Alternative Econ 101: Modern Money Theory

I've been doing a good bit of reading lately about concepts of economics that run counter to the prevailing 'wisdom' on the subject.    I'm going to be posting some quick intros to these concepts along with links.  In my experience, lack of a deep understanding of economics and willingness to be intellectually bullied by people who think they know what they're talking about is a major reason so many people are happily standing by while the political centre gets shifted incrementally rightward.  (Quick side note: people who uses the phrase 'Econ 101' in a political argument rarely understand any econ beyond the 101 level and probably misunderstood half of that too.)  The ideas of modern money theory are a prime example of this.

The primary observations of MMT as it is commonly known relate to the nature of the money supply in a fiat-money economy.  For those who don't know, fiat money is money created by a central national bank like the Bank of Canada or the US Federal Reserve at the behest of the state central government.  Before 1971 the international monetary standard was at least nominally a 'gold standard' in which currency was theoretically exchangeable for a set quantity of gold on demand.  This meant that currency was in effect a form of commodity with a limited supply.  Since 1971 the countries of the world have been on a 'fiat money' standard in which the quantities of currency in circulation are determined directly by the central bank.  Instead of being a (theoretical) guarantee of exchange for a commodity, fiat currency is 'valuable' because it is 'legal tender' which can be used to pay taxes.

This leads to an interesting consequence.  For most people and organizations, you have to get money before you spend it.  Simple, right?  First you get the money, then you spend it.  When money is a commodity with limited supply, the government works the same way - first it has to get money, by imposing taxes or by borrowing it, then it gets to spend money from its 'treasury'.

However, according to MMT, once a government moves from commodity to fiat money, this is no longer the case -- in fact, the reverse is true.  The government is the only reason there is any money in circulation; in order to get spending money, the government simply prints it.  ('Printing' is a bit of a misnomer; in this day and age, most money does not have a literal physical existence, so the creation and destruction of money are both a matter of changes to balances in bank-account ledgers at the central bank.)  The money created by the government runs around the economy, passing from the recipient to companies to individuals to companies and so on, and eventually gets paid as taxes back to the government, at which point it is effectively destroyed.

Let's say that again because it might not have quite sunk in.  Under a fiat money system, the government does not need to finance its spending because it is the source of all money.  Taxes and government debt have become little more than tools for shaping macroeconomic policy.  The government does not need to tax before it can spend.  It does not need to borrow before it can spend, either.  The government creates all the money; therefore the government can spend all of the money it wants.

There's quite a bit more to MMT, but that one simple fact should be enough to wipe away a lot of the haze that surrounds our discourse on government spending.  There's a fashion for 'austerity' these days, based on the premise that government spending is 'out of control', that the governments of the world are too deeply in debt and can't afford all those lavish social programs; that, like spendthrift people who run up huge credit card bills buying stuff they can't afford, the governments of the world are going to have to cut back if they don't want, I guess, their infrastructure to be repossessed and their countries to be foreclosed?  The simple extension of the metaphor makes it clear how absurd this is.  We keep hearing about governments 'running out of money' or 'defaulting of their debt'.  This is a lie.  It is a lie used to bully people who don't understand economics by those who should know better.  'Wasteful' deficit spending is not going to make the government go broke.  The government creates all of the money.  Therefore, the government by definition has all of the money it could possibly need.

Further Reading:
Modern Money Mechanics
Bill Mitchell's blog
Kindergarten Guide to MMT (PDF)