Modern Monetary Theory: why government spending isn't like household checkbooks


Originally published at:


And remember: governments are not businesses, CEOs make shitty presidents, and government debt is not a bank-loan.

Repeat it all you want, but Objectivists and Libertarians will never understand it. The vast majority of these self-styled tycoons and economic geniuses would drive a lemonade stand into the ground if given the opportunity to run one.


I’ve found the argument that at least gets through to the less rabid libertarians is to ask them what an idealized government and an idealized business would be. An ideal business would have no costs and infinite revenues. An idealized government would perform infinite services with no income. There’s no reason to assume that the two should operate similarly when they work towards nearly opposite ends.


You may be obliged to remind the Libertarian who insists the best government is no government at all that they need some kind of government to enforce their precious property rights.


And yet nobody ever asks “but who will pay for it?” when it’s a war. (one exception: the Iraq war was the only time I can think of where the idea was even brought up, but Wolfowitz’s claim that oil revenues would pay for the entire thing were (of course) completely false.)


I’ll have to take a longer look into the links in the article, because I’ve heard about MMT over the last few years, but I’ve never been able to get a good explanation as to how and why it would work.


Thank you @doctorow! Recently I’ve been reluctant to ask you how to explain this stuff to my family and close friends. This seems like the perfect opportunity to begin the explanation.

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MMT works nothing like this:

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There is a strong tendency to image the nation as oneself writ large. This leads to ideas like the Wall (“I built a wall around my house, and it worked just fine!”) and the notion that budgeting the country is just like what I do at my kitchen table. It also leads to other pernicious notions like nations naturally wanting to be devoted to a particular ethnicity.
Of course, some nations are: Turkey, Japan, Denmark are current examples. Some very much are not, like the USA, China, and Russia - but in all those cases, there is a politically dominant ethnicity: White Anglo, Han, and, well, Russian, respectively.
Some may find it surprising that Israel is a multi-ethnic state, with roughly equal populations of Arab, Russian, Western European, and Middle Eastern Jewish, plus a smattering of African. A dominant religion, but not a dominant ethnicity. In fact, right now, the Middle Easterners and Russians (more comfortable with strongman politics) dominate the more lefty Western European groups.


YES! Plus giant tax cuts for the rich are not questioned the same way anything that benefits the rest of us is.


Let me translate that economics gobbley gook for you…Ahem, the questions is:

(with utter indignation) How are you going to pay for all that?

Open your god damn eyes, WE ARE FUCKING PAYING FOR IT RIGHT NOW.


Kim Stanley Robinson summarised it neatly* in Green Mars:

Even if you want no state, or a minimal state, then you have to argue point by point. Especially since the minimalists want to keep the economic and police system that keeps them privileged. That’s libertarians for you — anarchists who want police protection from their slaves.

[* I’d have preferred he used a capital L, but I know that’s the kind he’s talking about.]


I recently heard MMT proponent Prof Bill Mitchell say it’s perfectly possible for governments to release money into the economy and spend without this being inflationary – so long as the economy is able to absorb the demand created by that fiscal influx.

How modern are these MMt ideas anyway?
People have been calling foul on this 'ol game for over a century:

And I sincerely believe with you that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding, is but swindling futurity on a large scale.

  • Thomas Jefferson, letter to John Taylor May 28 (1816)

History records that the money-changers have used every form of abuse, intrigue, deceit and violent means possible to maintain their control over governments by controlling money and its issuance.

  • James Madison

Whoever controls the volume of money in any country is absolute master of all industry and commerce. And when you realize the entire system is very easily controlled one way or another by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.

  • James Garfield

The real truth of the matter is, as you and I know, that a financial element in the larger centres has owned the government since the days of Andrew Jackson.

  • Franklin Roosevelt in a letter to Colonel House (1933)

I’m not sure I can clearly articulate my problem with this kind of fiscal/monetary policy. I think it makes sense and I’d love to see it widely put in practice… but I keep on coming back to how corrupt we are.

We have finite resources on this planet, renewable energy and automation notwithstanding. Supply and demand will always apply, and some people exploit that and pay a premium to secure more than their share of those resources. To pay those premiums, they need more money than others. Getting the state to create that money for them seems an obvious solution, and they do that even now; the military-industrial complex being a noticeable culprit.

Basically, I can’t see free tuition, basic income, anything other than subsistence-level welfare (if that) as not being wide open to corruption. And that’s ignoring indirect ways of securing the cash, like raising prices on goods and services you have a monopoly on.

Do we need to improve anti-corruption and anti-monopoly enforcement, or is there a solution that takes humans out of the equation, or are we simply damned if we do try to share our wealth between ourselves and damned if we don’t?


Behold the modern model of a monetary theory
Subsidize new PCBs and dump 'em in Lake Erie

(Couldn’t resist)

A thorough defense of Modern Monetary Theory

True. Countries that end up with hyperinflation don’t have control of their own currency, one way or another. They’re debtor nations (e.g. Weimar Germany, Greece) or have pegged their currency to a single underlying and volatile asset (e.g Venezuela).

It’s “modern” in the sense that the traditional narrative of public spending from all parts of the economic spectrum since the dawn of nation-states has been “the government collects revenues in the form of taxes and then applies those funds to various public programmes and works. If it needs more money than it collects from taxes it borrows, risking inflation.”

MMT switches around the order, in the process reflecting the reality of the situation in modern industrialised countries: “the government applies funds first, creating new money as needed for programmes and works. Revenue collected in the form of taxes exists to offset the risk of inflation.” It requires a different way of thinking that looks at the value of things beyond money and more fine-tuned management and analytics on the part of the central bank (and a different relationship between the bank and the government than currently exists).

That’s a political problem, not an economic problem. Our current situation wouldn’t get worse and, given a new viewpoint, might get better with MMT.

Fiat currency, being a human construct and standard to begin with, is not one of those finite resources. MMT economics, almost as a result, focuses just as much if not more on the finite resources and limits than does traditional economic theory. How and where the government applies those funds is a political issue under MMT just as it is now.


Good thing I was concerned about it as a policy then!

Seriously, I have no issues with the observations of MMT or Monetary Realism; I’m just not imaginative enough to see put them to use without them being corrupted; especially since they’re already in use in some capacity and already corrupted!

It’s a bit more of a trial than simply finding a simple way to explain that the state can create as much money as it wants as long as the money can be absorbed by the economy (and arguably better, be used to grow the economy further as in health, education, and infrastructure).

We need to loosen the hold of the banks and defense industry on the politicians who give them their basically exclusive right to the distribution of new money when that same money lets them buy any new politicians you elect if not buy the election outright.


If they had pegged the currency to oil, they wouldn’t have the problem. Basing their main source of revenue on oil was a problem.

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These theories are where the unwary can end up when we aren’t aware of the relationship between the abstract financial system and the physical matter/energy system. They aren’t independent - the former is an outcome of the second. Specifically, money is a call on matter/energy.

For the last 90 or so years, the physical matter/energy system has undergone a process of constant expansion. This has been enabled by the availability of hydrocarbon - oil and gas. Hydrocarbons are extraordinarily dense energy sources - each litre is (in effect) the product of millions of years of sunlight captured by millions of acres of plants. Expansion has been so constant that we have become oblivious to it, as a fish is to the water in which it swims.

The rate at which oil and gas can be supplied has reached certain non-negotiable physical limitations. As a statement of physical reality, a power source providing millions of years of sunlight captured by millions of acres of plants, cannot be replaced with one intermittently capturing sunlight and wind over a few acres in real time.

For the first time, therefore, our energy supplies are heading into a phase of permanent contraction. That has implications for our financial system.

The supply of money and the amount of matter/energy must remain in some sort of correspondence. If it didn’t, there could be no confidence that the money in your hand represented ‘value’.

For 90 years, government has been able (through banks) to create money. They have done so in the assumption that the matter/energy system will expand to maintain correspondence.

That assumption no longer holds. So money certainly cannot be created in the manner suggested in the posting. Worse, to maintain correspondence in a contracting system, money now has to be withdrawn from the system. To the extent that this money is things like our pensions, that is politically impossible.

The outcome is the rapid divergence between our financial system and our physical matter/energy system. That is the fundamental cause of financial instability.

Much of economic and financial theory is now irrelevant, The key disciplines are thermodynamics and ecology (the dynamics of living things operating within rate-limiting constraints). That is where to look for sources of solutions to our predicament.


The US Treasury could mint a platinum coin, declare it to be worth $100T, and the government would then have $100T. This is legal right now, has been for generations, and has never been done. Whatever level of corruption we have, it has never led to abuse of such a loophole for funding the government. And yet, for the better part of a decade the Fed was unable to hit its 2% inflation target because it was at the zero lower bound of interest rate, no matter how much it expanded the money supply. The result of the government not spending money into existence was measured in millions of people’s financial well being destroyed, and trillions of lost economic productivity due to un- and underemployment. So go ahead and tell me precisely where and how thinking about where money actually comes from and what it means is going to make the situation worse due to the corruption that already exists in any human system.

@falcon: You’re trying to solve a different problem than the OP. Of course the government can’t spend matter and energy into existence, but solving our distributional problems does not require additional matter and energy, and a more sane system of taxation and government spending would make addressing our collective thermodynamic, ecological, and technological/scientific problems a heck of a lot easier. Imagine it: “Global warming is clearly a problem. Therefore, we’re immediately creating a $1T/yr fund supporting research, infrastructure, and development projects to reduce emissions and adapt to unavoidable effects. This may increase inflation, which will indirectly further reduce the consumption contributing to the problem in the first place.”