Modern Monetary Theory

Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly for a government and unemployment as the evidence that a currency monopolist is restricting the supply of the financial assets needed to pay taxes and satisfy savings desires.[1][2] MMT is seen as an evolution of chartalism and is sometimes referred to as neo-chartalism.

MMT advocates argue that the government should use fiscal policy to achieve full employment, creating new money to fund government purchases. The primary risk once the economy reaches full employment is inflation, which can be addressed by raising taxes and issuing bonds, to remove excess money from the system.[3] MMT is controversial, with active debate[4] about its policy effectiveness and risks.

Overview

U.S. money supply change from a year ago ($ Billions).
Percent change in U.S. money supply vs. year ago. Money supply increases about 6% per year.

MMT states that a government that can create its own money, such as the United States:

  1. Cannot default on debt denominated in its own currency;
  2. Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;
  3. Is limited in its money creation and purchases by inflation, which accelerates once the economic resources (i.e., labor and capital) of the economy are utilized at full employment;
  4. Can control Demand-pull inflation[5] by taxation and bond issuance, which remove excess money from circulation, although the political will to do so may not always exist;
  5. Does not need to compete with the private sector for scarce savings by issuing bonds.

These tenets challenge the mainstream economics view that government spending should be funded a priori by taxes and debt issuance.[6][7][4]

The first four MMT tenets are not in conflict with mainstream economics in terms of how money creation is executed and inflation works. For example, as former Fed Chair Alan Greenspan said, "The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default."[8] However, MMT economists disagree with mainstream economics about the fifth tenet in terms of impact on interest rates.[9][10][11][12][13]