Modern Monetary Theory

The following is a combination of a presentation based on the book "The Deficit Myth" by Stephanie Kelton, the movie "Finding the Money" with Stephanie Kelton, and comments, questions and answers from a discussion of the topic.

The Fed issues currency. It cannot go broke. What the nation can afford without causing inflation depends not on the deficit but on what real resources (people, land, factories, minerals, etc) are available to do what the govt spends the money on.

Conventionally, money is considered a means of exchange and a store of value. People value people by how much money they have. The housing market says how much a house is worth.

In reality, money (as credit or paper, not as silver or gold) is NOT attached to a specific durable value. It is an IOU.

In today's world, sovereign federal banks have sole authority to issue currency. Sovereign governments with their own currency, which used to be tied to the market price of gold, can now create as much money as they want and raise taxes or risk inflation. This is not true for all countries. China has its own currency. However, Greece, for example, depends on the Euro as its currency, which creates problems for it. It's economy is not as strong as the EU and its lenders, such as Germany, so it accumulates debt to those lenders. Some countries use the US dollar as their currency. Some use dollars as well as an alternative or primary currency, such as Belize, which uses Belize dollars as their primary currency, tied two-to-one with US dollars.

The US dollar is the primary (but not the sole) medium to measure international trade. Short term treasury bonds are also a form of currency. The US dollar became the primary medium to measure trade after world war two at the Bank of International Settlement, which meets in Basil Switzerland, because the US had a stronger economy then Great Britain and other allies. Therefore, even countries with their own currency may have to somehow accumulate US dollars (usually through trade with the US or other countries that use the dollar for trade), to pay for what they need to import. Unfortunately, the Bank of International Settlements is biased in favor of rich countries and rich people.

Currency users - states, local governments and individuals can't issue money. Nor can private banks. However banks can lend more money out than they actually have in reserve. This is regulated by the federal government. For example banks might actually have only around10% of what they loan out. So banks can go bankrupt, as happens when they speculate during a downturn in the housing market.

When a government creates money, it demands that people pay back some of that money in the form of taxes in the same currency that it created. Short term bonds may have to be repaid in full in the given currency, with interest. The currency is used to pay for real resources, whether these expenditures are considered good or bad. For example, the govt can spend money on fracking and weapons, or on teachers and health care. That depends on political priorities, not on the deficit/surplus balance sheet.

Conventionally, we are taught that the fed collects taxes first, then spends money.

In reality, federal currency issuers create and spend money first, then collect taxes.

Traditionally, paper taxes were burned, and we still burn old paper money that is taken out of circulation so it can be replaced with newly printed bills. In today's world, taxes are collected electronically as are most purchases. This is essentially more of a balance sheet accounting system than a transfer of real value, although it takes away from what people can purchase.

The fed takes money out of people's pockets by raising taxes or by raising interest rates on what they loan out.

Contrary to conservative arguments, it is not sustainable for the federal govt to run a surplus, by taking more money out of the private sector than they put into it. The government's debt is the savings of the private sector (and of trading partners). While running a federal surplus may work in the short term, if it lasts too long, it causes a recession.

The real limit on what the govt can do is not dependent on the amount of money it has, but on the resources available for it to use by spending money.

If there is too much money chasing too few goods and services available, this causes inflation. To be clear, there is almost always some inflation, at least as long as we have an economy based on growth. However, there is a difference between the hyper inflation such as happened in Germany following their defeat in world war one, and the relatively milder, but nevertheless irritable form of inflation in rich countries.

The conventional way to fix inflation is for the fed to raise interest rates to make people spend less. However, it is not the only option. For example, raising taxes (on those who can afford to pay more) also reduces inflation. So does raising the minimum amount that banks need to hold in reserve compared to what they loan out.

However, there is a problem of how to accurately measuring inflation. Is it the cost of everything that is bought and sold? For example, conventionally, it includes the cost of fighter jets, oil spill cleanups, second mansions, luxury vacations, etc. However, for most people, inflation would be better measured by the cost of food, rent, heat and other utilities, college tuition and the cost of repaying student loans, and the cost of transportation to and from work. These costs go up faster than the overall cost of everything together, and this is not addressed by MMT.

During world war two, the US government encouraged people to spend less on non-essentials and invest in US savings bonds. This enabled the government to shift resources from the production of consumer goods and automobiles to the production of tanks and bombers. This was possible despite the US being in an economic depression because it meant that the unemployed and idle factories were unused resources that could be put to work for war production. It actually helped the economy get out of the depression.

MMT advocates and others, such as Green New Deal advocates say that we can do the reverse - shift resources from war production to human services and environmental programs such as clean energy, and that this too would help the economy for the average person. While climate action is not at the heart of MMT, it could be a complement to it. Another way to keep the economy going is to guarantee everyone jobs at decent living wages.

However, there is also a problem of accurately measuring the value of the human and material resources available for the government to spend money on, before considering how much to spend on what. Classical economics up and through Marxist economics put the exchange value of everything on the value added by the amount of labor necessary to produce and/or bring a product or service to market. Accurately measuring such value is extremely difficult and there are many questions such as how to value labor involving different skills and skill levels and unpaid domestic labor, such as raising families, and how to measure the labor put into a product that goes through a number of construction steps in the global supply chain.

Therefore, after Marx, economists simply defined the value of labor and everything else as its price as determined by supply and demand. This is a circular argument because the price of anything is dependent on the value represented by the currency used to measure it at the time, fluctuations in the market and differences in supply and demand in different areas. It also doesn't deal with what to do with the value added by labor, which can be paid to the workers who created it, or taken as profits. Capitalism is based on the accumulation of capital from profits. The more capital accumulates in fewer and fewer hands, the greater the political power of owners to resist remedies to inequalities such as higher taxes on the rich, which is one of MMT's recommendations.

There is also the question of how to value unpaid domestic labor. It may be argued that any form of radical restructuring of the economy either in favor of labor or in favor of capital leads to brutal dictatorship. However, we need to somehow reshape our government's priorities firmly and durably, and with greater democratic control, in the direction of providing for human needs and the planet.

Another issue that MMT does not address is the effects of interest on debts, both national and individual. Interest on debt, whether it is a mortgage or a treasury bond has to be paid even before principle. In the case of the payment of interest on national debt, for example from a trade deficit, requires additional money to be created and can cause inflation. US trade deficits can be financed by selling treasury bonds or bills to countries with a trade surplus. While China could call in treasury bills, this would make trouble for both the US and China itself. It is easier for them to collect the interest on these bills. Interest payment on the debt is considered a non-negotiable, sacrosanct item in the US budget, because it protects the integrity of the dollar.

However, interest payments on anything, particularly compound interest, locks us into some form of economic growth, on the national level it means speculating on growing GDP, and for individuals it means speculating on (steady or increasing) personal income to keep up loan payments. Mortgages repayments add up over time to about double the amount borrowed. Banks depend on these payments and can take your house even if you just miss a couple of payments. We now know that economic growth at this point is destroying the planet through overuse of energy, resources and increased waste.

There are alternative measurements to the health of an economy that don't necessarily involve growth. For example, HDI (Human Development Index) considers life expectancy, average years of schooling, gross income per capita. GPI (Genuine Progress Indicator) considers things like the cost of ozone depletion, crime and poverty. TPI (Thriving Places Index) considers mental and physical health, education, green infrastructure, land use, recycling and inequality. Green GDP considers the cost of environmental damage, resource depletion and environmental degradation. BLI (Better Life Index) considers housing, income, education, environment and health. IWI (Inducive Wealth Index) considers assets for wellbeing. GSI (Genuine Savings Indicator) considers resource revenues and costs of pollution. HPI (Happy Planet Index) considers life expectancy, wellbeing and ecological footprint. GNH (Gross National Happiness - Bhutan) considers sustainable development and cultural preservation. HDP (Human Development Product) considers female workplace participation, gender income inequality, public health, water quality and availability, criminal cases against legislators and possibly CO2 emissions and internet access.

 For conservatives, the issue with MMT  as well as other arguments about what to cut and what to include in deficit spending is that the rich don't want to give more money to the poor. If they wanted to do this, they could raise wages and pay more in taxes. MMT works great as long as our government representatives have concern for, and have the power to prioritize people's needs.

Therefore, in addition to the need to create a better way to measure the monetary value of available resource, there is also, and more importantly, a need to establish some agreement on a common value system. Does our value system put military dominance above the needs of the population and the preservation of the environment, or the reverse? One successful campaign in Massachusetts established what is called the Fair Share Amendment. It means that people with yearly personal incomes above one million dollars are taxed an additional 4% on the amount over one million. This money is dedicated by the amendment to transportation and public education. We could express similar broad values by measures such as cutting back on fossil fuel subsidies and the use of private jets.

Regarding similar theories to MMT, MMT inherited some features from Keynesianism, which is an older theory. Keynesians believe that, because prices are somewhat rigid, fluctuations in any component of spending - consumption, investment, or government expenditures - cause output to change. If government spending increases, for example, and all other spending components remain constant, then output will increase.