Simple Explanation of Modern Monetary Theory (MMT)

We dropped the Gold Standard some time ago and don’t have to round up gold to pay for things anymore. Hence the “Modern” in Modern Monetary Theory. MMT just explains how money works in a modern economy. Government “spends” money into the economy and taxes it back out. The amount not taxed back out (“deficit”) is the amount left circulating in the economy. The total over the years (“debt”) is a measure of the money in the economy. “Balancing” the budget means not putting new money into circulation. “Paying off the debt” means removing all the money from the economy.

Also, selling government bonds is a choice, not “borrowing.” There are good reasons to do it, but it is not “borrowing.” There are good reasons to tax – balance distribution, address inequality, fight the influence of accumulated fortunes, behavior incentives – but it is not “raising revenue.”

Application of MMT: Look at what the US govt did when Covid hit. It kept businesses from going under, kept the economy from the worst crash ever, dramatically cut child poverty, etc, followed by the fastest recovery ever. Compare that to what happened after the 2008 crash when Summers kept the “stimulus” low. It was almost 10 YEARS before things recovered completely – leading to Trump.

Simplest way to understand modern money: learn where banks get the money from to give out loans. (Hint: They “create” it.)

Unfortunately certain well-to-do influential interests benefit greatly from the old ways of understanding money and will do anything to keep it that way.

One More Thing

One more thing about MMT – it meets stiff ideological resistance from certain vested interests because the “gold standard” “kitchen table budgeting” thinking keeps the system working for the wealthy. If government could just spend money without “borrowing” from the wealthy to solve problems, then what do we need the wealthy for?

The conservative game since Reagan/Thatcher has been to cut taxes at the top in order to create deficits, and then demand budget cuts and privatization to get rid of the deficits they created. This is a strategy for gutting government – democracy – and moving wealth upwards. Get pesky government out of the way of the oligarchs and their corporations.

Remember the resistance to solving the 2023 debt ceiling “crisis” by “minting the coin”? Minting the coin was completely legal, and made the problem disappear. The problem was, if people could just mint a coin to pay off wealthy bondholders then why can’t government mint a coin to … you name it.

See Why Minting the Coin Is A Threat To The Established Order:

Minting platinum coins with a face value of $1 trillion and depositing them with the Federal

Reserve is Constitutional and solves the problem. But it brings up questions that shake the foundations of neoliberalism. If we can “mint coins” to pay bondholders, why can’t we mint coins to do things that people want and need? Instead of just relying on private capital (the rich) to make investment decisions and get things done in our economy?

So Biden can do the right thing and just … pay our bills. But then the neoliberal order breaks down. If We (through Congress) can decide to … you name it, then why are we depending on “the investor class” (capital) and “market solutions” etc to decide where to invest, allocate resources, do the planning and everything else?

This Is How Money Works (Video)

Watch this video. The “gold standard” ended a long time ago. Since then economies work in a more “modern” way. Hence “Modern Monetary Theory” – MMT.

Countries no longer round up gold to “pay for” things. They decide on priorities and issue currency – “spend” – as an exchange medium. They impose taxes to both soak up excess currency and rebalance the distribution of wealth.

The currency that is “spent” into the economy and not taxed back out is still unfortunately called a “deficit” and the total over the years is unfortunately called “debt.” This is the legacy of ancient times and the use of gold. (This should be called “National Money” instead of National Debt.)

If a country offers bonds (T-Bills in the US) that is a place for wealthy people to store excess cash. Countries can choose to pay interest on them. This is not “borrowing.”

Call It “National Money” Not “National Debt”

I propose renaming the “National Debt” as the “National Money.” Here is why.

Once upon a time, governments had to round up gold to “pay for” things. Kings would gather gold to finance armies and pay mercenaries for their wars. If they collected it from the population through taxes, fees etc it was called “revenue.” If they borrowed it, they would have to pay it back. That was actual debt. Later, nations used gold as a means of exchange and had to actually collect or borrow as much gold as they would spend.

But things have changed. Gold is out of the picture. (So are shells, gems and other historical means of exchange.) Governments allocate resources toward priorities and issue currency as a means of exchange. This is commonly called “spending.” They do not “collect revenue” nor do they “borrow.” They appropriate and issue currency. They tax the currency back to balance and regulate the amount of currency in circulation, and to address inequalities and raise or lower public priorities (like taxing cigarettes.)

Many of the terms used have not kept up with the changes. People still think governments “borrow” when they sell bonds. But bonds are for other purposes than raising money (rounding up gold.)

The budget “deficit” is the amount of currency spent into the economy but not taxed back. What today is generally called the National Debt is the accumulated yearly budget deficits minus any yearly surpluses. (Surpluses happened in the Clinton years.) It is a measure of the currency spent into the economy and not taxed back out.

The legacy use of the word “debt” misleads people into thinking it is “debt.” It is not. Governments that issue their own currencies have no need to collect gold or other “revenue” to “pay for” the goods and services the government decides to direct toward priorities. (Of course governments should not direct more resources than are available, this creates inflation.)

I propose renaming the “National Debt” as the “National Money.”

Or maybe “NashCash.”

#MMT

How Free Markets Work

“Neoliberalism” is the idea that markets are better at making decisions than democracy.

If it doesn’t show up click here.

A Way To Understand What Went Wrong With The US

Society wants cars/antibiotics/furniture/houses/etc but doesn’t want to make them ourselves through our government.

In order to accomplish functions like these that government wants accomplished but doesn’t want to do itself, government “contracts out” those functions. Corporations are those contracts. Corporations facilitate aggregation and manage of resources (huge sums, labor, etc) that are beyond the scope of individuals. We “contract out” through corporate charters to get these things done for us.

When You Look At It This Way

When you look at it this way — that government is the way all of society’s functions are managed(of course it is) and that corporations & the “private sector” are just “contracting out” some government functions — it gives people a way to take back the power in their own thinking. Who is the boss of who? How should corporations be regulated? Who should be regulating them? Etc.

Where Things Went Wrong

Here is where we went wrong. Executives at corporations are allowed to use corporate funds to influence society and pay politicians to allow things that enrich those executives personally.

Everything else we see happening flows from that.

The “Private Sector” Is Government “Contracting Out” Its Functions

This was originally posted at Imagine Democracy

We live in a society, and getting things done for society is what government is for. Government is society’s way to make decisions about society’s resources, economy and future. Period. Anyone who tells you you don’t need government, or that government shouldn’t do this or that, is actually just trying to BE the government, for their own benefit.

EVERY decision about society’s resources, econony and future is made by government, one way or another. Period. Every. Single. One. Socialism, capitalism, communism, dictatorship, aristocracy, oligarchy, democracy, etc are just descriptions of how that decision-making is divided up. It’s about who makes the decisions and who gets the benefits. All the “ideological” battles are really just all about keeping the public from understanding that.

In the US, supposedly a democracy where the decisions are ultimately made by “We the People,” we hear about the “public sector” and the “private sector” of our economy. What we call “the private sector” is really just the government “contracting out” the functions of managing society. Corporations are those contracts. From the recent post about corporations, Understanding What a Corporation Actually Is Can Help Restore Democracy,

We the People want to have factories to build cars or toasters. We the People could do this – build the factory, hire the managers, organize supply chains, provide insurance. etc. – ourselves but instead we have come up with corporations as a way to “contract it out” to private investors to accomplish these jobs for us.

Corporations are the contracts government makes when it “contracts out” its functions. Period. Government charters corporations to do things government doesn’t want to do itself. Those charters come with conditions and rules.

Except our currently captured government doesn’t enforce the agreements.

A Currently ‘Hot’ Example

Government contracts out money creation. We charter banking corporations to do that function of government for us. The Post Office could do that as well, but we, for various reasons, choose to let a few “capital” holders – wealthy people – do that and reap the returns.

Why Minting the Coin Is A Threat To The Established Order

I really think the upcoming Debt Ceiling fight is going to be a turning point of some kind. The right intends to let the country default to stop “government spending.” They mean it.

Biden’s choice is to let that happen, cave like Obama did, or enforce the Constitution, which says the govt has to pay its bills.

Gimmicks

For those insisting that “Mint the Coin” as a solution to this is a “gimmick” – (as if the debt ceiling wasn’t just a gimmick) – compare that to what we do now:

Our Government Issues Currency

Our federal budget is not like a family “kitchen table” budget. We stopped using gold as our currency a long time ago. We don’t mine or “round up” money at the federal level. Our government does not get “revenue” from taxes. It does not “borrow” money, it prints it.

(In this clip economist Stephanie Kelton explains that our government does not operate like a family “kitchen table” budget):

We (representative democracy through our Congress) decide that we’re going to allocate our resources toward accomplishing something, and we issue dollars as an exchange medium toward that. There are things Congress should do along with issuing currency (which we are not doing because of neoliberalism): Make sure we allocate resources we have (allocate toward steel increasing capacity before allocating toward using more steel than we have) and tax enough to balance the distribution (tax the rich) and soak up some of those circulating dollars.

This is the modern way of understanding money: Modern Monetary Theory, or MMT.

MMT Is A Paradigm Shift

Breaking away from the idea that the federal govt operates with “kitchen table economics” is a paradigm shift. You see it completely one way (deficits, debt, govt spending are bad), and then when something clicks you can’t see it that way anymore, only the new way (MMT, govt issues currency), and then you are frustrated seeing so many getting it so wrong.

Our government issues currency. So of course we could just “mint a coin” to issue dollars to pay off bondholders. But if we did that, the most dangerous question arises: If we can just issue money to pay bondholders, why can’t we issue money to … do things that people want and need?

Shake The Foundation

Minting platinum coins with a face value of $1 trillion and depositing them with the Federal Reserve is Constitutional and solves the problem. But it brings up questions that shake the foundations of neoliberalism. If we can “mint coins” to pay bondholders, why can’t we mint coins to do things that people want and need? Instead of just relying on private capital (the rich) to make investment decisions and get things done in our economy?

So Biden can do the right thing and just … pay our bills. But then the neoliberal order breaks down. If We (through Congress) can decide to … you name it, then why are we depending on “the investor class” (capital) and “market solutions” etc to decide where to invest, allocate resources, do the planning and everything else?

PS We CAN Have Nice Things!

Mint The Coin!

It is argued that the way around the “debt ceiling” argument is for the government to mint $1 trillion platinum coins and deposit them with the Federal Reserve. This would then reduce the “national debt” by $1 trillion for each coin minted.

The problem people have with this is people just don’t understand what money -IS-.

Money Is Created Not Mined Or “Raised”

I hope everyone reading this understands where banks get the money they loan out from. The answer is they “create” it. They are not loaning out deposits. They create the money out of thin air. If you don’t believe this, go look it up and come back when you understand it.

Like banks, the US CREATES money; it doesn’t get money from taxes or borrowing. The US does not round up gold to trade for armies anymore. The government doesn’t have to “borrow” money or get it by taxing. It just doesn’t. It creates it.

Our “money” says right on it that it is “legal tender for all debts public and private.” It doesn’t say you can trade it in for gold or something, it says it IS the money.

The US govt “appropriates” spending. Money is CREATED to use as the intermediary – the token – of that appropriation. The money the government spends minus the money it taxes bak is the amount of money in circulation. (Think about what “paying off the debt” would mean – it would require taking $30 trillion out of circulation.) Stephanie Kelton does a good job explaining all this in her book about Modern Monetary Theory (MMT).

Republicans Understand Money

Republicans understand money and know that Democrats and the public do not. This is why they ALWAYS use deficit spending and then beat Democrats over the head for “borrowing.” They do this so they can deliver things to the public and keep Democrats from doing the same. They do this every time, and Democrats respond by being “responsible” and imposing austerity on the public.

MMT and Inflation

One last important point. MMT does NOT say we can just print all the money we need. It explains that our govt needs to analyze spending for inflationary effect BEFORE spending. Like how China built tens of thousands of miles of HS rail – they ramped up steel plants etc first. What we do now is superstition – don’t spend “too much” or you “might trigger” inflation. And then you “fight” inflation by putting people out of work.

So Why Can’t Leaders Admit This?

Thinking about WHY Biden and Yellen and all Republicans and Wall Street types maintain this illusion that it would be “irresponsible” to mint the coin or get rid of the “debt limit.” It seems that maintaining the public’s “kitchen table” misunderstanding that the US gets money from taxes and borrows the rest, is the underpinning of the neoliberal order.

If the powers-that-be ever admitted that the US creates money through appropriation, and can control inflation by planning, (and therefore give everyone a job with good pay,) that would undercut the ideology that “markets” are superior to public planning, that capital is better at allocating resources than the public.

The website We CAN Have Nice Things explains MMT and links to many sources, articles, videos, etc.

A Game As Old As Wealth

This post originated at Imagine Democracy. If you follow all the links, it pieces together.

Over at sister-site Government Cheese, a discussion of capitalism, propaganda and how a few wealthy people keep things under control

Capitalism literally means that the people with wealth make the investment decisions for society & get the return on investment, and the broad public don’t.

All the rest is just propaganda. Capitalism has nothing to do with “markets” or “freedom” or any of the rest.

It’s really so simple. It’s how a few people maintain control of society for their own benefit and it’s been this way for thousands of year, under different labels. It’s what a monarchy is. The King and his buddies control the wealth. “WE should have this and you should not and here’s why.”

It’s why the United States was such a breakthrough. WE THE PEOPLE will decide what’s best for us, not you. Government of, by and for THE PEOPLE. Not the elites, the wealthy, the aristocrats, the priesthood, the monarchy, the warlord, whatever label put on the ruling wealthy. A country run for the benefit of the people in the country. Whatever label we put on that – democracy, socialism, whatever.

That’s all. All the rest is just propaganda.

Read Lincoln’s Gettysburg Address in the context of the monarchies of Europe just salivating waiting for “the Union” – the experiment in democracy – fail so they can get the world back where they want it.

Budget Cuts = Eating The Seed Corn

This post first appeared at Government Cheese – Chronicling the Collapse of democracy

Government budget cuts are not what they seem.

Understanding history could also be called ‘wisdom.’ Wisdom told stories about “eating the seed corn.” If you eat the seed corn you can’t plant your crops the following year and everyone eventually starves.

In the early 80s Reaganism/Thatcherism (neoliberalism) convinced the country to drastically cut taxes on the rich and “pay for” it by cutting spending. The US stopped spending on maintaining and modernizing infrastructure – especially transportation infrastructure, on education, on science … on so many things. So we lived off of prior investment for so long. But the infrastructure deteriorated and we certain never modernized it. (Just look at our rail and transportation systems, compared to the rest of the world.)

All that $$ was transferred to the already-wealthy top few who paid for the propaganda that convinced the rest to do this.

Privatization

Another piece of this scam was “saving money” through privatization. Using local trash collection as an example, cities would “save money” by getting rid of public trash collection and contracting with the “private sector” to do this more “efficiently.” What this meant was laying off the decently-paid public employees and hiring them back at minimum wage with no benefits. The infrastructure – trucks etc – to do this would receive little maintenance, collection schedules would be cut back, and people had to drag their trash to the curb instead of having it picked up at the house.

This didn’t actually save money, it shifted it. The newly minimum-wage workers would lose their houses which reduced property prices for e everyone and killed the tax base, they’d go on public assistance, schools would suffer and have higher costs, etc across the board. And poor people can’t spend much so all local businesses suffer, too.

Etc etc etc we can see it all around us now. But it is too late.

See also:

When Government ‘Saves Money’ And Gets ‘Smaller,’ We All Lose

You can “save money” by not changing the oil in your car. But have you ever seen a car that has never had its oil changed? After a while white smoke pours out the back because the rings are ruined. Other parts of the engine are also being ruined. Eventually the engine will seize up and quit and you have to either replace the engine or scrap the car. A simple and inexpensive procedure every few months would have prevented many thousands of dollars in expenses later.

After the Reagan tax cuts we “made government smaller” in several ways that are coming back to bite us now. One way we “saved money” by not “changing the oil” was by deferring maintenance of the country’s infrastructure – the water systems, levees, dams, roads, bridges, airports, ports, rails systems, electrical systems, and the rest of the things we all rely on to bring us safe water, get us to work, ship products and generally move our economy and live our lives.

Now the American Society of Civil Engineers’ (ASCE) most recent “Infrastructure Report Card” estimates we need to spend $3.6 trillion just to bring the infrastructure up to where it should be, never mind catching up to the rest of the word with high-speed rail and smart electrical grid systems. The bill is getting more expensive every year, and people are dying as bridges, roads and other important infrastructure components fail. Thousands died in New Orleans when the levees failed.

5 ways privatization is fleecing American taxpayers

If people with OK public-employee jobs are replaced by lower-paid workers the community is poorer in the aggregate. More people will need public “safety-net” services. There will be foreclosures. Tax revenue drops because of lower pay but also because poorer people can’t spend as much in stores. Sales taxes drop as stores face fewer customers able to get by.

Reagan Revolution Home to Roost: America Is Crumbling

Inflation and Modern Monetary Theory- MMT

How many of you have heard about “MMT” – Modern Monetary Theory?

MMT says federal budgeting should look ahead to whether spending will cause inflation instead of just worrying that it will. After analyzing whether spending might cause inflationary pressures, address those causes of inflation – resource & capacity shortages – in advance. Then spend.

That way government can do what it needs to do to meet the needs and wants of We the People.

Example, of you want a high-speed rail system make sure to set up steel & train car manufacturing etc. first, then build the rail systems. If you approach it that way, capacity and resource shortages – steel, labor & other resources – don’t cause inflation.

Address the causes of inflation first instead of trying to “fight inflation” later by forcing people out of work, etc.

Superstitious Fear of Deficits

We have a superstitious fear that we might “run out of money.” We used to use gold (or shells) as money. Kings used to have to round up gold. People still think this is what money is. People think taxes round up gold – “revenue” – and the government that makes money – “dollars” – can somehow run out of the money it makes.

But that is not what money is, and not how a modern economy works. Money is created by government. (We “make” dollars and license banks to “create” money.) Taxes help regulate the money in the economy and (used to) balance its distribution. Dollars are like points on a scoreboard. A baseball game can’t “run out” runs. Our government can’t “run out” of dollars. Dollars are just an instrument of keeping score of how government has allocated our resources.

Unfortunately, the way government budgeting still works now – worrying about “deficits” and inflation instead of addressing problems that deficits might cause – we end up with austerity. We don’t spend enough. We don’t address the needs and wants of We the People. And if we see inflation we do terrible things to fight it. We CAUSE unemployment. We CAUSE poverty. Etc. We try to fight inflation after it begins instead of not causing inflation in the first place.

Austerity Breeds Fascism

Our medieval monetary superstitions and the resulting practices cause us to refuse to allocate resources to address our societal problems. This austerity keeps us from doing things to make our lives better. We don’t fix and certainly don’t modernize infrastructure, don’t provide healthcare or childcare or good education (through college), etc., so people feel government doesn’t work. As we saw in the 1930s and are seeing again now, austerity breeds fascism.

This is a great book to help understand MMT:

The Deficit Myth
Modern Monetary Theory and the Birth of the People’s Economy
by Stephanie Kelton

Also this April, 2021 NYT Op-ed by Stephanie Kelton, warning that our Covid relief budget process could boost inflation:
Biden Can Go Bigger and Not ‘Pay for It’ the Old Way

We CAN Have Nice Things

Take a look at this website keeping track of and teaching about MMT: We CAN Have Nice Things