MMT — modern monetary realism

16 Mar, 2019 at 11:39 | Posted in Economics | 40 Comments

MMT is not, as its opponents seem to think, primarily a set of policy ideas. Rather, it is essentially a description of how a modern credit economy actually works – how money is created and destroyed, by governments and by banks, and how financial markets function. Nor is MMT new: it is based on the work of John Maynard Keynes, whose Treatise on Money pointed out back in 1930 that “modern States” have functioned this way for thousands of years.

Abrahamian-Long-ver-imgFrom this description, certain straightforward facts flow. Governments create money by spending and extinguish it via taxation. It follows, therefore, that a large country, borrowing in its own currency, cannot be forced into default. That is why the US is not Greece, and cannot become Venezuela or Zimbabwe.

Does this mean that “deficits don’t matter”? I know of no MMT adherent who has made such a claim. MMT acknowledges that policy can be too expansionary and push past resource constraints, causing inflation and exchange-rate depreciation – which may or may not be desirable. (Hyperinflation, on the other hand, is a bogeyman, which some MMT critics deploy as a scare tactic.)

But the issue with budget deficits isn’t interest rates, which remain under government control. Nor is it the possible crowding out of private investment, which assumes that the pool of finance is fixed. The issue is real resources. Here, MMT’s proposed job guarantee would keep real resource use exactly at the level required for full employment – not less, but also not more.

J K Galbraith


  1. JKH has a point about MMT’s (and mainstream) misconception about reserves.
    See a graphical depiction of the Fed balance sheet:
    Before 2008, there were Treasuries that were being bought with private bank money. The Fed created new debt-free reserves to buy those Treasuries, thus converting private bank credit into Federal Reserve credit, after the private sector had created the money.
    In other words Treasury issues debt and gets paid not in Fed reserves, but in private credit money. Then it spends the private credit money. Taxes too get deo=posited in private banks, thus bypassing the Fed and its reserves.
    The diagram shows that all banks including the Fed can choose to reinvest returning loans rather than destroy them. The Fed can keep the new reserves it created circulating in the banking sector forever. Banks can do the same with the credit they issued (and eventually the Fed will sterilize the new credit by making them as good as reserves.
    Thus loans do not have to be destroyed onsecurities ce repaid; banks can reinvest the repaid loan in new loans, thus keeping the credit circulating.
    Also see this table:
    Note that Cash at the Fed declines but Securities classified as High Quality Liquid Assets increase by almost the same amount. Thus you can say that the Fed “destroyed” $260 billion, but at the same time banks created their own money to add $256 billion in Treasuries. The banks paid for the Treasuries not with Fed reserves, but with their own credit issuance.
    Thus the mainstream (including MMT) story that banks settle in Fed reserves is wrong. Banks and Treasury very commonly accept private credit as ultimate settlement. This means that the private sector is creating new net financial assets, contrary to Bill Mitchell’s assertion that they can only do so if government spends first.
    Jeffrey Snider’s blog is also very interesting to see how finance really operates.
    “It’s like there is a whole other independent monetary system that doesn’t work the way everyone seems to still think.”
    MMT is right there with the mainstream as part of “everyone”.

  2. Jerry, Henry, Bruce

    appreciate your questions/interest

    I think one important fact is the existence of Treasury accounts at both the central bank and the commercial banks

    I believe the institutional origin for this was the desire to keep fiscal separate from money creation, delegating money creation mostly to the private sector banking system

    now, if anybody wanted to raise hell against a system of private sector banking, I suppose one way of attempting to do that would be to contort reserve logic in such a way as to bias the whole thing toward a lopsided conclusion about how the reserve system equates to some unique public purpose to ensure that government can spend before it taxes … blah …

    • Difficult to ascribe all ills on the Fed when since conception there has been basically three periods of administration, of which, we’re in the third or quasi monetarist.

      I would have thought various opinions like share holder value [our Ken’s mea culpa down under] and Equity shenanigans more directive than IR alone.

      Yet for some is quite a small bucket of fish ….

    • Monetary systems evolve dynamically under a great deal of pressure from the strategic gaming of the “system” by participants pursuing their “private” interests as well as collective efforts to adapt to changing circumstances in pursuit of a general or public interest — any monetary system is a continually emergent system.
      MMT is apparently trying to create space for political change by rationalizing changes in the U.S. system of money and payments that for the most part have already taken place. U.S. banking and payments systems have evolved from systems that relied on gold specie and national debt for banking reserves into what appears to be a nearly pure credit system.
      The irony of Galbraith’s “modern States” have functioned this way for thousands of years is that few monetary systems survive more than a couple of generations. The U.S. system has changed radically every thirty-five to forty years of national independence.
      For better or worse, I expect the rise of MMT heralds another such change — though I suspect MMT are blowing the herald’s horn from the back of the parade, not the front.

  3. Acknowleging facts is a good starting point.

    Actual facts are a prerequisite for considering alternative possible constructions for new and different facts. This goes for monetary system design.

    Why does this matter?

    Simple stuff like truth, intellectual honesty, trust, and integrity.

    MMT is chronically incapable of recognizing and/or acknowleging the distinction between factual and counterfactual monetary system representations.

    I’ve been very close to this stuff in the real world – functionally closer than Mosler. And I’ve studied the MMT logic machine pretty closely.

    It’s downright Trumpian and Orwellian. It annoys the hell out of me.


    The US Treasury does not spend before it taxes or borrows.


    The MMT distraction that the central bank provides the commercial banks the reserves they need to make tax or bond payments to Treasury is an observation that equally applicable to any other type of payment made by any bank to any counterparty. The fact that MMT teases this out as some sort of unique evidence of something in the case of Treasury is an intellectual con. And the same conclusion holds a fortiori for any consolidated flow analysis.

    • So the MMT line that taxes once received by the Treasury are destroyed or mysteriously disappear is bullshit?

    • JKH, you say that acknowledging facts is a good starting point. Who could possibly disagree with that?

      You say- “Fact:
      The US Treasury does not spend before it taxes or borrows.”
      Ok. Has that always been a fact? How did the US Treasury borrow or tax any US Dollars before it spent any of them? Did the US government not issue greenback currency during the civil war in excess of taxation and borrowing? And at other times in more recent history? Would the US government be incapable of doing a similar thing presently? Does the Federal Reserve not own quite a few Treasury Bonds? How did it get them? – through spending tax revenue? Borrowing? What is going on when the US Mint makes quarters or dollar coins? Is that tax revenue or borrowing?

      Yes sure the operational details are very important- but why is it wrong to try to understand this whole process in terms of ‘creating money’ by spending and ‘destroying’ it by taxing? And maybe you can show it is wrong but calling it dishonest? I’m not being dishonest when I try to explain this- not in any way. Maybe I’m wrong, which is what you could help me understand why if I am- but at the moment it has nothing to do with my honesty or my integrity. If you show me MMT is wrong about this stuff and I know that, then maybe at that point you can talk about integrity.

      I’ve been reading about MMT for about eight or nine years now and I was highly skeptical at the beginning of that. And I know you have been involved in some way for longer than me- I have read a lot of your what I can only call spectacular comments from before and since that time. And I have been looking for evidence that really would show MMT is wrong or at least an inappropriate way of looking at economics. And I really have not found much evidence there to show it is wrong and nothing at all to show that it isn’t the best way among the alternative schools to describe our economy.

      • All money is debt, so in issuing the Greenbacks — both Demand notes and Treasury Notes — the government was borrowing, after a fashion.
        Now what?

      • The context is the design and operation of the monetary system.

        Layer on that the past , the present, and various possible futures.

        I’m referring to present facts.

        One possible future for example is a system in which Treasury spends without regard to the status of its own bank account, or even without the existence of such a bank account. This might allow it the option to spend freely without taxing or borrowing first.

        That’s essentially what MMT describes.

        But that’s not fact in today’s system.

        And to represent it as such – as “operational reality” as they might say – is factually incorrect.

        It’s a strange brew of present fact and possible future.

        Could Treasury do so?

        Maybe – in a possible future.

        But that’s not how it’s represented.

        Instead we have the fog of ‘self imposed constraints’ and the selective application of central bank reserve easing and the like as attempted cover for a muddied merging of present facts and possible futures.

        Clarity matters.

        Otherwise it’s a house built on sand.

        And the tragedy is that it’s totally unnecessary in order to establish the logical framing that simply buries mainstream as uninformed nonsense.

    • Double entry bookkeeping is better representation and does not need replacing by mmt.

      Double entry includes financial and nonfinancial. MMT is often stated as only including only the financial.

      In fact, there are people who like to seperate the financial and the non financial parts in double entry but they do not reomove either just regroup them.

  4. Eric Tymoigne in the blog post referenced by JKH said the following:
    “What puzzles me is that people are willing to accept the monetary side (“The US can issue our one money so we are fine”), which is false in a strict sense of the operational reality, but they cry wolf when MMT continues by saying that taxes and Treasuries don’t fund the US government. This is false in the strict sense of operational realities but true in a consolidated gov.”
    I can’t believe the admission – “which is false in a strict sense of the operational reality”!!!!
    Seeing I forked $100 for the new book I am beginning to wonder what else might be “false in a strict operational sense”.

    • If Congress passed a law that said government spending could only happen after the President did a handstand for three minutes then in a strict operational sense, government spending is dependent on the athletic abilities of the President. But anyone who actually described that as ‘necessary’ for it to happen- well what would you say to them?

      • I would say thanks for being descriptively accurate.
        If you can’t be descriptively accurate in the first instance, then you are going to cause a great deal of confusion, which it has for me.
        Then I begin to question where else has MMT been loose with the truth.
        MMT has suddenly begun to lose credibility. Not that I have swallowed the MMT line holus bolus at all. I am very much on a learning curve and very skeptical about a few things. It doesn’t help when they don’t talk straight. At least Tymoigne clarified the situation.

        • We are not talking about economics then- we are talking about legislation. And that is going to differ all over the world just because there are so many countries and each has its own different laws about how things will be done. And I have lived in my country for more than 50 years and I certainly don’t know all the laws and definitely not all the details of every law that Congress has passed. Anybody who told me it was economically necessary for the president to do a handstand before the government could spend- well I would tell them that is ridiculous and stop bothering me with arcane legalistics. I might just say Congress made that law and just as easily could make another that revoked it.

          I haven’t seen that MMT is ‘losing credibility’ whatsoever. I see a whole lot more people all of a sudden starting to realize they have to deal with the ideas MMT presents.

          • “We are not talking about economics then- we are talking about legislation.”
            Fair enough. MMT has a problem – does it describe a particular system (say that in the US) or does it generalize to a more eclectic explanation so that it is actually explaining what could or should be rather than getting bogged down in what is in a particular jurisdiction? The trouble is it seems to keep crossing the boundary back and forth, hence the confusion and probably the source of mainstream attacks. Its has to be clear when it is talking descriptively and when talking prescriptively.
            I am still not clear whether it is within US law for:
            1. the Fed to create money to directly finance Treasury expenditure
            2. the Fed to finance Treasury expenditure with loans directly
            3. the Fed to finance Treasury expenditure with loans indirectly by underwriting Treasury security issues
            and whether and how these various operations (which ever of them is legal) affect the Fed’s monetary operations.

            • “I haven’t seen that MMT is ‘losing credibility’ whatsoever. ”
              MMT has its gaggle of vociferous supporters who seem to be more interested in polemics and social justice issues and think that MMT is the answer to all their prayers. I wonder how much they understand.

            • MMT might have that problem also but what the heck world was the economics I learned in the 1980’s supposedly describing? It wasn’t describing the US economy and legal structure either. As far as I am concerned many economists still haven’t figured out that we are not on a gold standard. MMT at least recognizes that fact. Mainstream economics crosses over to unreality and never comes back. MMT at least recognizes that the legal system matters.

              On your questions 1,2,and 3- I don’t know either. JKH would know. I don’t think any of them are technically legal at this time. Some of them were legal at times since the creation of the Fed in 1913. But the laws have been changed. But that does not mean that the Fed cannot indicate that it will be purchasing Federal debt in the secondary markets and it does not mean that the Fed will not make sure that the reserves necessary to purchase all government bond offerings are available at the time of the auction.

            • Clearly, MMT describes a particular system. It doesn’t apply to membres of the EU, it doesn’t apply to countries unable to collect taxes, etc. I don’t think this is a “problem”, as MMTers are quite open about this.

              As for the legal problem, as I understand it, MMTers argue that laws are self-imposed: “we” can get rid of them the same way “we” passed them. So your questions about what the Fed can or cannot do according to the law are interesting, but probably besides the point. Utimately, those laws reflect the will of the people (or are supposed to), who is free to keep, amend, or revoke them.

              • Applications of empiricism wrongly ascribed to a political matrix.

  5. MMT is right in the sense of starting out with the right accounting building blocks for depicting macroeconomic activity and operational steps.

    They are wrong in their development of the consolidation concept at the flow level. I explained this above.

    This is a logical error and technical error that costs them credibility with those who know better.

    Of course, mainstream not only doesn’t know better, but hasn’t understood the essential importance of stock flow consistent accounting in the logical development of behavioral functions.

    • So is it correct to say that deficits can be financed flat out by CB money creation or not?
      Can deficits only be financed by borrowing even if is borrowing from the Fed?

      • The core function of a monetary sovereign’s central bank is to manage the national debt in such a way that it is a perfectly liquid “risk-free” instrument for hedging and benchmark reference for lending at interest. The state is enabled to borrow without practical limit associated with its credit among lenders and always at relatively low interest rates barring expectations of general inflation.
        Reactionary business and rentier interests may prefer a political mythology that “describes” the national debt and credit prospects in more pejorative terms and can afford to pay economists to preach accordingly. People who care to understand how things actually work must also understand that this is part of the reality.

        • So that sounds like the CB money creation description is false. Deficits are financed by borrowing, fullstop.

          JKH, what do you say?

          • Well I’m not JKH but my name does start with a J and I want to blather.
            In the US at least, the central bank was created by the federal government and given the power to issue Federal Reserve notes (currency) and create bank reserves. So the Fed absolutely can create money when it wants to. So I would have a hard time understanding why it couldn’t create money that ended up financing a government deficit.

            • Jerry,
              See my comment below.

  6. The mainstream attacks on MMT are a travesty. But MMT has only itself to blame for bad analysis and bad messaging.

    MMT takes elements of obvious accounting truth and contorts them in such a way that only exacerbates the effect of mainstream ignorance in response.

    The crux of the problem is this.

    MMT treats government fiscal funds flows as special in the context of central bank reserves.

    The idea is that the CB provides the reserves necessary for tax payments and bond settlements. Then … blah, blah, blah … can’t run out of money … and on and on.

    That’s wrong.

    Government flows are not special in this context.

    The context being the existence of a reserve system for commercial banks.

    The central bank provides the reserves necessary for banks to make payments to ALL counterparties.

    The objective is interest rate control, along with bank specific liquidity needs – REGARDLESS of the payee.

    It is on this basis that MMT’s logic as used in its ‘consolidation’ theme is faulty.

    The “can’t run out of money” theme is not faulty. It’s obvious from double entry accounting. That’s why mainstream doesn’t get it.

    But there are more straightforward ways of making this point. Simple sector balances combined with easy deconsolidated funds flows is a piece of cake. Instead, MMT takes a shotgun to the foot with this clumsy asymmetric reserve centric argument.

    The result being that a mainstream mob that is accounting-ignorant out of the box becomes fully invested in its botched critiques.

    A recent paper tries to make amends for the reserve centric consolidation approach by moving on to a deconsolidated ‘coordination’ approach.

    But it’s too late. They’ve lost this latest war with incompetent analysis.

    And I’ll bet this new textbook will feature the same lopsided reserve-centric obsession.

    • JKH, is the point you are making that MMT economists are not marketing geniuses? That they are not necessarily world class writers? That they are bad tacticians as far as the public debate goes? If that is the case, yeah I can see your point. But are they RIGHT? – that is the most important issue to me.

      • I have to say that Stephanie Kelton is a very good public speaker though. Very good. And Bill Mitchell is also a good public speaker. They are both way way better at that than I would be.

      • MMT is right in the sense of at least starting out with the right accounting building blocks for depicting macroeconomic activity and operational steps.

        They are wrong in their detailed development of the consolidation concept at the flow level. I explained this above.

        This is a technical error in logic that costs them credibility with those who know better.

        Of course, mainstream not only doesn’t know better, but hasn’t understood the essential importance of stock flow consistent accounting in the logical development of behavioral functions.

      • MMT is right in the sense of starting out with the right accounting building blocks for depicting macroeconomic activity and operational steps.

        They are wrong in their development of the consolidation concept at the flow level. I explained this above.

        This is a logical and technical error that costs them credibility with those who know better.

        Of course, mainstream not only doesn’t know better, but hasn’t understood the essential importance of stock flow consistent accounting in the logical development of behavioral functions.

    • JKH,
      “A recent paper tries to make amends for the reserve centric consolidation approach by moving on to a deconsolidated ‘coordination’ approach.”
      Do you have the paper’s title/authors?

    • Like Jerry Brown, I admit that I am a bit mystified by your characterization of this error (and I agree it is an error of description and logic — and wrong about the operational mechanisms) because I see the error as tied in with the hostility of at least some MMT advocates to the issuing of interest-bearing public debt or advocacy for administrative consolidation of what are now separate Central Bank and Treasury (and ultimately legislative functions, aka Congressional appropriation).
      It may be that Bill Mitchell, for example, simply does not understand the accounting and administrative operations involved, but it seems to me that he’s actually hostile as a policy advocate to the whole elaborate administrative process.
      In other words, it is not just an error of rhetoric resulting in a failure to persuade people to consider an otherwise basically valid theory. It is also an application of theory to advocate for an administrative reform with catastrophic potential. Bill Mitchell does not just fail to understand the operations involved; he fails to appreciate their value as administrative controls and a means of isolating political responsibility.
      Bad observation, bad logic or bad architectural design principles? Hard to distinguish sometimes.
      Anyway, very much appreciate your comments. Thank you.

  7. “Governments create money by spending and extinguish it via taxation.”

    Except that they don’t – no more than a corporate treasurer who spends by way of overdraft (thereby “creating money”) and flattens his position by the end of the day with revenue. In fact, even less so, because Treasury has no such overdraft facility. So what is presented as some deep truth is at best superficial and at worst outright wrong – in the factual institutional world.

    • ““Governments create money by spending and extinguish it via taxation.”
      Except that they don’t ”

      Well this is pretty central to MMT thinking. If government spending cannot be thought of as ‘creating’ money, and taxation cannot be considered as destroying money, then MMT is probably completely wrong. But I don’t think that it is. And I do think that it is reasonable to consider federal spending and taxation as creation and destruction of ‘the currency’.

      I assume that you would agree that the US Federal Government actually could create US Dollars and spend them into the economy? I mean it has done that in the past and the US Constitution specifically empowers Congress to create the currency. But you are saying that they don’t typically ‘act’ as though they are doing this right? Well I would agree they try to hide this aspect through institutional rules and pretend that that is not what is happening. And that is important all by itself- but it does not make the fundamental truth of the situation go away.

      JKH, believe me- I am very hesitant to argue with you. Just because you are usually right all the time. But I am just not understanding this one.

      • It is just as true — more true if such a phrase can make sense — that the government borrows money into existence and extinguishes it by taxation.
        Supplying currency as such is a purely technical matter of the central bank keeping the banking system well-stocked. Money as tokens to use in exchange transactions is not very important compared to the use of money as an instrument for hedging, ballast if you will in an economic system beset by uncertainty.
        I worry a bit that MMT is not as it purports to be, “descriptive”. There is a lot it avoids describing, including the constant morphing of monetary systems thru time, many of which had quite different architectures from our present world of fiat, credit and central banks. It seems to be advocacy for a system simple enough for an economist to understand — a prescription for disaster. (Not that neoclassical ignorance does not produce financial catastrophe of its own — I would like to see the world learn from experience; my experience as an economist leads me to question whether it can learn economics from economists, including advocates of MMT).

        • Bruce Wilder, I am not the world but you can rest assured that at least this one person has learned quite a bit from your many very intelligent comments over many years. The same goes for JKH. Thanks.

          • That doesn’t mean I won’t be arguing with either of you though 🙂

      • The U.S. Constitution authorizes the coining of money and the regulation of standards of measurement. The anachronism involved ought to be a clue that money has not always been as it is.

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