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Modern Monetary Theory (MMT) has been a minor heterodox economic school in academia for the last couple of decades. Its stature in public policy and academic circles has grown mostly through a very informal academic blogosphere that emerged in the late 1990s and 2000s outside of the academic institutions themselves. Inspiration for MMT can be traced back to the thinking of the economists George Friedrich Knapp, Hyman Minsky, and Wynne Godly who all advocate for an active government that would take decisive actions in financial markets and the economy to curb excesses and optimize output. The founders and most well-known advocates of what we call MMT today include economists Bill Mitchell, Randall Wray, Warren Mosler, and Stephanie Kelton, who have formalized MMT as a distinct school of thought that departs from some economic and financial orthodoxy. For interested readers wanting to learn more, these four thinkers will give you the best overview of what MMT is all about.
Kelton, although not a founder, might be the most responsible for bringing MMT into the mainstream discussion amongst the financial and economic media because of her influence in crafting the economic policy of Bernie Sanders’ US presidential campaign in 2020. She’s also recently written a best selling book called “The Deficit Myth”, which explains MMT for a general audience.
MMT covers a lot of economic topics but it has garnered most of its attention for its explanation of how modern monetary systems work under public monopolies and its policy proposals as a result of its explanation. In this post we’ll only cover this narrow but key aspect of MMT.
Public monopolies, by MMT’s definition, are considered to be countries that can borrow in a money they control, and would include countries like the United States, Canada, Japan, and Australia and exclude countries in the Eurozone, Venezuela, and many others. Proponents of MMT are fierce critics of the usual discussions around fiscal policy, government deficits, and sovereign debt, which artificially constrict what many governments can do during times of crisis and needlessly fearmonger governments into tepid action or even misguided action. According to advocates, even though the United States and the rest of the world left the gold standard in 1971, governments and their populations are still mentally handicapped by acting as if there was some gold standard to limit their actions during times of economic distress. They argue that governments that issue their own currency and can borrow in that same currency have a lot more financial latitude to act than traditional policy advisors would have you believe.
Over the past year, the governments of most major economies have committed to massive fiscal stimulus packages in order to soften the negative economic impact of the coronavirus pandemic and the subsequent lockdowns. With Modern Monetary Theory (MMT) lurking in the background we could see government spending and money creation accelerate way past what people thought was previously possible. Central bank actions in March 2020 caught many by surprise when central bank balance sheets exploded, buying trillions of dollars worth of financial assets to prevent a collapse of financial markets. With MMT providing theoretical justification and tangible policy proposals, we shouldn’t be surprised by increasingly aggressive fiscal action over the next decade to accompany the aggressive monetary actions of Central Banks.
The Issuer Is Not A Household
In MMT’s view, money is a creation and responsibility of the state. It’s not a good that organically emerges in a market but is rather provided or issued to the market by the state. And since the supply of money is controlled by the state, any debt denominated in the state’s money precludes default as a risk that investors, citizens, and policy makers should be worried about. Individuals, corporations, and other states that have to borrow using debt denominated in a money they don’t control, in contrast, carry default risk because they don’t control the supply of the money they borrow. Sovereigns that supply money to the nation have the luxury of being able to look at their debts and deficits in a categorically different way. Sovereigns that have debt denominated in a money they control never have to worry about a financial default, and to worry about one is to misunderstand the power and flexibility of these states.
Debt and fiscal deficits in the eyes of MMT are tools of the state and are not burdens in the way they are to a private organization or a country like Greece that doesn’t control the money its debt is denominated in. A state that supplies its own money always has enough money to pay its debts and pay for any spending it decides to pursue.
Contrary to popular framings of debt, taxes, and spending, tax revenues are not constraints on fiscal spending because publicly issued money has to be spent first to enter the market. A money that originates in the public sector can’t be taxed until it first circulates in the private sector and since it can only make it into the private sector via public institutions, spending is logically the first step, not taxing. The purpose of taxes is not to fund government programs as many people often assume, instead taxes are used to create a legally enforced demand for the state’s money, redirect and distribute resources where it sees fit, and to curb inflation. Hand wringing over questions like “how can we afford it?” and the size of the national debt denominated in a money a country controls should not be national concerns and misunderstands how the monetary system works in countries like the United States and Japan.
The only constraints proponents of MMT recognize are real resources and inflationary pressures which are somewhat redundant concerns. MMTers recognize that just because a government creates more money doesn’t mean it automatically has access to all resources, and the creation of more money chasing too few goods and services does create an inflationary environment.
Their reasoning for the creation of new money or running fiscal deficits would be to optimize the potential output that the private sector is not taking advantage of. The key issue for advocates of MMT is the existence of unemployment for those who can and do want to work. Unemployment for the able and willing is a clear case of the private sector not utilizing all of the resources available in an economy, namely other human beings. And not only is productive capacity not being utilized, but there are real social costs beyond unutilized production, such as loss of skills from chronic unemployment, family and community breakdown, and even upticks in suicide. For states that control the supply of the money they borrow in, allowing unemployment to fester is the real problem, not a ballooning debt burden which it can financially always pay back. In this light, advocates preach that the appropriate size of fiscal spending is whatever is needed to get the economy to full employment. After full employment is achieved then it’s appropriate for the government to curtail spending to avoid inflationary pressures.
MMT Is Dangerously Correct
MMT does accurately describe the monetary reality for sovereigns that issue their own money and can borrow in that same money. With nothing like a gold standard in the way, there really is no limit to the supply of money that can be produced by those governments and their sponsor central banks. Financial default, in the accounting sense, is impossible due to this simple fact. Any limits post-1971 are mostly artificial and have been imposed by political will. Governments like the United States and Japan have almost unlimited slack under the current monetary regime. Governments like the United States can always “afford it”, whatever that “it” is.
However, none of this means these nations are free of consequence nor does it mean countries in these positions can automatically solve their problems. And the most rigorous and honest of the MMT advocates do acknowledge this.
The policy prescriptions of advocates often requires a massive amount of faith in the ability of policy makers and legislatures’ to allocate resources in such a way as to alleviate short-term pain and simultaneously grow the economic output of their economies. The rosy picture painted by advocates requires fiscal authorities that are capable of both improving economic productivity in the short term as well as the long-term productive capacity of their economies. With more money hitting the economy over the short and long term, the economy has to be able to produce more goods and services as well as more productive citizens. Simply maintaining productivity and output levels is not enough, as this would produce inflationary pressures that can get out of hand. Failure to grow the output of the economy will result in more money chasing the same amount of output, or even worse, more money chasing even less output than before the creation of the new money. Even though it’s true that governments like the United States and Japan can’t default due to simple truths about their monetary privileges, these countries depend heavily on their governments being excellent allocators of resources in the event that it makes the printing presses go brrrr. Their failure to be excellent will eventually result in a lower standard of living for citizens who primarily earn and save wealth in the government’s currency, unless those citizens become good investors in assets that don’t lose their purchasing power.
Someone’s support of MMT policy prescriptions might hinge on their faith in a governing regime’s ability to allocate resources efficiently and effectively to create a growing economy with a more productive labor force. A popular proposal of advocates is for governments with monetary privileges to set up a job guarantee and become the employer of last resort to pick up the slack of the private sector. I can see how this would alleviate short-term pain and even boost consumption, but I’m not sure how this would increase the productive capacity of an economy in and of itself. The effectiveness of the employer of last resort function over the long term depends heavily on how important and effective the work being done actually is. The devil is in the details on what work is actually being done by the employer of last resort and how well that work is being done.
Those with little faith in a particular government’s ability to pick economically productive projects and execute on them effectively and efficiently are going to have a hard time accepting the policy prescriptions of an MMT enlightened regime. Those that do believe in the wisdom of the regime should see no problem in their governments running perpetual deficits to pick up the slack of the private sector. If the government can consistently increase economic output that outpaces the new money put into circulation, concerns about inflation should be put to rest.
MMT is dangerously correct because it shines the light on what many crypto adopters and sound money advocates have understood for quite some time: there is no actual limit to what certain governments can spend and how much money certain central banks can conjure. Money might not grow on trees but it can grow precipitously with growing political will and central bank keystrokes.
Explicitly MMT-based economies will make it even more important than it already is to be as close as possible to political power. As policy makers and legislatures gain more political latitude and theoretical justification to create greater claims on social resources and allocate those resources, the incentives to get close to these decision makers will only intensify past what they already are. MMT-powered regimes will have shifted and created an even bigger class of Cantillon insiders who are first in line to benefit most from the newly created money. Right now these Cantillon insiders are closest to Central Banks and commercial banks who wield the most discretionary power over money creation, but an MMT regime would shift those privileges more and more to the political domain. Cantillon privileges conferred to political insiders and politically favored groups should be expected to balloon in this setup. Once programs and flows of funds have been set up by the power of legislatures, clawing them back should be much more difficult even if they are obviously wasteful. Again, these governments can’t go bankrupt so there isn’t much of a feedback mechanism to limit the proliferation of bad projects that are typical in the private sector.
We’ve been living in an MMT world ever since the world shifted over to a fiat standard and away from a hard standard like the gold standard in 1971. The only thing that has limited governments and central banks to go even further than they already have are artificial political constraints, lack of academic authority, and pushback from populations. However, if current trends stay the course we can expect institutional constraints to weaken and struggling populations to continue to demand help as they learn their governments can afford anything in a financial sense.
The Importance of Crypto
Although states have obviously been heavily involved in the production and management of money and payment systems, the state theory of money has always been incomplete at best, and with the advent of crypto-monies has become completely obsolete. Just as it would be untrue to say that money has nothing to do with the state, it’s equally untrue that money has or ever will be solely a creature of the state.
The success of crypto-monies has re-opened people’s eyes to the possibility of monies that are outside the control of states, an idea that had been almost lost amidst the powerful governments of the 20th century. In contrast to users of state money which create demand through force, users in crypto markets have an abundance of monetary choices that are usually architected with scarcity, a consensus around the schedule of dilution, and high barriers to change at the core of their designs. Users are not locked into a monopoly controlled by central authorities and can easily move to monies that are designed to protect their purchasing power over long periods of time.
As we drift further into an MMT-conscious world, the importance of crypto-monies as an escape hatch and hedge against the gross misallocation of resources by some of the most powerful governments on the planet becomes even more apparent. Crypto-monies could act as an indirect limit on government spending and over-reach as crypto-monies continue to gain ground on state money for claims on resources and the loyalty of highly productive and mobile labor. Right now state money is the dominant unit of account, store of value, and medium of exchange, but crypto-monies are poised to reduce state money to its true fundamental use case, paying taxes. As crypto-monies increasingly become more transparent measures of value, reliable stores of value, and optimized exchangers of value, the only real reason to hold state money will be to pay taxes and avoid jail.
Coda
The rise of both MMT and crypto is an ominous sign for the previous financial orthodoxies which are being displaced by radical reframings of money, finance, and economics. MMT is a reframing of government accounting and fiscal thinking that opens up paths to even greater spending and more government action in issuer economies like the US, Japan, Canada, the United Kingdom, and Australia. Crypto is reframing and re-architecting money itself that is designed to give more power to individuals and organizations outside of the state. It’s pretty clear what individuals should hold if they want to maximize their purchasing power over any significant amount of time, especially with the specter of MMT looming over the next chapter of state money.
