{"id":87910,"date":"2025-11-26T07:21:00","date_gmt":"2025-11-26T07:21:00","guid":{"rendered":"https:\/\/www.taxresearch.org.uk\/Blog\/?p=87910"},"modified":"2025-11-26T07:21:00","modified_gmt":"2025-11-26T07:21:00","slug":"modern-monetary-theory-mythology-and-a-glossary-update","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2025\/11\/26\/modern-monetary-theory-mythology-and-a-glossary-update\/","title":{"rendered":"Modern Monetary Theory, mythology and a glossary update"},"content":{"rendered":"

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.<\/em><\/p>\n

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.<\/em><\/p>\n

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. <\/em><\/p>\n

This is the new entry:<\/em><\/p>\n

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\u00a0Modern Monetary Theory<\/strong><\/p>\n

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Modern monetary theory<\/a>\u00a0(MMT<\/a>) explains how a government with its\u00a0own sovereign\u00a0currency<\/a>\u00a0and\u00a0central bank<\/a><\/span>\u00a0actually finances its activities. In essence, such a government\u00a0creates\u00a0money<\/a>\u00a0when it spends<\/span>\u00a0and\u00a0removes money from circulation when it taxes<\/span>. Spending precedes taxation. Nothing in this cycle requires prior revenue.<\/p>\n

MMT therefore describes the operational reality of public finance, not an idealised model.<\/p>\n

Core propositions<\/b><\/p>\n

First<\/span>, a government that issues its own currency and has a central bank acting on its behalf\u00a0does not need to tax or borrow before spending<\/span>. All government expenditure is made possible by the central bank crediting bank\u00a0accounts<\/a>\u00a0as instructed by the Treasury. This is new\u00a0money creation<\/a>. Tax revenues and government borrowing may serve other purposes, but funding spending is not one of them.<\/p>\n

Second<\/span>, the resulting balance sheet entry \u2013 the government's \u201cdebt\u201d to its own central bank \u2013 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\u00a0liability<\/a>\u00a0never needs to be repaid<\/span>.<\/p>\n

Third<\/span>, the primary fiscal tool for controlling\u00a0inflation<\/a>\u00a0is\u00a0taxation<\/span>, 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.<\/p>\n

Fourth<\/span>, 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.<\/p>\n

Fifth<\/span>, once its stabilising role is fulfilled, taxation becomes an instrument of wider economic and social policy. Taxes can be designed to shape behaviour, tackle\u00a0inequality<\/a>, and regulate economic activity \u2014 but\u00a0not<\/span>\u00a0to \u201craise revenue\u201d for spending, which has already occurred through money creation.<\/p>\n

Deficits<\/a>, borrowing and\u00a0saving<\/a><\/b><\/p>\n

Sixth<\/span>, there is no requirement for governments in this position to balance their budgets. In a growing economy,\u00a0deficits<\/a>\u00a0are normal and desirable<\/span>\u00a0because they allow the money supply to expand in line with real economic activity. Government deficits are the private sector's financial surpluses.<\/p>\n

Seventh<\/span>, such a government\u00a0need not borrow from financial markets<\/span>. It can always borrow from its own central bank. Bond issuance is therefore a choice, not a necessity.<\/p>\n

Eighth<\/span>, the government may nevertheless offer interest-bearing savings accounts or\u00a0bonds<\/a>\u00a0as a safe place for the private sector to store financial surpluses. This is best understood as\u00a0a deposit-taking service<\/span>, not a funding mechanism. The central bank can always guarantee repayment by creating new money.<\/p>\n

Interest rates and credit control<\/b><\/p>\n

Ninth<\/span>, the government does not require interest rate manipulation to manage inflation. It can instead use:<\/p>\n