Modern Monetary Theory

M2 Money Stock

Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox macroeconomic theory that describes currency as a public monopoly for the government and unemployment as evidence that a currency monopolist is overly 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. According to advocates, 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. Its macroeconomic policy prescriptions have been described as being a version of Abba Lerner's theory of functional finance.

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 issues its own money:

  1. 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;
  2. Cannot be forced to default on debt denominated in its own currency;
  3. Is limited in its money creation and purchases by inflation, which accelerates once the real resources (labor, capital and natural resources) 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 pre-emptively 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]