance its expenditure. This is the source of all new government-created money, otherwise known as base money, which is used to enable the banking system of a jurisdiction to function by providing the liquidity required so that the jurisdiction's commercial banks can settle their liabilities to each other.

Government-created money is injected into the economy via the central bank reserve accounts that commercial banks maintain with a jurisdiction's central bank.

Government-created money is destroyed through the payment of tax. This is important. It explains why tax does not fund government spending. Money creation by the government funds government spending. Taxation takes the money the government creates to fund its spending out of circulation as a mechanism to control inflation. That money is then destroyed. Tax as a result never funds government spending: it cancels money creation.

Government-created money can also be effectively neutered by the issue of government bonds: these effectively lock away government-created money from use in the economy for significant periods of time. They do not have the same impact of destroying money as taxation does, but the impact is not far short of that: the money, or debt, is locked out of use.

Commercial banks also take part in the money-creation process. They do so by lending, The money that they create is destroyed by loan repayment. This was acknowledged as a fact by the Bank of England in 2014.

There is no fixed stock of money. The amount of money in circulation depends on the amount of money created by both the government and the commercial banks of a jurisdiction, and the amount of money destroyed by taxation and loan repayment. In that case, the control of inflation necessarily requires the integration of tax policy and monetary policy. The fact that this rarely happens is a major weakness within modern macroeconomics.

Money creation by banks is pro-cyclical. That means when the economy is booming the banks lend more and so create more money. When an economy is sluggish borrowing is reduced and loan repayments tend to increase. The result is that if money supply is to be maintained across an economic cycle a government has to spend more money into existence during economic downturns. This is a major reason why austerity economics has been so counter-productive because it reinforces the pro-cyclical swings created by commercial bank lending policies and exaggerates the economic cycle as a result.

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It is commonplace for people to say that they have ‘money in the bank'. This is not true.

No one has ‘money in the bank'. The only thing that a bank has is a general ledger (see double entry bookkeeping) that records the money owed to it and the people to whom it owes money. Banks are just giant exercises in bookkeeping, whatever mystique they like to create around the process.

There is no tangible asset that backs up this process of debt management.

All money is debt: there is nothing more to it than that. As such all that a bank does is acknowledge the debts owed to it and by it. As a result, the only approximation to the tangible existence of money that actually exists is a bank statement.

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The process of ‘cleaning' money from criminal or illicit activities (including tax evasion) to give it the appearance of originating from a legitimate source.

The term originated from the use of laundromats or launderettes for this purpose since they always took payment in cash.

Money laundering frequently involves a process described as layering which means money moves through a number of processes or stages to distance it from its illicit or illegal origins.

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See transnational corporations.

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A multiplier effect is a measure of the amount by which national income is increased or decreased as a result of additional spending within an economy. If a multiplier effect is greater than one then the additional spending produces an increase in income of greater than its own amount, and vice versa.

The largest multiplier effects are usually associated with healthcare spending and capital investment, where returns that are several times the size of the sum initially expended can result. In contrast, defence spending has very low multiplier effects.

Some multiplier effects e.g. those resulting from spending on education are hard to measure because of the extended time periods involved.

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