I promised an explanation of how to learn about Modern Money Theory. If you haven’t understood this theory, then you probably don’t understand money, nor sovereign government debt, nor sovereign government deficits, nor foreign trade balances. I have a very strong suspicion that most of the people in the US government who are making budgetary or foreign trade decisions have little understanding of this theory. The average citizen has even less understanding.
Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems started out as a series of post on the New Economics Perspectives blog. L. Randall Wray is the author.
In 2012, this material was published in the book Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems [Paperback].
Wikipedia has an excellent article on Modern Monetary Theory which is a common alias for Modern Money Theory. The article has a number of references, some of which are shown in the excerpt below. To start your understanding of MMT, it is probably much easier to read the Wikipedia article first and then read the recommended references (including the one I have recommended) if you want more details.
Modern Monetary Theory (MMT), also known as neochartalism is a descriptive economic theory that details the procedures and consequences of using government-issued tokens as the unit of money, i.e., fiat money.
MMT aims to describe and analyze modern economies in which the national currency is fiat money, established and created exclusively by the government. In MMT, money enters circulation through government spending. Taxation and its Legal Tender power to discharge debt establish the fiat money as currency, giving it value by creating demand for it in the form of a private tax obligation that must be met using the government’s currency. An ongoing tax obligation, in concert with private confidence and acceptance of the currency, maintains its value. Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending (the government’s deficit spending or budget surplus) is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government’s activities per se.
If you have not already accepted some of the ideas of MMT, you might find yourself battling to deny the theory. Logically, it makes perfect sense (at least most of it). Of course, making perfect sense doesn’t mean it is true. People may not behave the way an economist thinks they should. However, the basis for MMT is mostly about the mechanics of money creation which does not seem to depend on human psychology. I also think that there is a lot of evidence for the truth of MMT.
The only disagreement I have so far is the book author’s insistence that taxation (and government fees and fines) is what drives the acceptance of modern money. I think he goes overboard when he shoots down other reasons for money’s acceptance. You will notice that the Wikipedia article lists taxation as only one of the reasons modern money is accepted by people. I had put an only semi-facetious comment on the New Economics Perspectives blog asking how the acceptance of Bitcoin is explained since no government requires (or maybe even accepts) Bitcoin as payment of taxes.
January 30, 2017
My doubts about MMT expressed above in the initial article just demonstrate my naivete. The more I read and learn about MMT, the more my doubts and quibbles melt away.