MMT and the deficit myth

12 Sep, 2021 at 14:28 | Posted in Economics | 24 Comments


What Modern Monetary Theory (MMT) does is more or less what Knut Wicksell tried to do more than a hundred years ago, when he in 1898 wrote on ‘pure credit systems’ in Interest and Prices (Geldzins und Güterpreise). The difference is that today the ‘pure credit economy’ is a reality and not just a theoretical curiosity — MMT describes a fiat currency system that almost every country in the world is operating under.

In modern times legal currencies are totally based on fiat. Currencies no longer have intrinsic value (as gold and silver). What gives them value is basically the simple fact that you have to pay your taxes with them. That also enables governments to run a kind of monopoly business where it never can run out of money. A fortiori, spending becomes the prime mover, and taxing and borrowing are degraded to following acts. If we have a depression, the solution, then, is not austerity. It is spending. Budget deficits are not a major problem since fiat money means that governments can always make more of them.​

In the mainstream economist’s world, we don’t need fiscal policy other than when interest rates hit their lower bound (ZLB). In normal times monetary policy suffices. The central banks simply adjust the interest rate to achieve full employment without inflation. If governments in that situation take on larger budget deficits, these tend to crowd out private spending and the interest rates get higher.

What mainstream economists have in mind when they argue this way, is nothing but a version of Say’s law, basically saying that savings have to equal investments and that if the state increases investments, then private investments have to come down (‘crowding out’). As an accounting identity, there is, of course, nothing to say about the law, but as such, it is also totally uninteresting from an economic point of view. What happens when ex-ante savings and investments differ, is that we basically get output adjustments. GDP changes and so makes saving and investments equal ex-post. And this, nota bene, says nothing at all about the success or failure of fiscal policies!

MMT rejects the traditional Phillips curve inflation-unemployment trade-off and has a less positive evaluation of traditional policy measures to reach full employment. Instead of a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfill our basic economic objectives — full employment and price stability.

Governments can spend whatever amount of money they want. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMTer denies that too much government spendings can be inflationary. What is questioned is that government deficits necessarily is inflationary.

Contrary to mainstream theory, finance in the world of MMT — and people like Keynes and Minsky — precedes investment and saving. What is ‘forgotten’ in mainstream theory, is the insight that finance — in all its different shapes — has its own dimension, and if taken seriously, its effect on an analysis must modify the whole theoretical system and not just be added as an unsystematic appendage. Finance is fundamental to our understanding of modern economies​ and acting like the baker’s apprentice who, having forgotten to add yeast to the dough, throws it into the oven afterwards, simply isn’t enough.

All real economic activities depend on a functioning financial machinery. But institutional arrangements, states of confidence, fundamental uncertainties, asymmetric expectations, the banking system, financial intermediation, loan granting processes, default risks, liquidity constraints, aggregate debt, cash flow fluctuations, etc., etc. — things that play decisive roles in channelling money/savings/credit — are more or less left in the dark in modern mainstream formalizations of economic theory.


  1. At the risk of shipping coal to Newcastle, Doughnut Economics by Kate Raworth (currently reading/listening to) seems to fit very well with MMT. Depending on how you look at it, Raworth’s analysis complementary to MMT and, with almost identical critiques of m/stream ‘economics’ as well as her own savage deconstruction of it, looks to redefine economics to include such things as effects on, and relationship to, our biosphere.

  2. Language matters ~ why do we keep calling our money supply a deficit? By calling our money supply by its real name we take back our shared ownership of it. Money is a public utility, spent into existence and taxed back for recirculation by ‘we the people’.

    There is no political democracy without democratizing our money supply. The economy is our social operating system, and needs to be democratically operated.

  3. Stephanie Kelton is refining her basic assumptions. I like her analysis of the trade-off from quantity to quality via the deficit. From my ‘dumber than a 5th grader’ perspective, I wonder what ‘just prints money’ is all about beyond the paper-digital distinction. It seemed to me that deficit/debt referred to government bonds which must eventually be repaid, and was the point of Quantitative Easing – to reduce the debt, that is, the interest on the bonds. However, at the local level where budgets must be balanced, all sorts of accounting tricks are being used which tend to result in dramatic increases in property taxes. Now, the question is who benefits from these property taxes? Are my roads repaired? Is crime lessened? We should see, according to MMT, real outcomes from the deficit spending, from government spending generally, perhaps even corporate public interest: we should not see unanalyzed unemployment (US employs around 160M out of around 210M eligible workers) nor high crime rates. The quantity to quality transformation from production and government spending at all levels should be totalized, all things considered.

    • There needs to be a better distinction between ‘deficit’ & ‘debt’ ~

      The deficit is simply the excess government spending beyond what the government has recalled back from the economy through taxation. The excess government spending is essentially our money supply. Without a government ‘deficit’ there would be no money supply in the market.

      The debt on the other hand is the interest the government has promised to pay bond holders. Selling bonds is a throwback to the days having a currency that was backed by gold, which limited the amount of money the government could create. Back then in order to spend new money into the economy the government was required to either tax money back from the wealthy or borrow money from folks who had excess currency by selling them bonds.

      However with a fiat currency it is no longer necessary to either tax or sell bonds to spend new money into existence. Unfortunately the practice of selling bonds has remained in use as part of our monetary policy to affect the size of the money supply. It is a terrible mistake for the issuer of a fiat currency to ever ‘borrow’ it’s own currency at interest in this way. Essentially what happens is that when the money supply is too large the government pays folks an interest fee to take some of that excess money out of the market for some period of time defined by the bond. This is a positive feedback loop that continues to give more money to folks who already have an excess beyond what they can productively put to use which only exacerbates our wealth gap.

  4. From a logical point of view this is how it is. But is there any empirism to back it up?

    Listening to too many mainstreamers I have got somewhat fed up with logics. There seems always to be some nasty fact to bring it down.

    • You betcha! Read Stephanie’s book “The Deficit Myth.” It is a bit more scholarly and referenced than her TED talk. There is quite a lot of research showing, for example, that every time Congress has declared an austerity program to bring down the national debt, it triggered a recession. That is why GHW Bush was a 1-term president – Reagan’s economic policies led to a recession on Bush’s watch.

      Hopefully, people have wised up to the myth of trickle-down. Such notions are just political gaslight to manufacture more billionaires. An example of current inequity is this. If your wealth is over $7.6M, you are in the top 1.5% – meaning 98.5% of Americans have less wealth. The distance from 1.5% to the 1%, just half a percentage point, is $8M more dollars – twice as wealthy. If you had a whopping $500M you would need a space ship to catch Jeff Bezos and $200BN (400 times $500,000,000).

      • For those not yet ready to buy & read the book, this lecture she gave to London University’s UCL Institute for Innovation and Public Purpose rehearses many of the themes, with superb slides/illustrations

        • QE brought the US out of the recession, similarly for other nations.

          • Really? Please explain how that works. Would be fascinating.

            I think everyone else understands fiscal injections like paid furlough etc were what put money in people’s pockets. Similarly for other nations.

            Monetarist boosting of bank cash reserves by swapping bondholders money out from interest paying bonds into cash would likely have done little except boost stock prices etc

            You would do better to watch the video with an open mind rather than issue uninformed comment. Or explain how QE put money in everyone’s pockets and paid for furlough, which would be difficult, as they were not even remotely connected.

            • Why couldn’t you do some research to establish the effects of QE instead of making pejorative remarks. Apparently, you think unlimited debt is just great, but you have no rationale other than making associations to your own assertions. Your problem, like other MMT’easers is that you don’t promote discussion; either you make indefensible remarks or you provoke hostility!

  5. Go ask Michael Hudson why MMT is so yesterday. It’s because it has already been highjacked by the corpocracy to bail itself out, financialize everything, and completely restructure the economy along rentier lines. The whole glorious experiment is over because the Fed, Congress, and Wall Street used it for their own devices to redistribute all the money upwards to create massive inequality without any increase in productivity and they will continue to do so until the system collapses.

    So please, I beg you, stop this scholastic road show about this discovery of MMT and how it will transform society. Those in power have have already co-opted the idea and are using it to enrich themselves.

    • Of course MMT won’t transform society. Only we can do that. Choosing to NOT learn how the economy actually works because the powerful might use of to lavish themselves… I think it’s a bit to late for that. The only hope we have is for the rest of us to learn it, and then replace them with people who are more competent and caring. Is it likely? Maybe not. But it’s the only option there is.

    • I think MMT has had its moment in the sun.
      The big public pending of the last year or so will eventually end and once the drama of the pandemic is over the old rhetoric will return.

  6. […] MMT and the deficit myth Lars P. Syll […]

  7. MMT basically took solid post keynesianism and broke it. You only have to look back to the financial crisis to see inflation isn’t a constraint.

  8. The limit on deficits is the availablility of goods and services available when approaching full employment. Where there are shortages then price inflation eventually occurs. Crowding out does not pply. See the blog of Professor Bill Mitchell, one of the fathers of MMT, “billy blog” where there is extensive writings on the limits to MMT and misconceptions like crowding out.

  9. Another excellent article.
    At the risk of repeating the same arguments made by Professor Syll, a quote from an article by Dr. Peter Cooper who blogs at “” which expresses the same ideas with different wording :
    Having acknowledged that there are real limits to government deficits (it was never denied), MMT nevertheless makes clear that government deficits are the norm, not the exception. This does not mean that government deficits of any size are okay. They must be consistent with private-sector net-saving intentions. It simply means that ongoing government deficits of some size will be the appropriate policy under normal circumstances. The reason for this is that the non-government sector typically desires to net save. This means, as a matter of accounting, that the government must run deficits.
    Whenever the non-government sector net saves (maintains a surplus), it is spending less of the monetary unit than it earns. The result is unsold output and a signal to firms to cut back production unless the government fills the demand gap through deficit expenditure. By doing so, the government is in a position to ensure all output is sold at current prices and that the non-government sector satisfies its net saving desires. If, instead, the government allows the demand shortfall to persist by not injecting sufficient expenditure of its own, firms will respond by cutting back production. There will be a contraction in output and income, thwarting non-government net saving intentions. If the non-government sector responds by redoubling its efforts to net save, the result is a further shortfall in demand, further contraction of income (as well as tax revenue), more frustration of non-government saving plans, etc. There is no end to the process until either the non-government sector accepts a smaller net-saving position or the government accepts a bigger deficit.
    [end quote]
    source: Krugman and Galbraith on Deficits

  10. 》What gives them value is basically the simple fact that you have to pay your taxes with them.
    Why does bitcoin have value, then?
    》our basic economic objectives — full employment and price stability.
    Isn’t real hetetodoxy the rejection of these two fetishistic totems as societal goals?
    》All real economic activities depend on a functioning financial machinery. But institutional arrangements, states of confidence, fundamental uncertainties, asymmetric expectations, the banking system, financial intermediation, loan granting processes, default risks, liquidity constraints, aggregate debt, cash flow fluctuations, etc., etc. — things that play decisive roles in channelling money/savings/credit — are more or less left in the dark in modern mainstream formalizations of economic theory.
    So why assume inflation is primarily to do with real supply and demand? If you include a properly-scaled financial sector, doesn’t it become obvious (as it did to Fischer Black) that prices are arbitrary and inflation psychological?

  11. MMT is a product of what happens when you have a generation grow up with fiat money. It’s all a game of how much of other people’s labor you can expropriate against their will or knowledge without people stopping working entirely or before you have to put them into work camps. Gold as a constraint checked this privilege of issuing currency. It was a mechanism. I’m not a fan of a gold standard either, but inevitably there is this abuse of fiat.

  12. Lucid and very well written Lars!

  13. Very helpful, incisive commentary here, for me at any rate. Although for one of the paras, never having made much sense of Say’s ‘Law’ when first introduced to it, not sure I’m any the wiser now.
    Great short article

    • Say’s law is essentially that supply CAUSES demand, which justifies supply-side/trickle-down economics. The truth is demand causes supply, which justifies Keynes’ and MMT’s prescriptions of demand management.

      Read the 1999 paper by Mathew Forstater, Savings-Recycling Public Employment: An Assets-based Approach to Full Employment and Price Stability:

      • Thanks Acitivist for the link to Forstater’s paper. I found this in which Vickery links Says ‘Law’ to another discredited theory: Loanable Funds.

        “In orthodox neoclassical theory, savings determines investment through variations in the rate of interest. Thus income not consumed is transformed into investment expenditure in the market for loanable funds. It is this mechanism that, under perfectly competitive conditions, ensures that all output will be purchased at the full employment level of output and income. Vickrey rejected such a view, which he identified as the heart of “Say’s law,” and targeted for rebuttal the implication that economic growth is achieved by promoting an increase in savings (1993c, p. 6).”

      • What if firms make so much hedging inflation in financial markets, they don’t need to raise prices?

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