What Is Missing In Modern Money Theory (MMT)?


I think I have finally come to understand the key omission in Modern Monetary Theory (MMT). Close to the beginning of MMT Primer there is the chapter THE BASICS OF MACRO ACCOUNTING.

It is a fundamental principle of accounting that for every financial asset there is an equal and offsetting financial liability.

They using this accounting fact to justify later claims that banks making loans does not create net money. In this country, only the federal government is allowed to create money.

Accounting is essentially a static balance of assets and liabilities. An economy is not static, however.

When you get a loan from the bank, you make a promise to pay the money back later. However, you get the money to spend now. Your spending now stimulates the economy now, whereas the promise to pay back later will only have economic consequences later. The idea of spending now and paying later is promoted by business exactly because they know that you will be enticed to spend more money now if you don’t have to pay for it now.

During WWII, war bonds were not sold to finance the war. There was no need for the government to take back the money it had already created to finance the war, when it could just have created more money to finance the war. What the war bonds were for was to control inflation. With all of the country’s productive capacity going to the war effort, people immediately spending what they earned would have caused competition between too much money chasing too few goods. The government had to find a way to let you earn your income now, but get you to wait to spend it. So you gave the government back your money with the promise that they would return it to you later and add some interest to make it worth your while.

The point of this discussion is that the difference in time between when you get money and when you spend it or pay it back has a huge economic consequence.

The recognition of this difference may be implicit in some of the discussion of Modern Money Theory, but it ought to be more explicit. I’d hate to have our political leaders making economic decisions for our country solely based on the accounting balance idea only to figure out later that there is a time component that they needed to considered.


November 13, 2018

Michael Hudson’s book Killing the Host: How Financial Parasites and Debt Destroy the Global Economy, made me see the key difference between Fed money and private bank money. Essentially, it is all about the interest charges. MMT says that, but the significance didn’t quite strike me until I read the book.

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