Modern Monetary Theory
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Contents |
Introduction
Modern monetary theory (often, "MMT") is a descriptive framework of the macroeconomic system. It is applicable to countries that use fiat non-convertible currency with a flexible exchange rate. It proponents are often also proponents of functional finance.
Modern monetary theory shows that countries do not ever face a risk of being unable to pay their debts (the solvency constraint) but may, under certain circumstances, face undesirable inflation if a deficit is run in excess of the needs of the economy (the inflation constraint).
Basic Concepts
Money
Sectoral Balances
The Deficit
The "Debt"
In contrast to the deficit, the amount of so-called debt a government has is irrelevant. Government bonds, when issued in the currency of the country issuing them, can never be involuntarily defaulted on. The government can always create currency, at no cost, to meet any obligation. The "debt" is merely the sum of the government's previous deficits and surpluses.
This is of course different than a household or business, who cannot create currency. As currency users, rather than currency issuers, their debt must be serviced by currency raised through economic activity. This is an example of the fallacy of composition.
Because the government can always simply print currency, a country that controls its own currency does not need to sell bonds to "borrow" funds. A government's decision to issue bonds is voluntary.
Taxes
Taxes serve two main purposes in the economy:
- Creating demand for currency. The government accepts its currency, and only its currency, as payment for taxes owed. People must hold currency to pay taxes or they are faced with penalties, including prison.
- Regulating inflation. Inflation occurs when aggregate demand exceeds the productive capacity of the economy. Taxes reduce the amount of money in the hands of the private sector, and thus reduce demand.
Countries that control their own currencies do not need to tax in order to spend. Such countries can always issue currency to purchase any good or service for sale in the economy. Taxes do not fund the government.
Inflation
History
References
Introductory
Frank Ashe, A kindergarten guide to modern monetary theory
Warren Mosler, The Center of the Universe, Mandatory Readings
Warren Mosler, Soft Currency Economics
Warren Mosler, The Seven Deadly Innocent Frauds of Economic Policy
