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Modern monetary theory

I can't write about MMT because I don't know enough about it. It would be nice if somebody (hint, hint) put together a short post that took down Versailles discourse on "revenue neutral" in the health care debate and on "entitlement reform" generally, so that when the FKDP's intent to gut Medicare and loot Social Security (if "gut" and "loot" are the right terms, given MMT) we've got some ammo.

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tjfxh's picture
Submitted by tjfxh on

While I am neither an economist nor a finance guy, I have gained some knowledge of MMT through reading L. Randall Wray's Understanding Modern Money, as well as following the blog posts and articles of Wray, Bill Mitchell, Warren Mosler, Scott Fulwiler, Marshall Auerback, and Mark Forstater. So I'll take a stab at it.

1. In the US the federal government is the currency issuer and firms, households and states are currency users. Any analogy comparing federal government finance to non-federal government finance is therefore invalid. There is just no parallel. In fact, issuer and users are opposites.

2. Being the sovereign provider of a non-convertible floating rate (fx) currency of issue, the US government is not financially constrained. This means that the federal government does not need to tax or borrow to finance its deficit spending. To say that the government will go bankrupt, become insolvent, run out of money or default on its debt is like saying that a scoreboard will run out of points. It is more than erroneous, it is simply ridiculous.

2a. While the federal government is not financially constrained since it issues its own non-convertible floating rate currency, there is the real constraint of inflation occurring if nominal demand exceeds real output potential. At this point the government must either cut discretionary spending to decrease its input into the economy, or else raise taxes to withdraw currency from the economy. Both reduce nominal aggregate demand. Conversely, when the public desires to save instead of spend, especially coupled with a trade deficit, if business does not fill the gap with investment, then the government must spend in order to fill the gap in nominal aggregate demand or there will be a real output gap and rising unemployment.

3. The government is the monopoly provider of its currency of issue by law, and the government only accepts own currency in payment of taxes, fines and fees. The government has the corresponding obligation to provide sufficient currency to the economy for the public purpose, which includes facilitating commerce and providing for the general welfare. In this sense, the money that the government provides is a public utility. Nota bene: The federal government does not need to go to non-government, the public and business, to get money to spend. It just issues its own currency. This is done mostly through simple accounting entries instead of printing Federal Reserve notes or minting coin, as many erroneously imagine.

3. Government deficits result in non-government surpluses (increase in net financial assets). Government surpluses result in non-government deficits (decrease in net financial assets). Non-government net financial assets are employed in the economy to create real assets. The government uses the money it issues to fund its operations and other expenditures. Through its expenditures (deficits) the government adds to the net financial assets of non-government. Commercial banking cannot increase or decrease net financial assets because all its transactions are essentially credit or transfer transactions that net to zero on the books. On balance, government deficits are therefore "good" instead "bad." They only become "bad" if they lead to nominal aggregate demand exceeding the real output capacity of goods and services and the government doesn't act by cutting discretionary spending AKA pork, or raising taxes in order to prevent inflation.

4. As long as there are goods and services for purchase, the government can purchase them. The things that government purchases are to further the public purpose, such as defense, education, social insurance programs like SS and unemployment insurance, social welfare such as food stamps, and health care (VA, Medicare, Medicaid at present). There is no reason that the government cannot extend this purchasing power to include universal health care and meet its future obligations to Medicare and SS, as well as defense, and other necessary spending. This doesn't have to be paid for by taxes, or by borrowing, and the government can negotiate the prices it is willing to pay for the services it wants to purchase in private markets. The government can also contract for services to administer the system in the private market, as it does in other areas. Incidentally, the government can also make unemployment a thing of the past by instituting a job guarantee as employer of last resort. (It's had no problem shoveling funds to Wall Street as lender of last resort.) There is no obstacle to getting this done other than removing the ignorance that stands in the way of it.

Virtually all the counter-arguments are based on mistaken premises that fail to take into account that when Nixon closed the gold window on August 15, 1971, the US monetary system shifted from a convertible fixed fate currency to a non-convertible floating rate one. This involves an entirely different financial and economic dynamic that renders obsolete the current conservative shibboleths, which liberals and progressive often unwittingly embrace at their peril. Progressives really need to study up on this, or they will continue to sabotage themselves by falling for a conservative established narrative that is based on erroneous assumptions and misleading memes like "fiscal responsibility," which falsely assert that social programs are unaffordable, or that they steal from the real economy and undermine national prosperity. It's just nonsense.


L. Randall Wray, Understanding Modern Money: The Key to Full Employment and Price Stability (1998)

Bill Mitchell's billy blog

Warren Mosler's Center of the Universe

Economic Perspectives for Kansas City (L. Randall Wray, Scott Fulwiler, also William Black, Michael Hudson)

Marhall Auerback's posts at New Deal 2.0

Levy Economics Institute at Baird College has a lot of working papers.