Could Modern Monetary Theory (MMT) Actually Save Us?

Modern Monetary Theory (MMT) is presented as a means to painlessly fund the large-scale infrastructure / alternative energy spending the nation desperate needs to rebuild and modernize.

While most people support the goal of useful fiscal stimulus (as opposed to paying people to dig holes and fill them), the question remains: Will MMT work as advertised?

Rather than dismiss it out of hand, I’m trying to approach the subject without ideological bias.

What Exactly Is MMT?

The basic idea of MMT (as I understand it) is that the economy is not running at 100% capacity--there is capital, equipment, people and resources which could be put to work to better society, and the chief impediment to making full use of our capacity is a lack of funding for projects that would benefit society.

In other words, the only thing standing in the way of broad-based, socially beneficial spending / progress is a lack of money (funding).

In the view of MMT advocates, a blindingly obvious source of funding is already available: the federal government can issue however much new currency it wants, and so the government could fund large-scale socially useful projects if the political will to do so was present.

We have to pause at this point and distinguish between borrowing money to fund projects, which is the current model, and issuing (printing) new currency.

In the current model, the federal government sells Treasury bonds and uses the proceeds to fund government spending. The Treasury pays interest on the bonds, and this mechanism – interest due on borrowed money – creates a “governor” on spending: as borrowing rises, so do interest payments, and as interest payments rise, this crimps other government spending.

The other mechanism in the current model is the central bank (Federal Reserve) can create currency out of thin air and buy Treasury bonds. This is a form of monetary stimulus, i.e. a way to inject new money into the financial system.

When the central bank creates money out of thin air to buy newly issued Treasury bonds, this is called “monetizing the debt”: in effect, the central bank creates money out of thin air and transfers it to the government by buying Treasury bonds.

The basic idea of MMT (as I understand it) bypasses both paying interest on newly issued money and the artifice of central bank monetization: instead, the Treasury issues new currency directly.

This removes the “governor” of interest payments, freeing the Treasury to issue cost-free currency in virtually unlimited quantities.

The Arguments Against MMT

Various historical studies have concluded that hyperinflation does not occur when governments must pay interest on their debt; the danger with rising interest and debt is default, not hyperinflation.

Hyperinflation arises when the supply of goods and services – the output of the economy – remains roughly the same while the supply of currency skyrockets. As money increases but the sum of goods and services available for purchase remains flat, the value of existing money declines accordingly.

If the supply of money in an economy is $1 billion, each unit of currency buys X (the purchasing power of each unit of currency). If the money supply is doubled without any expansion in the consumers’ pool of goods and services, the purchasing power of each unit of currency falls in half. This reduction in the purchasing power of each unit of currency is called inflation.

Governments facing soaring demands and limited tax revenues are naturally tempted to meet these demands with “free” new currency, since the political and financial pain caused by skyrocketing taxes leads to governments being tossed from power.

This temptation explains the regular occurrence of hyperinflation and debt default, as the temptation to over-borrow and pile up interest payments leads to governments defaulting on their debt. In both cases – hyperinflation and debt default – there’s a currency/ governance/ financial crisis that upends the status quo.

This is one common objection to MMT: the freedom to issue new currency is difficult to limit, as there will always be more demands for government spending. Without some “governor” to limit the issuance of new currency to align with the expansion of goods and services, then governments tend to issue new currency far in excess of what the real economy is creating. This generates inflation, which impoverishes everyone using the currency.

MMT advocates claim that since MMT generates goods and services, it won’t generate inflation. But as noted earlier, rebuilding a bridge doesn’t actually create any new goods and services, or increase productivity: it generates wages and consumes materials and energy. Since it doesn’t generate more consumable goods and services, the expansion of wages and demand for materials will drive prices higher.

The core difficulty here is that the democratic political process is intrinsically skewed to short-term, politically expedient dynamics: politicians focus by necessity on winning re-election, and they will naturally approve new issuance of currency and new spending to placate the demands of constituents, lobbyists and campaign donors.

I honestly don’t see any intrinsic limit on political expediency. Politicians need to be forced to say, “I know your need is legitimate, but the money’s simply not there.” Without some real-world limit on the issuance of new money, money will be issued in surplus because the issuance isn’t an economic process, it’s a political process.

This is a fatal flaw in MMT. Relying on politicians to impose limits on their own desire to win re-election is to deny human nature.

A second concern is the entire notion of “slack” in the economy – untapped capacity. Have you noticed the “help wanted” signs in every Home Depot and many other retail outlets and restaurants? We read about millions of people who aren’t working, but if they wanted to work, or had to work, why are there so many unfilled positions? The answers are complex: the wage being offered isn’t sufficient incentive, the unemployed don’t have the requisite skills, etc.

In other words, in some important ways, the economy appears to be very close to full capacity. New programs such as The New Green Deal will basically be poaching experienced workers from existing projects, driving up wages (good for workers) which can generate a wage-price spiral (bad for everyone who can’t demand higher incomes).

My third concern: as someone with 45 years of construction experience, I am keenly aware that the vast majority of the infrastructure and New Green Deal spending many people see as socially beneficial requires skilled labor. Rebuilding bridges, electrical grids, etc. all require highly specialized labor. Installing solar arrays also requires trained workers with physical stamina.

The process of training a large new workforce is time-consuming and expensive, and doesn’t necessarily generate new goods and services. In other words, it’s inherently inflationary as it puts new money into the economy but doesn’t increase the goods and services – at least until the newly trained workforce starts generating goods and services.

My fourth concern is related: ultimately, “wealth” (as measured in new goods and services generated by capital and labor) is generated by increasing productivity, via investment in greater efficiencies.

Much of the spending people want – repairing bridges, supplanting natural gas electrical generation with solar or wind, and so on – are not necessarily increasing productivity: the repaired bridge carries the same number of vehicles as it did before, so there is no increase in productivity.

In other words, efficiency and productivity are core dynamics, yet the MMT process is fundamentally political, and politics has little interest in efficiency or productivity. It is, as noted above, politically expedient, with a default setting to put off tough decisions into the future.

In the private sector, return on capital and the productivity of labor and processes are the core dynamics. These rationalize decisions to prioritize efficient use of capital, labor and resources. Absent this rationalization, resources can be squandered for politically expedient reasons. In other words, capital, resources and labor can be mal-invested, which brings up the opportunity cost: all the capital, labor and resources squandered on “bridges to nowhere” and other pork-barrel projects are no longer available for truly productive use.

The key question here is: How do we harness our intrinsically scarce capital, labor and resources to increase productivity and socially/ecologically beneficial investments in a sustainable way?

MMT’s diagnosis is that a lack of currency is the primary problem. The MMT solution assumes the new currency can be efficiently invested within the existing political system without disrupting the increasingly precarious existing financial system.

While the appeal of MMT is self-evident, it seems to me that both the financial and political systems are broken in ways that MMT, no matter how it’s managed, cannot fix.

The problem is we’re misallocating capital, resources and labor on a vast scale. That’s the problem. Adding more currency and capacity/“growth” doesn’t fix this problem, it actually makes it worse.

If we look around at the trillions of dollars in recently issued currency floating around the world looking for a yield, the trillions poured into asset bubbles that only benefit the few at the top, the billions of gallons of fuel wasted in traffic jams and other consequences of “endless growth on a finite planet”, the gargantuan waste of capital, resources and labor squandered in maintaining a “growth at any cost” Landfill Economy of mindless consumption, regardless of consequences, it’s hard not to see MMT as a “green” Band-Aid for a profoundly broken, wasteful, unsustainable system.

MMT leaves the existing status quo essentially untouched and adds a new layer of newly issued currency and spending, and a new layer of “growth” and consumption, consumption that no matter how socially beneficial is still an additional burden on the planet.

In effect, MMT is another attempt to preserve a dysfunctional status quo by adding another layer of newly issued currency and “growth.” More “growth,” even the sort envisioned as “Green,” is simply adding to a destructive system. What’s needed is a radical reduction in consumption and a diversion from a consumerist Landfill Economy to one driven by incentives other than “more of everything” in the name of “growth.”

As longtime readers know, I see a new system of private-sector currency, DeGrowth and decentralization and the institutionalization of a more sustainable (i.e. less perverse and destructive) set of incentives as the only set of solutions that can fix what’s broken in the current socio-economic model.

But that doesn’t mean MMT won’t be tried, as the three engines of “growth” over the past 20 years — soaring debt, financialization and globalization — all falter.

Life Under MMT

So what will life under MMT look like?

In Part 2 – Life Under MMT: A Self-Reinforcing, Inflationary Feedback Loop, we’ll examine the repercussions of the program’s massive new money creation and fiscal stimulus.

Owning just about anything tangible or scarce will be a better bet than hoping fiat currencies will survive the advent of MMT and/or runaway borrowing intended to duct-tape the status quo together for another election cycle.

Eventually even duct tape gives way.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access).

This is a companion discussion topic for the original entry at

In Part 2 — Life Under MMT: A Self-Reinforcing, Inflationary Feedback Loop, we’ll examine the repercussions of the program’s massive new money creation and fiscal stimulus.
This link is malformed.
Click here to read Part 2 of this report (free executive summary, enrollment required for full access).
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We agree:

" I see a new system of private-sector currency, DeGrowth and decentralization and the institutionalization of a more sustainable (i.e. less perverse and destructive) set of incentives as the only set of solutions that can fix what’s broken in the current socio-economic model."
That solution is a full descentralized, community created money, with all the controls and accountability. The benefit of this new financial - economic systems are enormous, the problem is ¿how we start the implementation of unitycoin? a couple of millions are needed. And the government and Elites dont like competence. If anyone have a solution we are all ears.

I hadn’t heard of unitycoin, thank you. The ideal scenario IMO is an open, transparent array of alternative currencies available to all, so the marketplace of users will sort out which ones are best suited to the changing conditions. I’d like to see a full spectrum of choices: gold-backed private currencies, state-issued gold-backed currencies, local currencies, community-issued currencies and my own preferred option, a labor-backed currency, and cryptocurrencies such as bitcoin, ethereum, etc… Governments will not allow alternatives to arise but as Venezuela shows, when the government-issued currency fails, people will turn to alternatives even if they are illegal. Once the government currency fails, enforcement fails as well. For this reason I see the greatest potential for competitive currencies to arise outside the developed world. Right now, the only legal options to fiat currencies are the cryptocurrencies, which are viewed as commodities by the US government. So the range of options in the crypto-world is our only legal option at the moment.

Thank you for getting to the core of what might be wrong with MMT and even many other “theories” of economics and government finance. If one does not take into account the demands and rewards within the political system, then what might be a reasonable theory on paper turns out to be disastrous in actual practice. I greatly appreciate your pointing out this all important discrepancy between theory and the reality of how such theoretical programs would actually roll out.

Charles - I would be curious about your thoughts on Andrew yangs proposal. 1000k per month to everyone over 18 with an opt in feature. But opting-in opts you out of all other .gov payments I.e. disability, food stamps, housing, welfare etc.
It seems like those programs have been inflationary. Yang’s program might offset some of that inflation for people who don’t qualify. Also might incentivize more people to get off those programs. If they can get a job making 20 to 30k and keep the 12k in Benefits. Leaves more room for upside than the current system.
And it prevents some of the problems you discuss above. The government really wouldn’t be picking where the money is spent. There’s some market forces in the mix.
Just curious. I have mixed feelings & don’t really see yang discussed much on this site.

MF, thank you for bringing up Andrew Yang’s ideas on UBI. Of all the candidates, Yang seems to have the most realistic grasp of the real-world economy as it careens into the 4th Industrial Revolution. I think some of the appeal of Yang’s proposal is as you say, a more grounded set of incentives. Another aspect people respond positively to is the idea that the US is generating tremendous wealth and we can afford to share it as a universal ‘dividend’ to everyone, not just the super-rich.
My concerns are:

  1. Are we really generating wealth, or are we just generating debt and asset bubbles? If all we’re really generating is debt and asset bubbles that will pop, the ‘wealth’ that’s supposed to be available to divvy up is illusory. The reality is Yang’s UBI will be paid by borrowing trillions, just like every other UBI.
  2. Are the incentives aligned with human nature? Will people who blow their UBI on drugs, etc. in the first week of the month and are left hungry on the streets really be forced to live with the consequences of their actions? Unlikely. Politically, the corporate lobbies will not let go of their gravy trains: food corporations will insist on food stamps EBT being retained; large landlords will keep Section 8 housing subsidies, Big Pharma will demand Medicaid be left untouched, etc. so the idea that any existing plan will actually be deleted is politically unlikely. Yang’s UBI will be “free money” on top of existing programs.
  3. My own work is focused on the value of positive social roles, i.e. work that is meaningful and which provides a sense of being useful/needed. All UBI proposals ignore this critical human/social aspect, as if being a consumer is all humans need to be fulfilled. Some advocates of UBI claim people will be free to start their own businesses once they have $1000 a month in hand, but this is wildly unrealistic: it requires a huge pool of human, social and financial capital to start and operate a legit/legal business, even a one-person business. The burdens of running a business have increased astronomically in the past 30 years. It is simply beyond the resources of most people to launch and successfully operate a small business nowadays.
    There’s more to say on this, but these are some basic concerns with Yang’s proposal. It’s well-meaning but not practical or affordable, and it doesn’t address the need for positive social roles for those left out of the formal economy.

Given all the challenges and dangers we face environmentally, economically, energy-wise, and beyond, what I discuss here may seem likes it is coming a bit too late. But I personally am totally against Universal Basic Income for one reason. It is really just a way for the 0.01% to retain their power and wealth. It is essentially a bribe to keep people pacified and not looking to closely at how a very small group of people want to keep pushing “infinite” growth, their wealth and power, even if it destroys our planet and what is meaningful and truly valuable in “working” peoples lives.
I have mentioned Prof. Richard Wolff’s work before on this website, and his efforts to inform people of the essential problems with capitalism. The true defining characteristic of capitalism is NOT private enterprise, market economies, shareholders, etc., it is rather the structure of enterprises where there is an employer and employees. What he is trying to make people aware of is an alternative that does NOT involve the government redistributing wealth or implementing any other major, top down approaches to try to make things more equitable after the fact. What he is promoting is the VOLUNTARY building up of a sector in all economies consisting of Worker Self Directed Enterprises, or WSDE’s. These are enterprises where the workers vote democratically, one person, one vote on all the major decisions that a board of directors or a sole owner make in capitalist structures. Thousands of these types of enterprises already exist around the world in many different countries. If this type of structure were to become prolific, then the need for UBI and other redistributions of money would become largely unnecessary. And that is only one of MANY benefits to these types of enterprises. This type of worker cooperative is really the essence of what I would call “true” socialism, and what Prof. Wolff calls “21st century socialism”. It gets to the root of many of the problems that capitalism engenders and bypasses the limitations and problems associated with “democratic socialism” and of course the failures and horrors of what we call communism.
I would encourage everyone to read Prof. Wolff’s book “Democracy at Work: A Cure for Capitalism”. He is also publishing a new book entitled “Understanding Socialism” which should be out near the end of this month. In this book he will apparently cover the pros and cons of 20th century forms of socialism, their successes and failures, and then explain how WSDE’s differ from those approaches. At a time when the idea of “socialism” is gaining popularity, but (as Prof. Wolff points out) most of us do NOT really understand what that term actually means, this promises to be a very worthwhile book to read.
I truly believe that making more people aware of this type of business/enterprise structure, and dealing as best and intelligently as we can with reducing our destruction of the climate and the environment that we absolutely depend upon, and waking up to the reality that infinite growth and our current “first world” lifestyle is a completely unsustainable and destructive goal are ALL parts of any possible solutions to human adaptations on this planet.

Development and use of alternative currencies is a core subject and I would love to see more discussion, all these points are good.
I read (internet article so don’t know if true) that Japan has the most alternative currencies. Reason: 1. labor based currencies are favored by the government (not illegal) because they alleviate the biggest financial problem of the government: how to take care of old people without spending “money” 2. a younger person takes care of an old person in return for labor credit, to be redeemed from the relatives when the care giver gets old and decrepit and needs care himself. 3. this mostly occurs in the countryside and is really an expansion of the existing ancient custom of building personal bank accounts wherein no good deed goes unrewarded (and no bad deed is forgotten). People are always doing things for others and this creates obligations, which in the case of elder care can be improved with a formal labor backed currency.
I think that Charles’s labor backed currency will be the most common and will develop within the resilient communities that most people here are dreaming about and working on.
Labor backed bank accounts that are transmogrified into formal currencies will be fun and facilitate community building in different ways. My wife left the mini truck all day at the ferry parking on Friday and it had a large amount of freshly harvested sweet potatoes in it Friday night. I imagine that the giver is having as much fun testing us to see if we can figure out who she/he is…

Thanks for the reference. Your reference mentioned “Mondragon”, a large co-op in Spain, which seems like a fascinating experiment that has run now for 60 years. Seemingly quite successfully. Proof is in the pudding, as they say.
As a startup guy, my focus would be on how such a co-op gets their seed funding. Once running, I understand the basic structure, and that all sounds fine.
An equity investment by an outside agent without representation would make no sense in an WDSE, since without representation, you can expect to get nothing back in terms of an income stream. (Rules for Rulers: if you are not a “key to power”, you end up getting nothing.)
So that leaves equity investments by worker-owners, and debt.
Could I imagine a debt-funder providing seed capital to a startup? Given the failure rate, the prospective ROI to that lender says no.
So we are back to getting funded either by the worker-owner, or by (say) a municipality that feels it will get paid back indirectly in tax dollars over time.
Certainly if the municipality can print its own money, that makes investment decisions easier, but it also makes corruption easier too, since “the community” is funding the startup, and only a much smaller number of worker-owners are receiving the direct benefit.
And - how many workers have enough savings to drop into seed funding for their new company? Precious few, I suspect. Maybe older tech workers? Its a limited set.
Of course you can get seed funding from charity. Is it a big funding source? Maybe it is. But the charity can expect nothing back. C.f. “Rules for Rulers” - no representation = no ROI.
So - seed funding. That’s the issue. As I see it. Structure is fine once it is successful and running.

I’ve always been confused by MMT because they claim all sorts of strange things about how the system works now, eg governments already create money when they spend etc. However, it looks like the end solution you describe here is very similar to Positive Money. The only difference is that you claim there is no solution to restrain government from spending. That’s very easy - as Positive Money explain, new money issued by the Central Bank, would be under the control of an independent, transparent and democratic Monetary Policy Committee. They would have access to all the information about economic indicators and would be tasked to keep inflation withing given limits. It would be the govt that would then decide how the money would be spent. I’ve always followed Positive Money but never had time for MMT as their claims and explanations have always been convoluted and not backed by official channels.

At present, governments issue bonds equal to the size of the deficit. You assert that this mechanism restrains politicians and forces them to say, “I know your need is legitimate, but the money’s simply not there.”
However, when do politicians ever say that about things that they actually want to do? Isn’t it more common to use that as an excuse to avoid doing things they don’t really want to do?

I notice that those who propose we actually use MMT to “solve” our fiscal problems never address the issue of political corruption. As in, do we really want to make it even easier for our corrupt political class to shovel money towards their donors/“keys to power”?
Until one of the many bot-like MMT visitors engages me specifically and directly on the political corruption issue, I will just assume it is because they have no answer for it.

is more deceitful than all else and is desperately sick, who can understand it?

DaveF, maybe some people have not seen it?
So here it is again - the most relevant and important 18 minutes you can possibly spend if you want to understand why and how governments operate.
I assume some people don’t want to know, and that’s why they resist watching this.
In my view, anybody who wants to “do something new” is obligated to confront the lessons in this video head-on and either tuck their solution within its framework, or offer a super-compelling explanation (preferably with real-life examples in hand) for how they will circumvent them.

As a follow up to Rules for Rulers…This helps explain why we see so many Trumps in the white house. And why we saw multiple Clintons, Bushs, Kennedys.

I’m going to disagree with the specifics of this one.
Death & Dynasties is all about the Keys to Power - the “court” - demanding continuity to keep treasure flowing to them. Thus, we see Bill, Hillary (and certainly, Chelsea). And George HW Bush, then W, and then (but “sadly”, not) Jeb. That’s “Death & Dynasties” in operation. Transitions of power to “known safe hands” for the benefit of the Court is what Death & Dynasties are all about.
In the US, we have two Court flavors - a Republican-flavored Court, and a Democratic-flavored Court. Corporations own them both, but they are different groups of people, with slightly different agendas, and they’d each dearly love their turn at the wheel.
We see a lot of Trumps in the White House not because “the Court wants continuity”, but rather because Trump didn’t come into office backed by the Republican Court, and so his family was literally the only group of people he could count on for loyalty.
Trump’s problem is that the Keys to Power that got him elected are vastly different from the Keys to Power required for governance.
In fact, it is really apparent just watching Faux Impeachment that Trump has little to no control over either Court Flavor - i.e. the “keys to power for governance.” The machinery of the Court (top echelons of CIA, State, FBI) have been working to get him removed since before he was inaugurated.
Trump’s mistake? Rules for Rulers has the answer. He should have ditched his campaign promises to his base (jobs back from China, ending foreign wars, defending the border) and instead gone over to the causes supported by “the Court” simply because, as we are told, “the people necessary to get you into power aren’t the same as those necessary to run the place.” Trump didn’t betray his base, and he’s constantly paying the price for it.
He should have done what the permanent bureaucracy wanted - endless war, open borders, and selling us out to China - and he would have had 8 calm, relaxed, largely uneventful years in office.
Just like Obama.
Straight out of Rules for Rulers.

It appears that Federal Reserve Chair Jerome Powell has indicated the Fed can’t get us out of the next recession alone and is opening the doors for “help” (others to drag into the quagmire of blame). This is an admission the Federal Reserve’s policies have finally brought the economic system to the brink. We are standing at the precipice. The Fed can no longer enable enrichment of the super wealthy alone. LOL. Chairman Powell has admitted what we have known for so long … Not enough tools left to forestall the impending downturn.

…Well, I never considered that might be true about the man. I don’t find evidence to support that theory. fyi, I’m in my fifties and still haven’t found a political party I can sign on to, so not being political here (I support PP rules on staying out of politics). I just never considered Trump to have any legit altruistic motivations or an honest man. If I look in the right place will I find evidence to change my mind?
I see you, Dave F, as a “Sr contributor” here and consistently providing well thought out commentary on PP, most of which I agree, a few things I don’t…for example, I’ve not drawn the conclusion that the impeachment proceedings are a “Faux Impeachment”. Its a process that seems to be as intended and will play itself out.
I do appreciate the value and content you bring to the site, while I mostly just pay my subscription and take the value to guide my life’s decisions. And, for the record, I’m really happy about the path PP has led me down. However, I do strongly support PP commentary staying out of political party leanings or favoring the elected officials of one party over another. If a Sr Contributor shows too many of those leanings then it may appear that PP has those same opinions and we lose membership and valuable contributions from others. Politics are just too f’d up to debate here.

What I read were some facts and conclusions about keeping campaign promises. From facts someone can draw conclusions…from conclusions someone can be scientific and debate the facts and conclusions or take political sides and totally leave the rational debate, or worse try to censor opposing viewpoints.
I welcome the investigations (all three) that are going on as self correcting mechanisms for our natural propensity to abuse power.
Although I do align with one political philosophy, I have to be honest and compel myself to accept truth as it is discovered, even if it supports those who don’t share my philosophy. Let the chips fall where they may. Our constitution will endure, while those in government are temporary actors.
I find Dave to be very fact oriented, and I read his facts with an open mind and his conclusions with the same skepticism that I reserve for all inquiry. I do believe that he supports truth over dogma.