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What is MMT?

from L. Randall Wray

MMT provides an analysis of fiscal and monetary policy that is applicable to national governments with sovereign currencies. We argue that there are four essential requirements that qualify a national currency as sovereign in the sense in which we use the term:

  1. the National government chooses a money of account in which the currency is denominated;
  2. the National government imposes obligations (taxes, fees, fines, tribute, tithes) denominated in the chosen money of account;
  3. the National government issues a currency denominated in the money of account, and accepts that currency in payment of the imposed obligations; and
  4. if the National government issues other obligations against itself, these are also denominated in the chosen money of account, and payable in the national government’s own currency.

There is a fifth, important, consideration, which concerns the exchange rate regime and follows from the fourth requirement above. Strictly speaking, if a country adopts a gold standard or “dollarizes” it does not have what we define as a sovereign currency because it has agreed to exchange its currency for gold or dollars at a fixed exchange rate. Its obligation really is to deliver gold or dollars in payment. On the other hand, a nation with a floating exchange rate clearly does not commit government to deliver gold or foreign currency at a fixed exchange rate – so meets our definition of a sovereign currency. Many nations fall between these two extremes – they issue their own currency but operate with some degree of exchange rate management. They might also explicitly commit themselves to delivering foreign currency in payment of their own obligations (that is, they issue debt in foreign currency). While floating a currency is not necessarily required in order to operate monetary and fiscal policy in a manner consistent with a fully sovereign currency, issuing national government debt in a foreign currency, or promising to exchange domestic currency for foreign currency at a managed exchange rate (which amounts to much the same thing) will usually compromise domestic policy space.

MMT argues that the financial situation facing a National government with a sovereign currency (meeting the four conditions identified above) is entirely different from that faced by a household, a firm, or a government that does not issue a sovereign currency. The sovereign currency issuer:

  1. does not face a “budget constraint” (as conventionally defined);
  2. cannot “run out of money”;
  3. can always meet its obligations by paying in its own currency;
  4. can set the interest rate on any obligations it issues.

It is important to note the use of the word “can” in the final two points (as well as “does not” and “cannot” in the first two). A sovereign government can impose on itself a “budget” that does “constrain” its spending. This is normal practice and probably a good idea. A sovereign government could choose to default on its promises. This is exceedingly rare and probably always a bad idea. A sovereign government might allow financial markets to set at least some of the interest rates on government obligations. This is also common and perhaps a good idea – although as we’ll see below government sets the base rate even when it allows markets to set other rates.

It is important to note the use of the word “can” in the final two points (as well as “does not” and “cannot” in the first two). A sovereign government can impose on itself a “budget” that does “constrain” its spending. This is normal practice and probably a good idea. A sovereign government could choose to default on its promises. This is exceedingly rare and probably always a bad idea. A sovereign government might allow financial markets to set at least some of the interest rates on government obligations. This is also common and perhaps a good idea – although as we’ll see below government sets the base rate even when it allows markets to set other rates.

Note that MMT does not argue that because a government “cannot run out of money” it should “spend without limit”. MMT does not argue that because a government “can always meet its obligations” that “deficits don’t matter”. MMT does not argue that because a government does not “face a budget constraint” it should have an “unconstrained budget”. Yet these are the top three complaints our critics have about MMT. This is why MMT is labeled “dangerous” and linked to hyperinflation. But MMT has never said such things.  read more – Alternative paths to modern money theory

  1. postkeynesian spain
    October 10, 2019 at 10:25 pm

    “Note that MMT does not argue that because a government…”

    But MMT argue that a government with a sovereign currency can have full employment sustainable in the time, and this is false when the external sector enter in scene. Only the countries with commercial surpluss can have full employment sustainable in the time, have his currency sovereign or not.

    • October 11, 2019 at 6:44 am

      This is the common PK argument against MMT – it focuses on the balance of payments and currency devaluation. It took me a long time to understand this argument, however my research lead me to conclude that it depends on some very specific political choices. Poor political choices can spoil well intended policy.

      I recommend the further readings here: What about Balance of Payments Constraints/Crises? https://modernmoneyview.wordpress.com/faqs/#14

      • postkeynesian spain
        October 12, 2019 at 7:45 pm

        I thinks same, depends. But for many countries is impossible if you don’t controller the external sector.

        I have a discussion here:

        https://rwer.wordpress.com/2019/08/22/who-is-to-blame-for-argentinas-economic-crisis/#comments

      • Calgacus
        October 21, 2019 at 12:01 am

        Needless to say, I disagree with postkeynesi spain. The common PK argument he makes is of course confused and wrong. MMT is right.

        Only the countries with commercial surpluss can have full employment sustainable in the time, have his currency sovereign or not.

        Is rather vague. Now, it is perfectly obvious that this is wrong, Full employment is perfectly obviously sustainable in time for any currency sovereign whatsoever. Disagreeing with that is so crazy it is hard to parse how anyone can disagree.

        Of course any government can print any quantity of money it likes and hand it to people who want to work for it. What on earth does this have to do with external sectors or the sector of red-headed people or whatever? Nothing. How could there possibly be an external or red-headed versus blonde constraint? There can’t.

        The MMT / Functional Finance observation is that this full employment policy is almost always a very good idea. In particular, for rich countries, like the USA, Europe Japan ,etc – always.

        postkeynesi spain introduces some implicit behavioral or causation assumptions, to support this completely wrong PK argument.

        Full employment might lead to depreciation – but so what? that doesn’t mean it is not sustained. This depreciation will likely lead toward fewer imports and more exports in the long run, and therefore a movement towards trade surplus. That is the real content of his statement. But it is a possible effect, not a cause or a constraint. It reverses cause and effect.

        If a trade surplus exists, the country is “exporting unemployment” and a JG is less necessary. Together these explain the mere association between exporting (like Germany) and low unemployment twisted into some mythical constraint.

        What may not be sustainable is any particular export balance, NOT the eternally easily sustainable and natural full employment.

        For the umpteenth time, Abba Lerner treated such matters long ago in his Economics of Employment and elsewhere. Nobody has ever refuted the simple logic, and for a while around 1950, assent to the “MMT” position was universal. The only later “refutation” was to ignore it and make confused and specious arguments to prove manifestly absurd conclusions.

  2. Craig
    October 10, 2019 at 11:19 pm

    MMT is an excellent reform that aligns with but does not rise to the level of paradigmatic thinking about money and finance….the same as several other reforms surrounding money and finance.

  3. Mike Ryan
    October 11, 2019 at 12:17 am

    Cannot face a budget constraint. (as conventionally defined)

    This seems ridiculous without a definition of conventional constraint.

    The reality is that the US government and many other national governments spend more than they take in with taxes by far – and it is getting worse and worse. The impact is giant mounds of debt that economists fail to understand and predict outcomes. Collapse, recession, depression total loss of faith in financial systems are all possible outcomes. Just a matter of when.

    MMT is just a way to kick the problem down the road and allow capitalists to cut taxes and line their own pockets as they don’t care about the pending demise of the world economy.

    Remember the capitalists motto: What is good for me is good enough!

  4. October 11, 2019 at 12:50 am

    Craig. MMT IS the paradigm change we need. It’s the only complete description of the construction of an economy totally based on fact. It doesn’t mean it will solve every issue because we as humans will always be seeking leverage somewhere. But if we see it become dominant it will revitalise economies everywhere. Killing off the false lament that the government cannot afford spending on things they use as excuses for poverty and inequality, which today are blamed on the poor for being poor etc. will be refused acceptance. Even if we are heading to hell in a hand basket, at least let’s sort out the mess beforehand

    • Craig
      October 11, 2019 at 5:00 am

      I’m sorry, it is good and accurate research on the money mechanics of the current paradigm and a very good attempt at reform.

      Paradigms are the essence concepts of patterns and a new paradigm is a new concept whose essence, enlightened by a new insight and/or tool, resolves the major long term problems of an old/current pattern and expresses and creates the new one.

      • October 11, 2019 at 6:38 am

        Yes that’s why it creates a consistent, coherent post-keynesian logic throughout. It moves away from taxpayer dollars to the public purse. If that’s not a paradigm shift, I don’t know what is.

      • Craig
        October 11, 2019 at 5:55 pm

        @Senexx

        It’s a very good reform that is aligned with the concept of the new paradigm. The problem is not just government or private money creation. That is indeed a part of the problem. It is about the nature of money distributed. Presently it is in the form of Debt Only. Even money created and distributed by governments are Debt Only. Money in the form of Gifts, completely free of any need to repay it is the new paradigm. That fulfills one of the essential signatures of a new paradigm/paradigm change and that is conceptual and temporal opposition to the old/current paradigm. In Hunting & Gathering it was nomadic relative austere survival to much more abundant agriculture, homesteading and urbanization.

        I’m not saying all money should be in the form of Gifts. Loans will still be issued, but true paradigms/paradigm changes are new ESSENTIAL concepts that create new TEMPORAL patterns. MMT is about who creates and distributes money…which is the temporal PART of the new paradigm. Abundantly Direct and Reciprocal Monetary Gifting….by a sovereign monetary authority is the FULL paradigm qualifying concept AND temporal universe pattern change.

  5. October 11, 2019 at 2:12 pm

    (1) We have come full circle. MMT’s “happy talk” (of no financial constraints on government and it being an easy reach for non-inflationary full employment) has disappeared.

    (2) The backing away from full employment without inflation began with the admission of the relevance of the Phillips curve. Now, we also have recognition of the disciplines imposed by domestic and international financial markets. Those disciplines mean there is need for domestic and international financial regulation and controls, that budget deficits and how they are financed matters, and that interest rate policy matters.

    (3) Meanwhile, MMT continues to dishonestly claim that it identified that the government budget constraint is different from the household budget constraint, that governments have the ability to demand taxes paid in state money (also known as outside or high-powered money), and governments have the ability create state money to pay its bills and debts.

    Of course, all those things were known long ago. Take a look at the budget restraint in any comprehensive stock-flow Keynesian model from the mid-1970s.

    (4) As regards fiscal policy, MMT has reduced itself back to 1970s Keynesianism. But characteristically, that is done without acknowledgment (or perhaps even awareness).

    (5) All of the above shows MMT adds nothing to macroeconomic theory. Instead, it is a political movement for more use of fiscal policy (which in my view is a reasonable empirically justified policy position). However, it is not an addition to theory. Moreover, many MMT proponents push for fiscal policies that are beyond what is reasonable (as I show in my 2019 RWER MMT symposium paper).

    • Greg Hannsgen
      October 11, 2019 at 9:04 pm

      Hi Tom,
      I have been puzzled by some of your arguments and claims about MMT, as you know. To just mention one thing here, at least at first, in point (1) of your comment, you argue:

      “MMT’s “happy talk” (of no financial constraints on government and it being an easy reach for non-inflationary full employment) has disappeared.”

      Can you explain precisely how Randy has dropped his claim of “no financial constraints on government,” given the statement in his post that:

      “The sovereign currency issuer:

      does not face a “budget constraint” (as conventionally defined);
      cannot “run out of money”;
      can always meet its obligations by paying in its own currency;
      can set the interest rate on any obligations it issues.”

      It might help us all if you were to quote and link to some stronger version of the “no financial constraints” claim to show us exactly what claim you believe Randy is circling away from, given the above! Thank you in advance.

      • October 11, 2019 at 9:43 pm

        Greg, in my opinion Randy Wray’s piece is the typically evasive stuff he produces.

        First, he has not shown government does not face a constraint as conventionally defined. The conventional government budget constraint (sometimes also referred to as a budget restraint) is an accounting relation.

        Second, almost immediately following, Wray writes “A sovereign government can impose a budget “constraint” that does constrain its spending.This is normal practice and probably a good idea.”

        This is typical MMT stuff – setting up strawman definitions, having it both ways, etc.

        That’s enough for today.

      • Greg Hannsgen
        October 12, 2019 at 2:05 am

        To respond to your two points in order.
        In your first response, you say he denies the existence of an accounting relation, showing how its net expenditures are consistent with its net issuance of liabilities. I think you rather clearly misread Randy here. Randy’s post might have more clearly conveyed his meaning if he had used a phrase like “no budget constraint other than an accounting identity.” He is not denying that there exists a government accounting identity. Such an identity would be like a column from a transactions-flow matrix in a stock-flow-consistent model in this work by Godley and Lavoie (or work by Tobin). On the other hand, Randy and MMT would deny the existence of neoclassical infinite-horizon constraints that impose balance between income and outlays over an “infinite horizon.”* Randy has ridiculed these latter constraints in work for the Levy Institute on long-run U.S fiscal “solvency” and Social Security.**

        Second, when Randy says in his post that a sovereign government “can impose a constraint,” he is referring to self-imposed budgetary rules such as (1) federal spending caps adopted by the U.S. government in 2011, (2) the federal debt ceilings that occasionally have to be raised, and (30 pay-as-you-go-rules instituted in the 90s. These “constraints” are acts by the government to bind itself from using its power to spend. Randy’s and MMT’s claimed lack of a constraint other than an accounting identity does not include voluntary constraints that it uses in attempts to bind its own short-term budgetary decisions. Hence, this point of Randy’s also does not seem to me to represent a change in a position that he has held in the past.

        Bye for tonight.

        * For an example, see Obstfeld and Rogoff, Foundations of International Macroeconomics, 1996, p. 64.
        ** For example, see pages 1 and 2 of this Policy Note he did for the Levy Institute on the implications of an aging society. http://www.levyinstitute.org/pubs/pn_5_06.pdf

  6. October 13, 2019 at 12:43 pm

    My objection is the same as always: All stick, no carrot. MMT claims that the value of the national currency comes entirely from tax obligations. History says that simply levying taxes on a population, for example in gold, causes resentment. Not an appreciation of gold. There’s also the cyclic reasoning how do you tax before a circulation in the chosen currency is established. Arbitrary per-head demand?

    Empirically we see that currencies gain their value by the willingness or others to sell goods and services for the currency. Common sense suggests that a consensus of business and the state selling goods and services, and accepting the fiat currency as payment, is the real anchor of the currency’s value. I think the state’s role as a staple vendor, for example of transport or electricity, was previously key to currency stability. I fear that with today’s economies being fully privatised the state loses that basic lever, and that contributes to currency instability.

    I think MMT teaches us the wrong lessons here, namely that the state has much more power through taxation than it really has. In practice if a state really tried activist MMT policy it might face tax revolt, an incursion of dollars or Bitcoin, high inflation, and other problems. If states were once again major economic actors, like 30-40% of productive GDP, then MMT and monetary sovereignty in general would be much more credible.

    Instead of axiomatic arguments for MMT, we need a modern dynamic analysis of debt and money variables. For example debt is OK so long as the economy grows faster that the burden of debt service. Inflation functions as a hard-to-avoid tax on holding a stock of money. Debt (bonds) sells immunity from inflation and pushes its burden on others. Private savings like stock pension plans are a privatisation of the income tax of big businesses. The size and distribution of the private pension pool is a real worry. Arguments about “indebting the future” are mostly a false worry or at least they’re distributional not absolute. The intellectual energy that goes into MMT could go into analysing these modern monetary dynamics properly.

  7. Ken Zimmerman
    October 17, 2019 at 11:47 am

    “We have also summarized four alternative paths to MMT: history, logic, theory and practice. The most advanced and coherent study in all these areas leads inexorably to MMT.” I agree but such hard work is unnecessary to find one’s way to MMT. This article accurately depicts the history of money as well as the practices of creating and using money for everyday purposes. If the logical path to MMT refers to rejection of economic scenarios (models) that are inconsistent with historical data and the results of empirical studies of the everyday practical uses of money and economic arrangements, that’s acceptable to me. Theory leading to MMT also rests on this rejection, in my view. MMT is thus supported by history, practice, logic, and theory. Today’s mainstream economists committed two errors, in my view that led them to reject MMT. First, these economists focus little on the study of history or of the actions of everyday people who create and practice economic arrangements. In the place of such studies mainstream economists placed mathematics (the more unconnected to everyday economics the better) and the logician’s pretended precision and certainty. Second, there is a political bias at the center of mainstream economics. That bias is the private market that self-regulates and can be constructed and operated only by ‘private sector’ capitalists (protected by government). Successful economies, they claim must be based on this formula and no other. 7,000 years ago, governments invented money and the economy. Why should private markets and capitalists take over these inventions at the last minute (historically speaking)? Market-centrists and capitalists have not shown their current efforts to takeover money and the economy improved either. Particularly, not improving the welfare of most of the members of any society.

    One famous story helps us see how MMT or something like it would have helped a lot of people. “Robin Hood” is as much the story of the Sherwood Forest outlaw as it is the King of England he opposed, John. John was such a poor King and wicked person that no one in England trusted him and most wanted him overthrown. When he returned from battles in France, which he, of course lost he might have been able to save himself and his kingdom (and its people) had he been able to mint or borrow money. He could do neither because of his actual crimes and reputation for personal malevolence. John’s own history, the history of his reign, and the history of England condemned him to failure. Economy and money are much more than ‘technical’ terms of some obscure group of technicians. Despite what mainstream economists today claim.

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