Modern Monetary Theory

Modern Monetary Theory, Modern Money Theory (MMT), or Modern Monetary Theory and Practice (MMTP) is a macroeconomic theory and practice that sees the practical uses of fiat currency in a public monopoly from the issuing authority, normally the government's central bank.

Modern Monetary Theory against the household theory

Many people think a government works like a family. A family must earn money before it can spend money.

MMT says this is wrong. A government that makes its own money, like the United States makes dollars, or Japan makes yen, can always create money. It cannot run out of money the way a family or a business can. And it has to create money for a taxpayer to have money to pay taxes.

Money is just numbers in a computer and not a resource

When a government spends money, nobody prints new bills. Instead, someone at the central bank types a number into a computer. The money appears in a bank account. This is sometimes called "keystrokes", because all it takes is pressing keys on a keyboard. Money is not a thing you can use up, like oil or wood. It is just a number that can be changed.

The real limits are resources

If money is just numbers, what is the real limit? MMT says: resources. Resources are things like workers, factories, food, energy, and time. A government can always create more money, but it cannot create more workers or more oil.

If a government spends a lot of money, but there are not enough workers or materials, prices go up. This is called inflation.

So MMT says the real question is not "Can we afford this?" but "Do we have enough workers and materials to do this without causing prices to rise too fast?"

Imagine the factories in a country are only working at 70%. They could make more things. It is just that nobody is buying enough. If the government spends new money, people have more money to buy things. The factories make more products to meet the demand. In this case, the result is not higher prices. Tt is more goods and more jobs.

Prices only start to rise when factories and workers are already as busy as they can be, and there is nothing left to buy.

Government deficit = private surplus

When people hear government deficit, they often think it is a bad thing. Like the family or household spending more than it earns. But MMT says: every dollar the government spends and does not take back in taxes stays in the hands of normal people and businesses. So a government deficit is just the other side of private savings.

Imagine the government spends 100 dollars but only collects 80 dollars in taxes. That means 20 dollars are left in the economy. This money is in people's pockets, in company bank accounts. The government's minus is the people's plus.

If the government tried to have zero deficit, there would be no new money left for people to save.

What about taxes?

Taxes are still important, but not because the government "needs" the money. Taxes help keep prices stable by taking some money back out of the economy. They could also limit the power of super-rich people.

Banks also create money

It is not only the government that creates money. When a bank gives someone a loan, it does not take that money from a vault. It simply adds a number to the borrower's account. This is how most money in the economy is created. But a bank's money is created by debt. This means someone has to pay it back.

Not everyone agrees

Many economists say MMT makes inflation sound too easy to control. Others say that several assumptions are wrong. This is still a big debate.