MODERN MONETARY THEORY – AN INTRODUCTION

Ted Trainer

14.1.2025.

Modern Monetary Theory shows that conventional economics is based on some totally mistaken assumptions which are leading governments to implement policies condemning most of the world’s people to immense and avoidable burdens.

The essential point in MMT.

Conventional economic theory says there are thigs governments would like to do but can’t because they don’t have the money. They would have to borrow it but they are already in debt.

The never questioned assumption here is that governments are the same as households, having to match expenditure with income either from earnings or borrowing. But this is not true for a government. You can't print money when you want it but a government can print and spend all the money it wants. Governments frequently create money out of nothing, just by pressing key strokes. This means they need not go into debt, can never run out of money, and can never say we need something but can’t afford it.

Yes at first sight this sounds strange and contrary to common sense, but let’s see.

To elaborate, most people accept the view conventional economics has always taken, which is that governments are like households in that they can go into debt but should avoid this if they can, that budget surpluses are desirable, that often governments must borrow and pay back with interest, that there are many things they don’t have enough money to do such as build better infrastructure and spend more on the environment, that they can only spend what taxes and government businesses bring in, that if debt is big then public assets have to be sold to pay it off, often governments have to borrow money and pay it back with large amounts of interest, sometimes governments must inflict savage austerity on their people in order to divert scarce funds to paying back loans, governments should not resort to printing money or there will be big trouble, etc. etc..

But Modern Monetary Theorists see that all these assumptions and beliefs are wrong.

At the core of MMT is the fact that national governments can create all the money they want; they don’t have to raise money by borrowing or taxing. They and then do print the stuff. This means they can ignore the capital markets, cease trying to attract foreign capital to invest, avoid borrowing and having to worry about being in debt, or inflict austerity on their citizens in order to pay off debt or balance budgets, and they can spend what they like to build things or solve problems.  Almost 40% of the US federal budget now goes to pay interest on borrowed money. This is absurd; because the government doesn't need to borrow any money. Governments actually do create large amount of money and issue it through the banking system. At times “Quantitative Easing” is used to stimulate the economy and this again involves creating large sums and putting them into the economy.

There are limits and dangers involved in this process but these are easily avoided. The obvious one is producing inflation by putting too much money into circulation.

The crucial consideration is, are there unused resource is sitting idle because putting them into production would require money, spending. If so MMT can bring unused labour and unused resources together.

Obviously any national government could bring together unemployed workers and available materials to organise production of necessities like cheap housing. This could be done by printing sufficient money and using it to purchase the materials and pay the newly employed workers. Yes this would increase the amount of money in circulation and therefore add a little to inflation. The main limiting factor would be how available unused resources are. Usually they are abundant and quite sufficient to meet urgent needs like lack of housing and jobs.

The annoying fact is that governments do this “money printing” all the time. That is, they actually practise (a warped form of) MMT. They constantly increase the amount of money in circulation through the process whereby bank “reserves” are added to, enabling banks to then lend more. And from time to time they engage in “Quantitative Easing”, which again is simply creating out of nothing large sums of money and putting them into circulation.

The gigantic fault in the QE system is that they give the newly created money to the banks to lend for interest. They never give it to ordinary people or spend it on ventures that would stimulate the impoverished real Main Street economy, such as enabling little firms to set up. The banks aren’t Interested in lending to little people wanting to start a little business when they can lend to the rich who are able to pay higher interest rates. But the big borrowers are not going to invest in setting up new factories because people in general cannot afford to buy many new products. There is widespread recession and a serious cost of living problem. So what do they do?  They spend it buying assets, chairs rental housing which will yield rents and interest for them. This does not help to get the economy going, it just increases the income generating wealth of the rich.

Where has money now in circulation come from?

Obviously money has to be and is created out of nothing and got into circulation. In 2024 the Australian economy was about twice as big as it was in 2000, and therefore involved about twice as much money moving around to enable the increased amount of buying and selling. Where did it come from?  Money trees? Obviously it was created somehow. The big concern however is the way it is got into circulation.

The crucial process; New money is created by the banks every time they make a loan. Here’s the Bank of England (2014) saying so.

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

“Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

When you go to the bank officer for a loan he does not go down into the vaults and get the money.  He does not get some of the money the bank is holding and give it to you.  He simply grants you the loan by keystrokes that put money into your account. It didn’t exist before he did that.

This is how the money in circulation increases over time. As investors see opportunities to set up more factories they go to banks to borrow money to build them etc. The rate at which this happens varies with the state of the economy; if there is recession investors won’t want to try to set up new businesses as they know the sales would be poor, so they don’t go to banks to get money.

But the extremely bad thing about the process is that private banks are allowed to do this. It means they can create money and get interest from lending it, which goes to shareholders ... but if the government did the lending the interest income would go to society as a whole.

That is the way MMT says it should be done.

This is the greatest scam the world has ever seen. Why have a process that gets money into circulation by allowing banks to “print” and lend it, meaning that the interest it earns goes into the pockets of rich people who own shares in the bank and never have to do any work to get it?

The essential point about MMT is that newly created money should be spent into circulation by the government, on socially important infrastructures or on relieving needs etc. Especially important would be spending on an agency that found socially useful work for everyone who could not find work in the normal economy.  In other words MMT would allow unemployment to be completely eliminated. 

And there are many other urgently needed things that are presently not being done because the government thinks it can’t get the money to do them.

There are many monetary reform agencies now arguing for adoption of the MMT approach. For instance the Positive Money group puts it clearly. Money

not have been produced.

 “ ...  should be spent via the government into infrastructure, green technology, or as a cash transfer to help households pay off their debts and improve their finances.”

Magic MoneyTree, Positive Money.

https://positivemoney.org/what-we-do/magic-money-tree/

Because MMT is not understood or used governments borrow huge sums to pay for projects, and therefore have to pay the money back plus interest someday. The Australian government now pays out $26 billion every year as interest on the federal debt, that is on the money it has borrowed. That’s about $2,700 taken from every household in tax.  MMT shows that this is totally avoidable.
The best way to think about it is that the government is just connecting available but idle labour with available but idle resources, to enable production of things that otherwise would Consider a government that decided to build levees around a town to protect it from floods. It printed bits of pink paper saying this entitles the holder to $1 worth of anything, and you can use it pay part of your tax.  It hired workers to build the levees and paid them with these bits of paper. The job involved only bulldozing soil so there was no expense on steel or cement to be paid. And they hired only unemployed workers. 

The workers could spend their new money in shops because the shopkeepers had been assured by the government that they too could pay all or part of their tax with them. They could use the pink dollars to pay for things they needed to buy from each other are you ******* ****. If some shops would not accept the new kind of money as payment then they would miss out on those possible sales.

What had been done here was an enabling of construction that created a worthwhile asset while providing work and incomes for unemployed people. The government had brought together idle resources, soil and workers to produce something needed.

Now what difference would have been made if instead of printing pink dollars the government just printed normal dollars to pay for the job? That’s what MMT does.

So the governments of poor countries could do wonders by creating a new currency to use alongside the old/normal one, to initiate lots of much needed production that needed only locally available inputs such as land, timber, water, and clay (for building.) But the global and local capitalist classes won’t do this; they only want to see “development” that involves normal dollars because that enables them to grant loans and receive interest payments.

Struggling towns in “rich” countries with high unemployment rates should set up their own parallel currency to pay for the building of the many things they need while reducing unemployment and the poverty, boredom and social damage it causes. A marvelous example is the Catalan Integral Cooperative in Spain, involving thousands of people in using an alternative currency to enable a great deal of producing and purchasing between members.

This process is a version of the well-known LETS system whereby people trade with each other simply by writing IOUs for goods and services supplied and received, and lodging them with a central registry that keeps account of who owes what to the system. When an IOU is written a form of money is being created, enabling economic activity.

Note that MMT is easily applied in countries which create and issue the money they use, but is not easily implemented in those which for instance use US dollars. However they could still apply it in situations or for projects where the inputs are available within the country but are idle. Also the money created probably can’t be used to pay for imports because the exporting country probably wouldn’t want to be paid in a currency they would have little or no use for, other than to pay for imports from the country that did the initial importing.

(The best strategy for getting an economy going would be to use “helicopter money”, that is just fly around tossing out lots of newly printed notes. People will immediately spend them generating “effective demand” and jobs. But strangely, conventional economists prefer to give money to rich people not poor people.)

            “But it would lead to mega-inflation.”

This is the standard knee-jerk response from people who don’t like MMT.  They claim it would lead to what happened in Weimar Germany and Zimbabwe where governments pumped far too much money into circulation. This is as silly as saying if the government trebled tax rates it would ruin the economy. Of course it would. But no sane government would create and spend more money than was needed to enable available and unused resources to be put into production. If the money created is just enough to get available resources into production there will be no surplus money pushing up prices. Parliaments can always set limits on the amount to be created. Quantitative Easing after the GFC did not cause inflation in the US, and the fact that Japan has been doing this kind of thing for ages without inflation.

            The consequences of ignoring MMT.

Consider the massive social damage and misery caused by conventional economists and politicians who have failed to accept MMT. We are told that Australia has always lacked capital and has always needed foreign investors to bring it in. As a result, at present the Australian government has borrowed so much that we now (2023) owe over $550 billion. As noted above, paying the interest means taxpayers lose over $26 billion every year, about $2,700 per family, in interest on federal government borrowing alone, (Aust. Fed Gov., undated). Yet the government could be printing all the money we need with no interest payments at all.  What a delightful arrangement … for foreign investors and bankers!

During the Great Depression how many millions endured ten years of poverty surrounded by unused resources, just because they had no money to enable production and sale of basic necessities to each other, (… among other things, contributing heavily to the rise of the Nazis.) When MMT is understood it is obvious that the unemployment + under-employment rate should be and can easily be reduced to zero. There are always important things to be done so just create and spend enough money to set up enough farms and factories to give jobs to all who want them.

In April 2020 much attention began to be given to the huge debt governments were stacking up in order to deal with the recession/depression being caused by the Covid virus. The Leader of the Australian Federal Opposition said, “We are headed for a trillion dollar debt. It is a bill that will saddle us for a generation.”  No one challenged him.  No one said, ”Look mate you can spend that much and more without increasing debt at all. You don’t have to borrow it…because you can just create it to get your economy going again.”

Because conventional economists do not understand any of this, billions of people are forced to suffer “austerity”. Their governments say, “We are so heavily in debt that we have to cut spending on welfare, pensions and benefits and desperately needed projects so we can pay off the debt.” They have no idea that they could so easily set up systems whereby unemployed and poor people could produce and sell to each other most of the basic things they need for at least tolerable lives. A basic principle for membership of the European Union is that countries are prohibited from setting up their own national currency; meaning that MMT is banned. So Greece was forced to implement vicious “austerity” impoverishing millions for years, and to sell of public asserts to foreign buyers in order to help pay off the debt to foreign banks ... when MMT would have enabled them to avoid much of that debt.

About five billion people in poor countries could be using the idle resources around them to produce for themselves basic necessities. Their deprivation occurs because conventional economists conceive “development” in terms of growing the GDP, the volume of business turnover. They have to build infrastructures like power stations and ports to attract foreign investors and enable export of logs and minerals. This requires investment of capital and therefore borrowing, which inevitably leads to massive debt and being forced to accept IMF Structural Adjustment Packages in order to earn money to pay off the debt … packages which divert their resources to whatever uses the investors think will maximize their global profits. If development was understood in terms of arranging for available resources to go into the production of simple goods to meet basic needs, then it would be seen that this is an organizational not a financial problem and that it would require hardly any capital to be borrowed. As noted above even if the currency is not ”sovereign”, e.g., if it is “pegged to the dollar”, a government could create a separate currency for use in a “needs-driven-sector” set up separately from the normal “profit-driven” sector.” 

So how come we have been operating with such an absurd and socially devastating approach to national finance?  Because for centuries it has been a bonanza for the owners of capital, that’s why. Banks do not want you to understand that your government does not need to go to them and borrow money to build infrastructures, etc. They want governments to believe it is necessary to borrow from the banks and repay with interest. They make zillions because capitalist ideology has taught everyone, via their loyal servants the conventional economists, that a great deal of capital investment is required and if you want capital to invest you must borrow it from people who have capital, and pay them interest for getting it.

And consider the disaster if it was realised that without debt the resource wealth flows from of poor countries to rich world corporations and supermarkets would cease; poor countries would no longer have to see their wealth flow out to pay off debt. (Of course it can make sense for them to borrow small amounts of foreign currencies to pay for the few crucial imports  appropriate development might require. See TSW: Development.)

As Marx and Polanyi and many others have stressed, money should not be treated as a commodity, as something that can be hired and used for a fee. If you allow that then people with a lot of money get richer and richer, and people who can only hire/borrow it will get poorer. And you end up with a bloated financial sector recently making 40% of US profits by lending and raking in interest payments. Hudson’s works on the history of debt (2015, 2021) show how many ancient rulers realized this and periodically cancelled debts. He argues this is the only way out of the present situation where global debt is far higher than before the GFC.

            What about in a zero growth economy?

However in a sane economy MMT would have been long forgotten. This is because it is about criticism how to get additional money into the economy, and a sane economy would not only have no growth, it would have “de-grown” to a small “steady-state” economy. And there could be no interest payments; you cannot have them without growth in the economy over time.

But MMT can play a vital role in the transition to a sane economy, because it reveals to governments that they have the power to take away from the capitalist class decisions about what is to be developed. In the present economy what is developed is decided by those who own capital and they are only interested in projects that will maximise their wealth. Consequently they never develop what is most needed,

So MMT would enable governments to spend setting up the sustainable Simpler Way communities that are crucial for solving the global predicament.

Criticisms of MMT.

Let me know if you find any criticisms that are remotely convincing. I have not found any that are respectable.

            The heavy literature.

The two major accounts are Stephanie Kelton’s, The Deficit Myth, (2020), 325 pp., and W. Mitchell, (2016), Modern Monetary Theory and Practice: An Introductory Text, Create Space Independent Publishing Platform, 364 pp. The first is not a good introduction to the issue; far too long and indirect, engaged in side-issues, and does not make the essentials clear at the start.

Aust. Fed. Govt., (undated), Budget Paper No.1: Budget Strategy and Outlook 2018-2020. Statement 6:Debt Statement, Assets and Liabilities.

https://budget.gov.au/2019-20/content/bp1/download/bp1_bs6.pdf

McLeay, M., et al., (2014),  Money creation in the modern economy, Bank of England,      Quarterly Bulletin. P.1.

Hudson, M., (2015), Killing The Host, Nation Books, New York.

Hudson, M., (2022), The Destiny of Civilisation, New York, Islet Press.