Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems

By L. Randall Wray

This week we begin a new feature at New Economic Perspectives—a Primer on Modern Money Theory. Each Monday we will post a relatively short piece, gradually building toward a comprehensive theory of the way that money “works” in sovereign countries. We will then collect comments through Wednesday night, and will post a response to the comments on Thursday. The comments should be directly related to that week’s blog. Since we are trying to develop an understanding of MMT, we especially encourage commentators to let us know where we have been unclear. Since we will be presenting the Primer over the course of the coming year, we will sometimes have to beg for patience—obviously we cannot present the entire theory all at once.

These blogs begin with the basics; no previous knowledge of MMT—or even of economics—is required. The blogs are sequential; each subsequent blog builds on previous blogs. The blogs will be at the level of theory, with only limited reference to specific cases, histories, and policies. That is intentional. A Primer should provide a general overview that can be adapted to specific national situations. The regular pages of NEP will continue to discuss current real world policy issues. The Primer will remain on a different plane.

What follows is a quick introduction to the background and purpose of the Primer.

MMT Primer Blog #1

In recent years an approach to macroeconomics has been developed that is called “modern money theory”. The components of the theory are not new, but the integration toward a coherent analysis is. My first attempt at a synthesis was in my 1998 book, Understanding Modern Money. That book traced the history of money as well as the history of thought undergirding the approach. It also presented the theory and examined both fiscal and monetary policy from the “modern money” point of view. Since that time, great strides have been made in applications of the theory to developing an understanding of the operational details involved. To put it simply, we have uncovered how money “works” in the modern economy. The findings have been reported in a large number of academic publications. In addition, the growth of the “blogosphere” has spread the ideas around the world. “Modern money theory” is now widely recognized as a more-or-less coherent alternative to conventional views. However, academic articles and short blogs do not provide the proper venue for a comprehensive introduction to the approach.

This primer seeks to fill the gap between formal presentations in the academic journals and the informal blogs. It will begin with the basics to build to a reasonably sophisticated understanding.

In addition, it will explicitly address another gap: the case of developing nations. The MMT approach has often been criticized for focusing too much on the case of the US, with many critics asserting that it has little or no application to the rest of the world’s nations that do not issue the international reserve currency. To be sure, that criticism is overdone because modern money theorists have applied the approach to a number of other countries, including Australia, Canada, Mexico, Brazil, and China. Still, much of the literature explicitly addresses the case of developed nations that operate with floating exchange rates. Some supporters have even argued that MMT cannot be applied to fixed exchange rate regimes. And there has been very little application of MMT to developing nations (many of which do adopt exchange rate pegs).

So this primer also fills that gap—it explicitly addresses alternative exchange rate regimes as well as the situation in developing nations. In that sense, it is a generalization of modern money theory.

Unlike my 1998 book, this primer will not revisit the history of money or the history of thought. The exposition will remain largely theoretical. I will provide a few examples, a little bit of data, and some discussion of actual real world operations. But for the most part, the discussion will remain at the theoretical level. The theory, however, is not difficult. It builds from simple macro identities to basic macroeconomics. It is designed to be accessible to those with little background in economics. Further, the primer mostly avoids criticism of the conventional approach to economics—there are many critiques already, so this primer aims instead to make a positive contribution. That helps to keep the exposition relatively short.

In this primer we will examine the macroeconomic theory that is the basis for analysing the economy as it actually exists. We begin with simple macro accounting, starting from the recognition that at the aggregate level spending equals income. We then move to a sectoral balance approach showing that the deficits of one sector must be offset by surpluses of another. We conclude by arguing that it is necessary to ensure stock-flow consistency: deficits accumulate to financial debt, surpluses accumulate to financial assets. We emphasize that all of these results apply to all nations as they follow from macroeconomic identities.

We next move to a discussion of currency regimes—ranging from fixed exchange rate systems (currency board arrangements and pegs), to managed float regimes, and finally to floating exchange rates. We can think of the possibilities as a continuum, with many developed nations toward the floating rate end of the spectrum and many developing nations toward the fixed exchange rate end.

We will examine how a government that issues its own currency spends. We first provide a general analysis that applies to all currency regimes; we then discuss the limitations placed on domestic policy as we move along the exchange rate regime continuum. It will be argued that the floating exchange rate regime provides more domestic policy space. The argument is related to the famous open economy “trilemma”—a country can choose only two of three policies: maintain an exchange rate peg, maintain an interest rate peg, and allow capital mobility. Here, however, it will be argued that a country that chooses an exchange rate target may not be able to pursue domestic policy devoted to achieving full employment with robust economic growth.

Later—-much later–we will show how the “functional finance” approach of Abba Lerner follows directly from MMT. This leads to a discussion of monetary and fiscal policy—not only what policy can do, but also what policy should do. Again, the discussion will be general because the most important goal of this Primer is to set out theory that can serve as the basis of policy formation. This Primer’s purpose is not to push any particular policy agenda. It can be used by advocates of “big government” as well as by those who favour “small government”. My own biases are well-known, but MMT itself is neutral.

As mentioned above, one major purpose of this primer is to apply the principles developed by recent research into sectoral balances and the modern money approach to the study of developing nations. The Levy Economics Institute has been at the forefront of such research, following the work of Wynne Godley and Hyman Minsky, but most of that work has focused on the situation of developed nations. Jan Kregel, in his work at UNCTAD, has used this approach in analysis of the economies of developing nations. Others at Levy have used the approach to push for implementation of job creation programs in developed and developing nations. This primer will extend these analyses, explicitly recognizing the different policy choices available to nations with alternative exchange rate regimes.

Finally, we will explore the nature of money. We will see that money cannot be a commodity, rather, it must be an IOU. Even a country that operates with a gold standard is really operating with monetary IOUs, albeit with some of those IOUs convertible on demand to a precious metal. We will show why monetary economies typically operate below capacity, with unemployed resources including labor. We will also examine the nature of credit worthiness, that is, the reason why some monetary liabilities are more acceptable than others. As my professor, the late and great Hyman Minsky used to say, “anyone can create money; the problem lies in getting it accepted”.

This series of blogs actually began as an effort to provide a basic primer on macroeconomics that can be used by home country analysts in developing nations, as an alternative to the macroeconomic textbooks that suffer from a variety of flaws. The purpose was not to critique orthodox theory but rather to make a positive contribution that maintains stock-flow consistency while also recognizing differences among alternative exchange rate regimes. Jesus Felipe at the Asian Development Bank urged me to put together a version that could be more widely circulated. At the same time, many bloggers have asked those who have written on MMT to provide a concise explication of the approach. Many professors have also asked for a textbook to use in the classroom.

This primer is designed to fulfil at least some of those requests, although a textbook for classroom use will have to wait. To keep the project manageable, I will not go deeply into operational details. That would require close analysis of specific procedures adopted in each country. This has already been done in academic papers for a few nations (as mentioned above, for the US, Australia, Canada, and Brazil, with some treatment of the cases of Mexico and China). As I am aiming for a nonspecialist audience, I am leaving those details out of the primer. What I do provide is a basic introduction to MMT that does not require a great deal of previous study of economics. I will stay free from unnecessary math or jargon. I build from what we might call “first principles” to a theory of the way money really “works”. And while it was tempting to address a wide range of policy issues and current events—especially given the global financial mess today—I will try to stay close to this mission.

I thank the MMT group that I have worked with over the past twenty years as we developed the approach together: Warren Mosler, Bill Mitchell, Jan Kregel, Stephanie Kelton, Pavlina Tcherneva, Mat Forstater, Scott Fullwiler, and Eric Tymoigne, as well as many current and former students among whom I want to recognize Joelle LeClaire, Heather Starzinsky, Daniel Conceicao, Felipe Rezende, Flavia Dantas, Yan Liang, Fadhel Kaboub, Zdravka Todorova, Shakuntala Das, Corinne Pastoret, Mike Murray, Alla Semenova and Yeva Nersisyan. Others—some of whom were initially critical of certain aspects of the approach—have also contributed to development of the theory: Charles Goodhart, Marc Lavoie, Mario Seccareccia, Michael Hudson, Alain Parguez, Rob Parenteau, Marshall Auerback, and Jamie Galbraith. Other international colleagues, including Peter Kreisler, Arturo Huerta, Claudio Sardoni, Bernard Vallegeas, and Xinhua Liu let me try out the ideas before audiences abroad. Many bloggers have helped to spread the word, including Edward Harrison, Lambert Strether, Dennis Kelleher, Rebecca Wilder, Yves Smith, Joe Firestone, Mike Norman, Tom Hickey, and the folks at New Economic Perspectives from Kansas City, Lynn Parramore at New Deal 2.0, Huffington Post, and Benzinga who posted my blogs (and above all, wearing two hats, Bill Mitchell at billyblog!). All those at CFEPs in the US and Coffee in Australia and Europe have helped to promote the ideas over the past decade. A big Thanks to all.

Enough with the preliminaries. We get started with the theory next week.

53 responses to “Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems

  1. I chanced upon MMT about a year ago and my jaw hasn't stopped dropping since. Yes, let's do this. At about the same time, I noticed Dr. Michael Hudson's passionate crusade against neo-barbarian economic imperialism. I get it that this project skirts political economy, but I assume you guys get it that that's where the payoff really comes in terms of human suffering and human needs. In my opinion, the greatest single thing that could happen would be for a native Spanish speaker to translate this primer in real time and bring it to the attention of the left-moving, IMF-dissing popular movements of Latin America.

  2. There are a couple of 'unanswered question' that I hope you will be able to nail in this series.(i) Where is the evidence that an economy will quantity expand rather than price expand when stimulated. (ii) Where is the evidence that the floating rate exchange mechanism gives you the degree of freedom required to allow MMT to work.I'm looking forward to it.

  3. I look forward to reading the series. It would be helpful, also, to include an overview of the 'conventional views' it intends to offer a 'more-or-less coherent alternative to'.Thanks.

  4. Looking forward to this.I think Cullen Roche over at, a very popular financial blog, should be placed in the thank you section as well. His posts regularly invoke MMT, and he often has Warren Mosler and other MMTers as guest bloggers.

  5. I became aware of Professor Randall Wray, thanks to the Italian journalist Paolo Barnard.Spread through my blog and YouTube videos Theory MMT. We Europeans are trapped in the Euro, we hope people begin to understand when the IMF will devastate our economies.Andrea Taxi Italy

  6. Thank you for crediting my work and the work of other MMT bloggers, Randy. Also, any people at FDL have been introduced to MMT by selise, whose blog posts as well as work on the April 2010 fiscal sustainability conference and its audio, video, and transcript products have been invaluable. She hosts Conference audiot, transcripts, video and presentation Products here:

  7. I agree wh10. I am a regular pragcap reader and would have never known what MMT was if not for Mr. Roche. I doubt anyone has done as much as he has to get MMT out to the mainstream. Not only does he run his own hugely popular site, but his articles are always reposted on Business Insider and Seeking Alpha where he is the top economics writer. No MMTer has that sort of reach. Not even Galbraith. I think it's a shame that MMTers don't even acknowledge his contribution. His primer on MMT is the only intelligible and readable piece of literature that exists for non eceonomists. The rest of the MMT literature is bogged down in impossible acadmemics and excessively wordy writing. I'll forward this to him to show that he is being ignored by you folks.

  8. I couldn't agree more. It is disgraceful to have overlooked Pragcap, although I don't think his wonderful essay is the only intelligible writing for the layman. Much of Mosler's "required readings" is very accessible.To me, the great problem is that the intellectuals have neglected the very great danger facing us in the form of what Hudson has called the debt serfdom. The privatization of currency and the realities of compound interest will spell the end of freedom. Only Bill Black and Hudson in the MMT crowd have fully and bravely faced the essential criminality of our current system. Before we see any real change, the banksters must be brought down and the money system must be changed. But how to do that when they own the Congress and the military? Local passive resistance and organization–decentralization–is a key point. Unfortuantely, though, the average American is thoroughly brainwashed–a veritable consumatron.

  9. I spent 10 years in on of the biggest US investment banks and have spent another 5 in an investment firm which a group of us set up after leaving. I'm usually met by total disbelief when I try to explain MMT.Of course it doesn't help that a large part of the profits of the financial system come from people accepting the stories they are told about the role of bonds in government finance.I think MMT in terms of acceptance is quite near a breakthrough. It reminds me of the position of monetarism in the early 1970's, derided by mainstream economists and relying on the willingness of advocates to be rejected until accepted. People have started attacking MMT. That is the big step up from being ignored which it needed to make.The one big difference of course is that MMT doesn't suit the interests of the rich.Keep chipping away at Krugman. He is very resistant but there are glimmers of understanding there and he's not just motivated by a desire to defend inequality which so many economists are.

  10. It’s very useful to get such compendium to spread MMT and to appoint to. Activists will be delighted. If they’ll ever learn that this exists. Policy makers are interested in votes, votes depend on people’s choice and their choice depends on their awareness. If people understand the relationship between MMT and their everyday difficulties, they will put pressure on policy makers for a change. Otherwise they will not. It could happen that some enlightened person would take all this matter into real Politics, but it is much harder without the people’s support. I think there was a person who suggested you the way to move towards people, but perhaps this point has no real importance for economists. In fact you did not even mention him. But he was able to reach and explain a simple Taxi Driver in Italy the MMT, the one that posted a comment up here. ChiaraItaly

  11. I quote both Pierce and Chiara. Very few economists grasp the political, human and historical context of their work. They often content themselves with brilliancy at academia and successful peer review, prestigious op-eds and reaching selected audiences within the PhD crowd. Fine for them, useless for anyone else. We (the supporters of MMT and Full Employment) are at watershed and we must see it. MMT & FE are anathema for anyone even remotely close to political power, since in practice they would subvert 75 years of the financial elites' most merciless attack on democracy in history. And these are the guys that hold the purse of any political career. No politician will ever embrace MMT & FE for their merits, they'd be politically dead in an instant. Only chance is building a bottom to top pressure, where Representatives will be told by folks "my vote for MMT & FE, or stuff it". To get to this point, MMT & FE must be brought to the real people, and the real people don't read NEP or Billy blog. I did it in Italy, reaching over 100,000 ordinary folks, but Italy is insignificant. The same must be done in the US. Prof. Wray knows my proposals. Happy to discuss them again. Failing this communication effort, all the rest is futile, and anyone grasping the historical realities of the past 75 years of political economy knows it. Paolo Barnard

  12. Make sure you provide lots and lots of evidence with every assertion please. It shouldn't take much time and would make your words much more credible in people's minds. Actually seeing the sector balance chart did wonders in the minds of those who've seen it.

  13. This will be awesome stuff. I cannot wait.I hope to help create some talking points around each of the columns over at the Traders Crucible.

  14. I have to agree with Paolo Barnard in that we have to put the message in language that the housewife understands and trust me she is not stupid but, she does not speak in academic terms. Maybe a more important point is the third world. If the MMT ideas go across in ordinary language that most folk can comprehend, with out to much difficulty (write as a newspaper does) then the third world may be our saviours. They may actually take up these ideas and run with them before the west or modern societies do. As an example a modern Cuba or African country might lead the way. All this because they find the theory easier to grasp and understand because, it is written that way.

  15. Fantastic idea!May I make a plea for brevity? There is a lot to say, but the more content is included in each posting (as opposed to via hyperlinks), the fewer people will have the time / goodwill / inclination to digest it all.However – please can you be as robust as you can on inflation? To my mind, the MAJOR stumbling block MMT faces is when people say "OK; I get that the govt/CB cannot be forced to default, even if bondholders revolt, because it can monetise its own debt or simply stop issuing debt. But there is no way rapidly increasing deposits wouldn't lead to inflation". When I have replied to such people "inflation only results when there is an insufficient output gap", they have not found this compelling. I can get into issues of market power / stagflation but it's less familiar ground.Given the importance of this, I think even in a short primer, inflation deserves its own article.

  16. My wish list would include the simultaneous access to an animation, cartoon, comic strip, or some such in order to supplement written information with a visual sort of reinforcement. I have viewed several animated video clips and found some to be most helpful as learning tools, but they require special skills and coordination between artist and information organizer. One of the more interesting artists whose work I have watched is Brandon McCooney (I tried to learn more about him and think that he is/was a college student while blogging); he provided his ideas at: at site which provides a variety of professionally rendered animation examples is: their videos are at: are actually a number of others, however, I am quite aware that there are challenges in obtaining assistance from someone with such talents. When it is so important that this subject be comprehended by a wide variety of readers, I think that efforts to employ suitable visual aids can be justified.

  17. MMT is the primary opposition to Neo-Liberalism. As such it's dangerous stuff. Long Live MMT!

  18. Dr Wray is such a good writer, I am looking forward to this!

  19. Excellent idea, professor Wray! MMT needs to be better known and more discussed. One point I would like to see considered at some moment: how are the conclusions of MMT affected when: a) the country that issues certain currency is a big, powerful nation whose money is accepted for international transactions (e.g., the USA); b) the country is a rather big one whose currency is not accepted internationally (Mexico, Argentina, Brazil, Thailand); c) the country is small (Uruguai, Vietnam, many African countries).

  20. "Sectoral balance", "stock-flow", "macroeconomic identities", yeowww! Okay, I want to understand this stuff, but I'm intimidated already. I don't claim to be as smart as the typical housewife, but I don't think the typical housewife gets those terms either. In any case I'll try to keep up. From the posts of what sound like smart people, I gather this is important to understand.

  21. The most immediately convincing argument for MMT is not its economic soundness. It lies in the reality of the fight for the control of our common wealth. Simply put: ever since the French Revolution, the wealthy elites saw their absolute power being eroded by the birth of States and democracies. In the 250 years since, the elites had to relinquish an immense amount of wealth and power in favor of us, the people. They didn't like that at all. And since the 1970's, with the return of FIAT currencies (that States can create out of thin air and spend with almost no constraints) within fully democratic States where the folks had a voice, the real possibility that States could decide to spend for the full benefit of the citizens frightened the hell out of the elites. It meant that States and their folks could acquire the largest slice of the wealth pie, cornering the elites into inferior positions and no world domination of money and resources. MMT is just this: it affirms the power of sovereign States to spend first for the benefit of the private sector (but not the super elites) with almost no limits: that is, full employment, full welfare and big control of the economy as a whole. The super elites hate this, and that's why you have never heard of MMT in the big media and it has never reached the elites' sponsored policymakers. That's why it's never reached you and your family. Nothing to do with its economic soundness, that is actually the easiest thing to demonstrate.

  22. Great to see you guys cranking it up.I'm looking forward to the material.Please don't skimp too much on operational details of central banking even if you have to use a 'typical' example. I feel this is vital to grasping the essential insight into how things really work.Good luck! We are right behind you.

  23. I would really like to better understand the role of the Fed — and have MMT address directly those who would like to see an end to the Fed as opposed to the MMT position which, if I understand it correctly, sees the Fed as an arm of the Treasury rather than a privately owned entity.I'm so glad to see Wray begin this project and look forward to keeping up with each new post.And thanks to all the MMTers for their interesting work!

  24. This all reads like an advertisement for soap. What is MMT? Just a lot of claims as to it's wonderfulness, as compared to the 'traditional theory'? Sounds like a lot of hot air, if you cannot back it up with some content.Please say what this new theory is supposed to explain, how it does that, what is wrong with the old theory, and why this 'new' one might be more generally useful. If your claims were valid, then why not immediately explain why they are?

  25. Hate to be a copycat, but I reiterate: Cullen Roche at has spread the word about MMT in the face of a continuing assault from those who still think the US gov't is bankrupt. I eagerly anticipate Prof. Wray's series.

  26. In many countries the central bank is an integral part of the government. As such, the central bank is not independent and the government can compel it to create money "out of the thin air" whenever it chooses. In the U.S., the Federal Reserve Bank, while regulated in its mandate by law and supervised by Congress, is owned by its member banks (all private) and is independent. In other words, the Treasury does not have the power to direct it to monetize the federal debt. Congress could change that, of course, but until it does so, I fail to understand why the proponents of MMT are so confident that the Federal government could not become insolvent and default on its financial obligations.

  27. That is because deficit spending creates new money and debt simultaneously. There is no functional difference between "borrowing" and "printing money". It's a wash: government deficits fund themselves.

  28. Hi Randy – I've been working on a laymen's explanation of MMT myself. When you get a chance can you take a look. Any and all feedback would appreciated. Thanks.

  29. Randy and Co., isn't this backwards according to MMT? (from the post above)"We conclude by arguing that it is necessary to ensure stock-flow consistency: deficits accumulate to financial debt, surpluses accumulate to financial assets."Isn't it that deficits accumulate to financial assets? If I'm misreading this, forgive me, but I'd suspect that I'm not alone.

  30. Hi Randy,Good luck.Rodger Malcolm Mitchell

  31. To: theunlikelyeconomistAnd in the case of federal deficits, there is no functional relationship with federal debt at all. There can be federal deficits without federal debt and there can be federal debt without federal deficits.One is just the total of outstanding T-securities; the other is the difference between taxes and spending. The only relationship is a legal one.Rodger Malcolm Mitchell

  32. Anonymous said, "There is no functional difference between 'borrowing' and 'printing money'. It's a wash: government deficits fund themselves."I think you meant to say, there is no functional difference between federal "spending" and printing money.As for borrowing, exchanging T-securities for dollars is a useless relic of the gold standard days, and functionally is unrelated to "printing money."Rodger Malcolm Mitchell

  33. This is going to be great. Only thing is, I’d really like to read it on my Nook, instead of this laptop. Anyway to get this in .epub format, or even .pdf?

  34. One of the imeratives is comprehending the purpose of mponey and the original purpose of Banking
    IMHO the primary purpose of money is to facilitate trade.
    The primary purpose of Bank Credit Money is to TEMPRARILY privide credit money to facilitate a trade and have it cancelled when the trade is completed.
    If all money were issued by govermnments or State owned Central Banks, then the state would be in a position to micro manage the economic activity.
    The problem came in when the bank credit departed from the essential primncipal of having marketable collateral to substantiate the credit it created. That was what occured back in the early days of credit, Bank crdit was substantiated with “bills of lading’ and the interest rate charged was the “risk factor” not the “rent factor”.

  35. Though the author takes you on a tour of new-to-me terminologies, he fails instantly when I read …”Finally, we will explore the nature of money. We will see that money cannot be a commodity, rather, it must be an IOU. ” He could not make a worse mistake than that. Money is or should be based on something of value, with my take being the GNP, as gold is just one commodity, etc. “Money as debt” should be eradicated from the world forever along with the “memory” of it’s inventor from the 16th century Scotland, John Law as the worst, most usurious monetary concept the world has ever divised or perpetrated on mankind IMO.

    • We need, first of all, to affirm “The Purpose of money’ which is proimarily to (A) act as an accounting system) and (B) to facilitate trade)
      As such it has to be predicated iupon upon value. (how much grain is in the ziggurate and how will it be distributed)
      The short term supplimenting of fiat (government) money with bank credit money is important. Provided that the money is cancelled when the trade is completed. If it is not cancelled, it will eventually replace the good (gov) with bad (bank credit)

      • Banks should be (but are always not) required to loan money to valid enterprise, as determined by independent and public FOIA determinatants IMO; however, that being not only good for economies, with no chance for banks to interfere, cause “cycles” or panics, you will therefore never see that, as political “buyout” is the order of the day, as eg. exemplified by Pelosi and her congressionally condoned insider trading on military contracts, many of which are often no-bid…as Smedley Butler said…”war is a racket”, etc.
        Money should always just be printed fiat by the government with a GNP backing IMO, to mimic barter, then a system of LET with it’s journals…and then just add “notes”…money. That’s how we originally got into trouble with the British with colonial scrip…and the colonies prospered of course with currency based loosely on value… then of course we disagreed with them so we had a war over it…establishing America, our Revolution !… during which money was again Ben Franlin’s genious endeavor, this time the Continental, which got us through that until the Brits figured out how to counterfeit it also (he put mica in the paper, etc.).
        There also should be NO National Debt of any large sort, just valid public benefit projects supported / paid off by taxation for the general benefit of all, not private investment in the government as now with the federal reserve, which prints (counterfeits) money and has done so since 1913 (art. 1., sec.8, par. 6; [counterfeiting]). As such activities and general private enterprise expand the economy, more fiat is printed to cover that with wiggle room for loans/projects/bonds, etc., but little to no “foreign or private investment” in the government per se… we the people own the govrenment, not WS or the chinese thankyou.
        There also should be no such thing as deficit spending…. if there is a shortfall of tax revenue for valid programs (not NDAA excess eg.), then the amount is just printed…and we ALL suffer the inflation, not just we the (little) people as it is presently done…then we fire/dis-elect/impeach or adjudicate those responsible for such abrogation of intent against the Constitution. more on my small blog…

  36. Robert Muniz

    I recall an article on MMT and fiat money by Bill Mitchell (U of Newcastle, Australia) in the U.S. publication The Nation, that was dismissive of episodes of paper currency inflation, specifically the episodes in Germany after World War 1. I was so upset at the article that I let my subscription to the magazine lapse for over a year. Now in this blog, I see references in MMT theory to the limits an economy’s productive capacity has over the quantity of money that should be in circulation. This particular explanation was lacking in Mitchell’s article (at least as edited by The Nation), and my net impression was that the (final) version of the article was edited to justify the demands of members of US public sector employee unions. I have just subscribed to this Blog, and will continue to read on to see what else I can learn. I will be looking in particular to see how MMT would impact increased economic efficency and technological change, especially in light of how soveriegn currencies and economic policy can be easily dictated to by electoral majorities in government. I wonder if under MMT, a majority can legislate policies that effectively stop the disintermediation of older industries and technologies, and any efficiencies that would result from in a reduction in employment, in both the private and public sectors. Finally, I wonder if there are actually any countries that have implemented MMT, and what their results have been.

  37. Last I heard, pQ=mV , ie., the Quantity Theory of Money was a tautology.

    How do you go about printing and spending a lot of m out of thin air without having V go to zero, as it is presently?

    ED G

  39. Economics is fantastic when ideas can be presented in a positive way (the saltwater vs. freshwater silliness is tiring) – thank you so much for writing this primer; I can only imagine the time it took to do so. I do not have an opinion on MMT yet as I know nothing about it, but I love to learn and am very intrigued. I am confident that I am in good hands here. Cheers.

  40. Stanley Mulaik

    I have been trying to discover the sources of the legal basis for the national debt. What I have discovered
    is that in 1932 the Glass-Steagall Act of 1932 permitted the Fed to purchase Treasury securities and treat
    them as collateral, which before that they had not been. Subsequently 12 U.S.C. § 412 states that Federal Reserve Notes shall be collateralized by ” any obligations which are direct obligations of, or are fully guaranteed as to
    principal and interest by, the United States or any agency thereof”. This implies, I believe, that when the Treasury issues securities to cover deficit spending of Congress, and these are sold to banks at public auction, and later are bought from the banks by the Federal Reserve (with Federal Reserve Note dollars created out of thin air) that the debt of the United States to the banks is redeemed, but there is now still an obligation in the securities themselves
    as collateral assets of the Federal Reserve. To whom is it owed? The Fed? Why? And how would it be redeemed?
    As I see it each Federal Reserve (Note) dollar created by the Fed in purchasing the securities is backed by a dollar lent by the banks to the Treasury (for the United States) in connection with the securities.
    Does this then run counter to the idea that our monetary system is a pure fiat money system? It means that the Federal Reserve dollars are backed by the dollars already in circulation at the banks and lent to the Treasury. And the only way to redeem the Federal Reserve dollars is by recovering these or equivalent dollars already in circulation and paying back the Fed. And this would have to be done with taxpayer money. Of course, the effect of paying off the entire national debt would be to give all of the money in circulation created by the all securities possessed by the Fed back to the Fed, eviscerating our economy.
    It seems also to me that this law was written during a time when the dollar was backed by gold. It is based on the idea that every dollar is backed by something else, e.g. 1/35 of an ounce of gold in 1934. So, the dollars behind the securities were backed by corresponding amounts of gold. And if the Fed bought them, the securities were collateral for the Federal Reserve dollars of the purchase. They may have been newly created dollars matched to “free gold” not yet attached to any given dollar.
    But what happens when nothing backs the dollars created by the Fed? What does it mean that the securities are collateral for the Federal Reserve dollars created to purchase them? Are we now looking at a vestigial practice that has no meaning in a purely fiat money system? Is it just a redundant book-keeping practice?
    But fiat dollars are backed by nothing and have no collateral to back them up but the full faith and credit of the U.S..
    Before discovering this idea that every Federal Reserve dollar has to be backed by collateral I looked at how the Fed acquired the securities and noticed that it was a master/servant operation. The Fed is a servant of the United States. It buys the securities with U.S. government money (by creating it). Thus it redeems the debt of the United States to the banks. And then the Fed possesses the securities, which as a result become inactive, meaning there is no creditor to whom the value of the securities is an obligation. The Fed cannot claim to be the creditor. Since the securities are obligations between the United States and someone else, there is now no someone else. The claim that the Fed is owed the full value of the securities is as invalid as the claim that a bank clerk would have to be owed the value of a security he/she has bought from a bank customer for the bank with bank money. The Fed is a servant of the United States doing work for the United States in purchasing the securities. It redeems the debt. It holds the inactive securities for the United States, which also authorizes the Fed to sell them again and buy others, in open market operations to fight inflation and deflation, respectively.
    So, how do we reconcile these two accounts of the national debt?

  41. Stanley Mulaik

    According to the Federal Reserve Act
    Section 23A Relations with Affiliates
    “Collateral for Certain Transactions with Affiliates

    Each loan or extension of credit to, or guarantee, acceptance, or letter of credit issued on behalf of, an affiliate by a member bank or its subsidiary, and any credit exposure of a member bank or a subsidiary to an affiliate resulting from a securities borrowing or lending transaction, or a derivative transaction, shall be secured at all times by collateral having a market value equal to-
    100 per centum of the amount of such loan or extension of credit, guarantee, acceptance, letter of credit, or credit exposure if the collateral is composed of–
    obligations of the United States or its agencies;
    obligations fully guaranteed by the United States or its agencies as to principal and interest;
    notes, drafts, bills of exchange or bankers’ acceptances that are eligible for rediscount or purchase by a Federal Reserve Bank; or a segregated, earmarked deposit account with the member bank;…”

    Thinking this over more, it seems to me that we can reconcile the idea that a security purchased by the Fed with Federal Reserve dollars issued out of thin air is collateral for the dollars of the purchase. It can be sold again for its same value, in fact, the Federal Reserve is authorized by law to sell these securities again to drain dollars from the banks during inflations. So, it does not mean that the Treasury has to come up with taxpayer money to buy back the security. So, maybe we are still in good shape in arguing that the Fed redeems the original debt of the United States to the banks incurred for deficit spending, and does so with new government money which increases the money supply when added to the reserves of the banks. The money Treasury obtains then is debt-free.
    So, the Fed can be a storage place for piles of securities it has bought, to be used for sale in the future. But the storage is for the United States and not merely the Fed, the agent of the U.S..

    There is no national debt at the Fed that the Fed has not either already redeemed or will redeem.

  42. You wrote a really great article. Have you seen this site. He has good stock trading advice.

  43. What is Free Market Fascism?

    Free market capitalism provides fastest economic growth possible. However free market capitalism is “unfair”, leads to extreme income inequality and destroys jobs through automation. Economic cycles produce unemployment which can lead to revolution, or redistribution of capital by the democratic government to create demand for excess human supply (e.g. The Great Depression). If being poor and unemployed was a crime then revolutions/redistribution of capital wouldn’t happen. The first country to adopt free market fascism will experience huge economic growth because the bourgeoisie will be able to accumulate capital exponentially, and replace obsolete human workers with machines without any government intervention to protect the proletariat. In the end, such an economy will attain 90-95% of the world GDP. Everyone else will become mere natural resource exporters because keynesian/socialist/marxist economies won’t be able to compete with free market fascism.

    Free market fascism comprises 3 social classes:
    The 1st class(fascists) consists of people who guard and regulate the system, and protect the capitalists from jealous proletarians (the artificially created middle class in the USA). If there are elections within this system, then only members of this class can vote. Though consulting the capitalist class is still possible. 1 to 10 million people are needed for this class. Tax revenue (approximately 10% of the GDP) from exploitation of capitalists is distributed more or less equally among members of the ruling class. They are the shareholders.
    2nd class(“haves”): capitalists, entrepreneurs, investors, speculators, lenders, rentiers, etc. Up to 1 million people.
    3rd class(“have-nots”): proletarians, including highly skilled workers, scientists and intellectuals. They are needed in the beginning, but most of them will eventually be replaced with machines and AI. Up to 100 million people.

    Japan and Germany have huge economies, yet relatively small territories (less than 400,000 km2). In free market fascism a large population won’t be needed either. A territory of similar size can be created (sea platform/artificial island), or the population of a country that nobody cares about can be displaced (Somalia, Colombia, Uganda, etc.)

  44. Pingback: Space colonies and monetary systems. Part 1 | Republic of Lagrangia

  45. Hugh Beaumont

    Does MMT have an objective? If so, isn’t that the place to start? Tell us the problem you’re trying to fix.

  46. spending = consumption

    but income equals consumption plus investment right?

  47. The rightist say that price is determined by supply and demand.
    They ignore that both are REGULATED by the supply of money by the bankers
    That regulation is supposed to be by bankers whose function is to facilitate trade by the supplty of credit money.
    The essential problem is that what has been borrowed into exitstance cannot be paid back WITH INTEREST, since the interest has never been created.
    That can be comprehended only if we imagine a single “Bankers Window” through which all credit is crested
    That leaves a ‘deficit imperative’ to be covered by either Government, Corpoprations or the consumers.

    “The intellectual faculties however are not of themselves sufficient to produce external action; they require the aid of physical force, THE DIRECTION AND COMBINATION OF WHICH ARE WHOLLY AT THE DISPOSAL OF MONEY, THAT MIGHTY SPRING BY WHICH THE TOTAL FORCE OF HUMAN ENERGIES IS SET IN MOTION.
    Augustus Boeckh; Translated; “The Public Economy of Athens”, P 7 Book I. London, 1828. Quoted in “The Babylonian Woe” Pg ii, by David Astle (1975)

  48. The author disputes the fact that money is a commodity; calling it an “IOU”. Perhaps he can explain the “IOU” functionality when a $100 bill come off the sophisticated printing process at the US Treasury BEP at a printing cost of 9.7 cents. Who is the “I” and who is the “U” and how much is “Oed” at that point in time?

    • To determine if money is commodity or abstarct, we need only identify two different kinds of money and look at the creation process.
      1/ fiat money is created by governments and is substantiated by the people’s faith in it. That faith is called “trust”
      2/ bank credit money is substantiated by the ‘deposits’ of marketable collateral.
      a person wants money, goes to a bank and deposits collateral
      The banker enters the value of the collateral in one column and, to balance the books, enters a like amount in the liability column for the borrower to draw upon.
      When the loan is repaid, the bank credit money is cancelled
      Two problems
      1/ Unregulated, banks lend credit money without the requisite collateral
      2/ The interest (risk levy, not rental) is never created and leaves a “deficit imperative” for state, corporations or citizens to pick up.
      There is only one “bank tellers window” to identify the banking system