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The MMT fundamentals, as explained
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Modern Money Systems
The Real Economy
Money, Government and Banking
The Role of Government Deficits
Full Employment along with Price Stability
Modern Money Theory, MMT, is a school of economic thought that has been developed specifically for "modern money systems", describing how they work and prescribing how a modern money regime should act to achieve its goals.
Modern Money Theory
Modern Money Theory, MMT, describes the workings of modern money systems, where a government responsible for fiscal policy (taxing and spending) is a monopoly currency issuer, issuing a non-commodity-based floating exchange rate currency. Such systems have become commonplace during recent decades.
A modern money regime's spending is not revenue constrained. It spends by issuing currency and simply crediting the recipients' bank accounts. Therefore, it can not possibly "run out of money". This is contrary to traditional pegged currency regimes (that are constrained by having a currency peg to defend) or members of the Eurozone (who are not issuers but users of the currency in use, the euro). It is fundamentally inadequate to use a household analogy for understanding the financial considerations of a modern money system (unlike for a pegged currency system, or for a Eurozone country).
The lack of revenue constraints adds one degree of policy freedom. MMT states that this enables governments to achieve full employment along with price stability – something that is not possible under a pegged currency regime, and believed to be generally impossible by mainstream economists. MMT asserts that within a modern money system, full employment and price stability is not only possible, the two are in fact natural complements to each other.
The aims of MMT is to provide governments with an economic understanding and policy options for achieving full employment along with price stability. MMT lays out strict principles for appropriate fiscal policy – government spending and taxing, deficits and surpluses. The key lies in adjusting the government's fiscal balance (deficits and surpluses) to offset fluctuations in non-government sector spending.
MMT proposes a Job Guarantee program (JG) as a way to automatically achieve such fiscal adjustments. The government would unconditionally offer a public sector job at the minimum wage to anyone willing and able to work. The government employs the unemployed directly, hiring from the "bottom". This is contrary to traditional Keynesian general demand stimulus, which relies on stimulated demand "trickling down" from the "top" (via "spending multipliers"), in the hope of ultimately creating new jobs. By instead stimulating the economy directly at the "bottom", the JG program can avoid the inflationary effects that result from traditional Keynesian demand stimulus.
With a Job Guarantee program the nation always remains fully employed. A buffer stock of employed is maintained. The mix between private and public sector employment will fluctuate as it the program responds to the economic fluctuations of the private sector. The condition of the Job Guarantee workers is key, so that skills, working habits and competitiveness is retained and developed. That way it can have better price stabilization effects than today's approach, which uses a suffering and ever deteriorating buffer stock of unemployed to keep price level under control.
MMT is logical when one understands it, but can initially be counter-intuitive as it turns much established economic thought on its head. "Mainstream" has not kept pace with the development of modern monetary systems. This has caused economies of today to perform far below potential.
Irrespective of ones ideologies, and whether one prefers a small or big government, whether one desires less market regulation or more welfare systems, it is empowering to come to grips with how the system works, and the options that are actually available.
MMT 101 Articles
- "Introduction" – this article.
- "Modern Money Systems" discusses these systems in more detail, contrasting them to regimes that are revenue constrained, such as pegged currency systems and the members of the Eurozone. Government deficit spending in a modern money system is not inherently bad and can, if implemented with precision, result in zero unemployment along with price stability.
- In "The Real Economy", it is emphasized that the costs of government policy should be understood in real terms, rather than nominal. Financial assets issued by the government, such as government bonds, should be thought of as non-government financial wealth, rather than government debt. These financial assets will be inherited by future generations as financial assets held by the non-government sector. This is contrary to the popular view that government bonds is a "debt burden" that future generations will suffer under. MMT holds that the burden future generations will suffer under is rather a burden of unfulfilled potential -- in real terms -- due to economic mismanagement today.
- "Money, Government and Banking" deals with operational details of how the government interacts monetarily with the banking system and the non-government sector. "Horizontal" and "vertical" money creation is contrasted. "Horizontal money" creation is when a bank deposit ("bank money" or "credit money") created by banks when a loan is extended to a customer. "Vertical money" creation is when "base money" is issued and spent into the economy by the government. Base money is the definitive currency. It is issued by the government, consists of bank reserves and physical currency and comprises the "monetary base". A number of popular myths and mistakes are discussed, such as the ideas of the "money multiplier" and "financial crowding out".
- In "The Role of Government Deficits" the whole economy is divided into a few main sectors, between which financial assets can flow. Not all sectors can simultaneously have an net inflow of financial assets – at least one must have a net outflow, that is run a deficit. The sectors in focus of the analysis are the government sector and the non-government sector (of which the latter can be divided into the private domestic sector and the foreign sector). Agents in the non-government sector typically has some desire to net save, i.e accumulate net financial assets, by holding on to some of their income. Income unspent results is a "demand leakage" that causes unemployment – unless an injection of financial assets into the private domestic sector offsets the leakage. Government deficits can create the needed inflow. MMT asserts that in a growing economy, persistent government deficits are the theoretical and practical norm, and that there is nothing inherently wrong with government deficits.
- "Full Employment along with Price Stability" discusses the Job Guarantee proposal in some detail.