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What is Modern Monetary Theory and will it help?

By Ken Wolff

Modern Monetary Theory (MMT) is a macroeconomic theory for the current age in which governments have abandoned the gold standard and also floated their currencies. It is ‘macroeconomic’ and ‘monetary’ because many of its conclusions relate to the money supply in an economy. Does it offer scope for a new economic approach recognising people? Can it better assist responses to robotics and computerisation than current economic approaches?

Historically, gold was important because coins were minted from it (and silver). Even when coins were no longer minted in gold, the currency issued by governments was convertible to gold and governments needed to hold sufficient gold reserves to satisfy a potential demand from all holders of their currency — that was the gold standard. In that situation governments could not spend without first taking money from the economy (taxation) because the money supply was limited to match the quantity of gold. Following WW2, fixed exchange rates also meant that governments, through their central banks, had to defend the rate they had fixed by buying or selling their own currency in international money markets: that also affected the money supply in their home economy and also placed limitations on government spending. Floating currencies now allow central banks and governments to target domestic economic policy goals knowing that the floating exchange rate will resolve the currency imbalances arising from trade deficits or surpluses.

MMT points out that much economic thinking since the 1980s operates as though the gold standard is still in place — namely, that governments can only fund their spending by taxation and therefore deficits are bad — but some MMT proponents and supporters argue that this has ideological (neoliberal) rather than genuine economic underpinnings.

Since the abandonment of the gold standard, most countries, including Australia, now have a fiat currency — that is, it is created by government fiat (decree) — and it has no intrinsic value. My $50 note is not matched by $50 worth of gold any longer, nor is my plastic note worth $50 itself (in 2012 Australia’s polymer notes cost 34c each on average to produce irrespective of their face value). My note has value only because the government decrees it has and the government is the monopoly provider of currency: therefore it is the currency I need to participate in the economy and to pay taxes.

MMT places this new reality at the centre of its approach. A sovereign government issuing its own currency can never run out of money, never go bankrupt or default on its ‘debt’. That in a sense was Greece’s problem: as part of the Eurozone it was no longer an issuer of its own currency. In that circumstance, as for the states within a sovereign nation, the oft-used analogy of a household budget still applies but it does not apply to the sovereign issuer of a currency.

The ‘sovereign issuer of currency’ argument leads to probably the most well-known and sometimes controversial aspect of MMT, that a government can always ‘create’ money. The critics argue such printing of money — although these days it actually requires only a few keystrokes on a computer to create deposits in the private banking system — will lead to hyperinflation as in Zimbabwe or the Weimar Republic in post-WW1 Germany. MMT accepts that inflation is one factor that imposes a limit on government spending but that limit is not reached until all the ‘real’ resources of the economy are fully utilised — all human resources (full employment) using all available physical resources. If a government continues to spend after that, then dangerous inflation may result but, prior to that point, MMT argues that government spending to assist utilisation of available resources will not lead to uncontrolled inflation. For MMT, the issue is not just money but the real human and physical resources that are available to the economy and not currently being used:

If there are slack resources available to purchase then a fiscal stimulus has the capacity to ensure they are fully employed.

As a means to help control inflation, current mainstream economic thinking accepts the Non-Accelerating Inflation Rate of Unemployment (more commonly known by its acronym, NAIRU). The Australian Treasury uses NAIRU in its modelling as the basic foundation of longer-term stable inflation — currently the NAIRU in Australia is 5% unemployment. Before NAIRU, full employment was taken to mean there would be about 2% unemployment, allowing for people moving between jobs or unemployed short term for various reasons. In practice, NAIRU provides a ‘buffer stock’ of unemployed which basically means that having those extra unemployed, above the previously accepted 2%, provides downward pressure on wages growth because the unemployed are more willing to accept lower wages simply to have a job. The argument goes that if unemployment falls below the NAIRU level the competition for workers will mean employers accept demands for higher wages thus leading to higher inflation. (Despite the whole capitalist free market system being based on competition, whenever workers appear to have a competitive advantage it is decried as a threat to the economy!)

MMT rejects the NAIRU and instead proposes a Job Guarantee for the ‘unemployed’, sometimes referred to as ‘transitional employment’ which probably describes it better. As opposed to the NAIRU ‘buffer stock of unemployed’, MMT offers a ‘buffer stock of employed’ but this is done at a ‘fixed price’ — in Australia this would be the minimum wage, inclusive of standard employment conditions. It means the government supports employment until such time as a person obtains higher paying mainstream work and it will be in productive work using under-utilised resources:

What matters … is whether there are enough real resources available to produce goods and services that are equal in value to the government’s job-guarantee spending. If these resources are available — if they are not already being used to produce something else — then the increased demand that results from the payment of job-guarantee wages will not be inflationary, regardless of what they go to produce.

On broader monetary issues, MMT says that there can only be saving in the private sector, inclusive of banks, businesses and households, if the government spends more than it collects in taxes: that is, only when the government adds money into the economy can there be private sector saving as well as investment.

A good, simplified explanation of this was provided by John Carney at CNBC in 2012:

The MMT people aren’t actually referring to you and I saving. They aren’t even talking about the entire household sector saving financial assets. They are talking about the entire private sector spending less money than it earns.

You can easily see why this would be impossible without the government spending more than it collects. Every dollar someone is paid is a dollar someone else has spent. If we all — every single person and company — spend less than we are paid, very quickly we will find we have to be paid less. The aggregate effect of savings is to reduce the total amount people are being paid for things.

So this is what MMT people are talking about when they refer to a “private sector desire to net save.” They mean that if you add up all the earning, spending and savings of every person and company in the economy outside of the government, sometimes you find that the private sector is trying — nearly impossibly — to earn more than it spends.

The only thing that can make private-sector net savings possible is government spending. If the government spends more than it takes in taxes, the private sector can earn more than it spends. Remember, if everyone pays less than they earn, some outsider must be paying more than he earns.

The MMT equation for this is:

(G – T) = (S – I)

Or in words, government spending (G) minus taxes (T) equals private saving (S) minus gross private investment (I). This is so because in macroeconomic terms the two represent the entire amount of money in the economy. And the other key of this equation is that it shows that money does not come into being in the private sector unless the government has first spent it (over many years now).

MMT points out that when governments run surpluses it leads to an increase in private sector debt because, in that circumstance, if the private sector wishes to save and invest, it has to borrow from the existing pool of money (and the government surpluses are actually reducing the money supply). This is explained by the concept that transactions between banks, businesses and households are ‘horizontal’ transactions and cannot change the amount of money in the economy (liquidity). Only a ‘vertical’ transaction between the government and the private sector can change liquidity (MMT includes both the treasury and central bank when it talks of ‘government’).

In the USA, on all occasions when the government has run surpluses, and reduced debt for a few years, it has been followed by recessions or depressions. Arising from the indebtedness forced on the private sector by the government surpluses, there comes a point when the private sector reduces spending because it cannot afford to take on more debt, thus creating an economic slow-down. In such circumstances, only government spending can relieve the situation. (It is also of interest that since 1776 the US government has been in debt in every year except for the years 1835 to 1837.)

In a globalised world, however, national economies do not operate in isolation so one more aspect needs to be added to the equation: exports (X) and imports (M).

(G – T) = (S – I) ‒ (X – M) or

(G – T) + (X – M) = (S – I)

If a country has a trade surplus that adds to private savings. Many countries, however, as Australia, operate a trade deficit which means that private sector saving is reduced and more reliant on government spending. And at a global level the nett outcome of all countries’ trade must sum to zero, so it is impossible for every country to run a trade surplus — a surplus in one country necessarily requires a deficit in other countries. So a trade deficit or surplus is not bad in itself but does affect private sector saving and creates more need for government to adjust its spending appropriately.

Although even MMT still talks about deficits and surpluses, my reading is that those words are less relevant in MMT. If a government can create money it can never really be in deficit (except perhaps in a point-in-time accounting sense). Even claiming that the deficit represents spending more than collected as taxes is not relevant. MMT says that the government does not need taxes in order to spend — it can always create whatever money it needs. The real purpose of taxes is to take money from the economy or, in economic terms, to reduce liquidity, meaning there is less money to spend and thereby total demand across the economy is also reduced. What taxes can achieve is to create ‘space’ for government spending. If an economy is already running at capacity and the government continues to spend, that is increases liquidity and demand without first making space for that spending, then high levels of inflation may result because there is more money in the economy to buy the same amount of goods and services, meaning people competing for those goods and services are willing and able to pay higher prices to obtain them. So taxes can be important in allowing government spending without dangerous inflation but are not necessary in themselves for that spending.

Similarly MMT argues that the sale of government bonds is not necessary to fund government ‘debt’. So-called ‘debt’ can actually be met at any time because the government can ‘create’ the money to do so. But as always the limiting factor is controlling demand in relation to the capacity of the economy so as not to allow dangerous levels of inflation.

MMT’s explanation is that the sale of government bonds is primarily a means of controlling interest rates: this relates to the overnight commercial bank reserves placed with the central bank but I won’t attempt to explain how that works. (This interview with Bill Mitchell for the Harvard International Review provides an explanation and also a good summary of MMT.) A secondary reason is that banks, financial markets and the private sector generally, desire government bonds as a safe haven to park money. Here in Australia, that became obvious during the Howard/Costello years when the government paid down its debt and saw little need to make new bond issues but the private sector complained and the government had to issue more ‘debt’ even though it had no debt: that fact alone gives credence to the MMT argument.

Although the approach is called Modern Monetary Theory, it places more emphasis on fiscal policy. Bill Mitchell writing on the current economic problems said, ‘until we stop relying on monetary policy and restore fiscal policy to the top of the macroeconomic policy hierarchy, nothing much is going to change’. Mitchell argues that governments have been using the wrong approach to overcome the current economic stagnation affecting many countries:

It is not that they have run out of ammunition. They have been using the wrong ‘ammunition’. For example, trying to drive growth with low or negative interest rates failed to work because the lack of bank lending had nothing to do with the ‘cost’ of loans.

It had all to do with the dearth of borrowers. Households, carrying record levels of debt and facing the daily prospect of losing their jobs, were not going to [start] suddenly bingeing on credit again.

Business firms, facing slack sales and a very uncertain future, could satisfy all the current (low) levels of aggregate spending in their economies with the existing capital stock they had in place and therefore had no reason to risk adding to that capital stock.

In the MMT model, the remedy to many economic problems is fiscal stimulus not austerity which only exacerbates the problems. And as a sovereign issuer of currency the government always has the capacity to provide such a stimulus when there are under-utilised resources in the economy.

Using fiscal policy, and the knowledge that governments can spend as much as they wish, limited only by available real economic resources and inflationary impacts, MMT suggests that the real issues are social policy issues. The debate should not be about ‘debt and deficit’ but what we as a society wish to achieve, wish to become, and, within the limits mentioned, governments do have the capacity to meet those goals. For me that is an important outcome from MMT, not just that it offers a new economic approach but that it offers scope for a new policy and political approach. To that extent, it does allow space for people by creating an economic approach that recognises social policy goals are of critical importance and the ability to achieve them is not so limited or proscribed as it is by existing neoliberal economic theory. For that reason alone MMT deserves more attention.

Next week, in the last of this four-part series, I will consider whether governments are ready for the coming economic and social changes.

What do you think?

Can MMT really change government thinking and overcome current neo-liberal approaches, not just in government but in Treasury?

Will it take a new generation of economists before MMT is accepted? Will that be too late to help the people?

This article was originally published on The Political Sword

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  1. diannaart

    Loving this – am beginning to get it. Maybe.

    “and the government surpluses are actually reducing the money supply” – it is money no-one is using, therefore, stultifying or even damaging to the economy, right?

  2. Troy Prideaux

    Thanks for the detailed explanation of the nuts and bolts of MMT. It’s school of economics I’ve been curious about since the exchange in John Kelly’s inter-generational debt piece a couple of months ago. I still haven’t fully rapped my head around it. I’m under the impression that it ideally relies on a full scope of levers to control inflation, employment, economic growth etc? ie. still utilising interest rates as a mechanism of controlling inflation and growth but with a greater emphasis on fiscal stimulus that can be funded with fiat money if needed. I’ve heard people like Warren Mosler mention that taxation should be the “thermostat” to control the temperature in the room (an analogy to inflation in an economy) but I would imagine that taxation control alone is not reactive enough (takes time to adjust rates etc) to deal with surges in inflation/deflation or growth?
    Another point: does MMT accept that money can also be essentially created in the private sector and does it consider that finance and debt is such a significant component of the private sector? Take the GFC for example, billions of dollars which were created by the private sector via property speculation and irresponsible financing suddenly vanished into the ether when the values in such assets crashed?
    None of that is questioning the validity of MMT, but my greatest concern about MMT is the power it can provide governments – particularly to (a) potentially recklessly spend for the sake of their own political interests and (b) potentially provide too much fiscal authority for governments to avoid economic crises that might be essential for economies with corrupt political systems – eg. where financial regulation and scrutiny (say) have been compromised considerably to the point of providing major structural faults that need political leaders to be forced into fixing (or at least be given the political mandate to fix) that can often only come with a good ol’ crisis.



  3. jimhaz

    [What do you think?]

    Not that I’d know, but my view is it is an absolute can of worms that would lead to disaster long term due to the non-discipline of pollies in the political cycle.

    We don’t actually have an unemployment problem – we have an excessive immigration problem.

    If any conservative gov used MMT, all they would do would be to increase immigration levels, if any progressive gov used it they would spend it on non-income producing jobs, and we’d end up with a no win situation. It would also cause wage rises in income producing industries.

    I know it to be a false theory simply as everyone would now be using it were it not. There appears to be nothing actually inventive or clever about the theory. At best it is theory for a rainy day – not even just recessions – but a deep recession.

    That said, I’m not convinced the US Quantative Easing is more or less the same thing, so it might not hurt to get on the same bandwagon.

  4. diannaart

    I agree with Jimhaz right up to concern at the level of integrity MMT would require of our politicians – particularly the right-wing, but anyone with a ‘born-to-rule’ mindset or sense of entitlement – Dastyari.

    And then we depart ways.

    Unemployment rates are the result of many things – immigration being the very least of our problems – I would put employer exploitation of 457 visas before any immigration ‘problem’.

    Many full-time permanent jobs have bee reinvented as part-time casual. Many people are working two or more jobs just to stay afloat because wages have not kept pace with living expenses. The closure of much of our manufacturing, the threat mining poses to agriculture, the threat mining poses to tourism (Great Barrier Reef…), the lack of governmemet investment in burgeoning new technology such in the renewable, recyclable, sustainable technology.

    Lower income people can no longer afford to go to Uni, our trade schools are mostly closed. Opportunities for training and education are limited for the middle class and down. None of this has anything to do with immigration and everything to do with a government governing for a minority of wealthy elites.

  5. nexusxyz

    MMT is marginally better but will fail like all other economic models. The thing that determines ‘economic wealth’ is the acquisition, manipulation and management of technology to generate ‘competitive’ outcomes . Only investments in technology that generate value are worthwhile. Printing money without taking into account the ‘constraints’ of the earth is doomed and will generate tens of billions in mal-investment.

  6. Harquebus

    MMT won’t save us any more than any other mumbo jumbo economic theory. It is a cock’n’bull wish made up by those who think that we can extend even further into the unsustainable by replacing energy per capita with increasing amounts of currency and debt per capita. Ha! Good luck with that.

  7. Kaye Lee

    There are reasons why the RBA is a (quasi) independent body. Politicians with no checks is a truly scary prospect.

    That is one of my real problems with MMT – they seem to suggest that the RBA is an arm/tool of the government and hence the government can just create money. That is not the operational reality. The RBA makes their own decisions and if the government disagrees, it is the Governor-General who may determine the policy to be adopted by the Bank. This has never been done.

    I also wonder about the effect on the exchange rate?

    MMT could work if we changed some rules and elected people with integrity and an ability to prioritise on the basis of expert independent advice, but would you trust the current lot to understand when and where money should be spent?

    Despite budgets from hell, efficiency dividends, and savage cuts to health, education and welfare, the defence budget has seen large increases every year and they proudly announce they will be spending $195 billion over the next ten years on defence materiel above and beyond the defence budget which they want to make 2% of GDP regardless of need. No wonder we are buying submarines, fighter jets, tanks, helicopters, patrol vessels, supply vessels etc etc with basically all of the money going to foreign companies – have to use that cash somehow since we aren’t at war and don’t look like being.

    It’s a great idea – pity it would rely on politicians to not abuse it.

  8. diannaart

    MMT could work if we changed some rules and elected people with integrity and an ability to prioritise on the basis of expert independent advice, but would you trust the current lot to understand where money should be spent?

    This is my misgiving also.

    I am beginning to understand how checks and balances could be used to prevent runaway inflation. By ensuring the government has specific uses for the money allocated such as for infrastructure, education, health – anything that can be given a $ value – and this can also include the environment, be it protection and/or restoration work -such as mining – in fact by placing $ value on damage we can seek restitution… yeah, I’m dreaming.

    But, we can’t trust government with the current system and MMT is very open to …. creative accounting.

  9. Harquebus

    Not to mention the very real push for a cashless society. Create the virtual currency from nothing, force everyone to become a bank customer, restrict what can be bought and sold and then steal levy what we don’t spend through negative interest rates.
    Brilliant! If you own a bank.

  10. Matters Not

    KL, re your comment:

    There are reasons why the RBA is a (quasi) independent body. Politicians with no checks is a truly scary prospect. That is one of my real problems with MMT – they seem to suggest that the RBA is an arm/tool of the government and hence the government can just create money

    Correct me if I am in error but your central objection seems to be in the ‘political’ domain (the who is driving the bus narrative). Are you suggesting that MMT’s greatest ‘hurdle’ lies within the political ‘power’ structure? And not with the (rational economic) logic of the argument as to how the ‘whole thing works’ theory?

    While I have due regard for that point of view, I also entertain the notion that the existing RBA Board also proceeds on certain assumptions that are ‘speculative’ and the appointment of those ‘speculators’ is certainly not without political bias.

    (Shit. If only ‘constructing reality’ was without a ‘theoretical’ base, then it would be so much easier. I think).

  11. paulwalter

    It explains the nature of the worm sucking the innards out of democracy, perhaps typified in the now viral exchange between Sen, Warren and the Wells Fargo executive Stumpf, a permutation of social loss private gain which is a rigged game.

    The Meltdown demonstrated that if big capital is big enough it will not be held responsible for its debts as the oligarchs play their roulette amongst themselves so it starts to appear to be a mechanism for an imposition of ancien regime feudalism, if anything.

    Rather, Capital will be given an opportunity to dissolve its debts on the next upswing of exchange value, while the sucker masses sweat out the consequences.

  12. Kaye Lee


    I, like everyone else, am trying to get my head around this and there are quite a few things that still bother me.

    On the RBA board, I would like to see appointments of such positions taken out of the hands of politicians.

    On MMT, I still struggle with a few things they say like money to the government is “destroyed” and money spent by the government is “created”. I can understand it in a conceptual sense but I can’t in an accounting sense.

    I also don’t get it when they say taxes make a demand for our currency. Bills are paid by key strokes so I could pay a bill from my account in America and the bank would just apply the relevant exchange rate.

    I am deliberately looking for problems, not because I don’t agree with the idea, but because I want to be convinced.

    As I was reading the article I started thinking about what you would spend money on and I have no faith that a Coalition government with an open cheque book would choose the right things. Pork-barrelling gone mad more likely. Renting very expensive offices from donors, buying fleets of BMWs, private jets flying all over the country, consultants making a fortune, arms manufacturers rubbing their hands in glee …..oh wait – they already do all that when we have a “budget emergency” – imagine giving them carte blanche. Do you trust them to spend the money on long term investments like free education or job guarantees?

  13. Don A Kelly

    The image at the top of this well explained article is the guts of the national accounts sectoral balances.
    The basic Income – Expenditure Model in macroeconomics: Sources of Spending and uses of income Produced.
    (G-T)+(I-S)+(X-M) = ZERO.
    Phil Holden, Headmaster at St. Lawrence College, Athens provides a very well presented Youtube video that explains how an economy works,
    The National Accounts Sectoral Balances Equation says that total private savings (S) minus private investment (I) has to equal the public deficit (Government Spending, (G) minus Taxes, (T)) plus net exports (Exports, (X) minus Imports (M)). All these relationships hold as a matter of accounting and not a matter of opinion. This is also a basic rule derived from the National Accounts and must apply at all times.
    If the private domestic sector (households and firms) spends less than it earns (tend to save) and the nation runs a small external deficit, ie. Imports are greater than Exports, then the government fiscal position will always be in deficit at all levels of national income.
    If the nation is running a current account deficit, ie. Imports are greater than Exports, which is accompanied by a Government Sector Surplus of equal size, the the Private Domestic Sector will always be spending more than it earns, (Credit Card spending).

  14. Ken Wolff

    G’day everyone

    Sorry I’m late to this but I had a busy day yesterday. Thank you for your comments.

    I am not an economist and like many of you am struggling to get my head around MMT. Researching and writing this article was as much to help my own understanding but I thought it may help others as well. Since writing the article I have been reading more about ‘sectoral balances’ which as Don points out is central to the MMT equation. It should be treated as a ‘primer’ as there is so much more that could be explained.

    Many of you seem concerned that under MMT a government would have open slather to spend. That’s not quite true. A government would certainly have more capacity to spend but there are still limitations, still economic checks and balances. As I pointed out, MMT does put a lot of emphasis on inflation and that if a government continues to spend when an economy is already running at capacity then it may well create hyper-inflation, obviously pressuring government to then reduce spending and the RBA to increase interest rates (which would not be in a government’s political interest). So as Troy said in an early comment, there are a number of levers involved (I did not have time or space to go into a more thorough explanation). Much depends on the ‘aggregate demand’ in the economy and that is what needs to be taken into account when the government is considering its spending – if demand is low (or, in other words, there are under-utilised resources), more can be spent but if aggregate demand is pretty much matching the production of the economy then money cannot be spent without creating dangerous inflation.

    Kaye: I too struggle a little with the concept that money taken in taxes is ‘destroyed’ but I did read an explanation of the idea that money arose from the need to pay taxes. MMT does not say that is definitively how it happened but that it is a logical explanation of the creation of money in society. So your example of being able to pay an international bill on the internet is not entirely relevant. Yes, we can do that now but the (logical) argument is that money was created initially to allow taxes to be paid and still has a strong element of that.

  15. Harquebus

    As is always the case in economic equations, externalities are never factored. That is things like, pollution, destruction of the environment, collapsing fish stocks etc. The things that we pay for in other ways which, do not appear on any balance sheet.

  16. Kaye Lee


    I have read so much about MMT that I find myself getting bogged down in statements like “money was created to allow taxes”.

    I am trying to step back from the equations to a broader line of questioning. More about the practical implementation I suppose.

    I understand and accept what you say about unused capacity in the economy. My point (today anyway – I have harassed MMTers for years with questions) is that, even under the current system, the government could be spending to utilise those idle resources but they choose not to. MMT rather relies on the money being spent on productive things but that isn’t what our politicians do, particularly not conservative ones. If the money is spent on the wrong things then we risk getting no social benefit, inflation (even when under capacity), and devaluation. Look at our current crop of politicians – would you trust them to act wisely?

    You say they would be pressured to reduce spending if hyperinflation occurred – they are now with inflation very low. You say that the RBA would increase interest rates which would be politically bad – they tend to do that if there is close to full employment anyway.

    I know I am using a scattergun approach here. I am annoying when I am trying to understand something.

  17. Troy Prideaux

    I guess Ken’s point might be that the central issue here is the ideology. Currently (as you mentioned) we’re in an economic environment of low inflation and reasonably strong currency. Say it’s below the RBA’s comfort zone – they are obliged to act by cutting interest rates. This should in theory (by the monetary economists playbook) make it more attractive for the private sector to invest in either higher productivity or capital growth or some kind of higher earnings capacity. However, that’s assuming that banks pass on the finance discounts and it also assumes they’re willing to finance investments in these (risky) areas which is a questionable point. What there’s no debate about is the effect it has on housing prices which can have both positive and negative social consequences.
    On the other side of the ideological coin is another approach: say the government thought, okay… inflation is low, the dollar is reasonable… what if instead of lowering the RBA’s cash rate (which I know is out their control) we pump (invest) some fiat money into the economy into programs like Gonkski, public infrastructure, NDIS, sickness prevention, Childcare support, Training etc. There’s a fair argument to suggest that this would be safer or surer bet in future investment than the monetary method that’s been relied on for decades now and is starting to show signs of outliving its usefulness.
    It’s important to point out that the use of new (fiat) money to pay for such investment should only be utilised when inflation rates are low enough thereby leaving you with more of a Keynesian approach in other times which we know also has limits to usefulness (stagflation).
    Of course, this leaves you requiring a mechanism to lower inflation should it exceed comfort levels and taxation must do the heavy lifting there – otherwise interest rates would keep rising. How it could be implemented over a long term effectively – I’m not sure. Come to think of it, I’ve confused myself 😛

  18. Kaye Lee

    I can accept all that Troy but we could be investing in Gonkski, public infrastructure, NDIS, sickness prevention, Childcare support, Training etc now but our government chooses not to. They would rather spend hundreds of billions on war toys and keeping asylum seekers away and paying polluters.

  19. Ken Wolff

    Kaye and Troy

    Thank you, and especially you Troy for your response to Kaye’s initial questions.

    It is largely about ideology because the current neoliberal economic approach (under which almost all Western governments operate) places undue emphasis on debt and, as pointed out early in the article, operates in many ways as though the gold standard was still in place. It used to pay a lot more attention to the ‘money supply’ (liquidity) but over the years that was reduced to controlling interest rates.

    There is no valid reason why our government could not spend more on useful infrastructure projects except that they believe in the neoliberal mantra of supposedly avoiding ‘debt and deficit’ and Abbott here turned it into a political slogan so that no-one is game to go against it. So a lot of politics comes into this as well.

    I will give you a quotation (that I actually use in the next (last) article in this series) which summarises the political impact of the neoliberal approach:

    “Indebting government gives creditors a lever to pry away land, public infrastructure and other property in the public domain. Indebting companies enables creditors to seize employee pension savings. And indebting labor means that it no longer is necessary to hire strikebreakers to attack union organizers and strikers. Workers have become so deeply indebted on their home mortgages, credit card and other bank debt that they fear to strike or even to complain about working conditions.”

    That was written about the US but I think you will also see how much it applies to Oz.

    In summary ideology and politics are driving the current approach. The real economic debate should be about whether the neoliberal monetary approach or the MMT approach is describing the real world and in that regard, for example in relation to interest rates, the MMT explanation seems to better describe what is currently happening than the neoliberal monetary theory.

  20. Bacchus

    Yes Ken, that last sentence hits the nail on the head. In general, MMT doesn’t offer policy solutions (the exception being the Job Guarantee) but seeks to describe how the economy actually works.

    From that starting point, politics must work out how to best use what is revealed with the MMT approach. Kaye Lee points out some of the potential hazards that need to be negotiated before this can be brought into our politics, but the problems are not insurmountable.

    Perhaps it needs an independent body to oversee the use of fiscal policy, as the RBA oversees monetary policy? A combination of an Infrastructure Australia type body with a branch of Treasury to keep a close eye on how close to the ‘productive capacity of the economy’ we come and to advise of the range of correct adjustments to make.

  21. Harquebus

    “In general, MMT doesn’t offer policy solutions… but seeks to describe how the economy actually works.”
    From this, can I assume that presently “how the economy actually works” is not known?
    I’ve been saying for years now that our current crop of economic policy wonks don’t have a clue.

  22. Bacchus

    I assume that presently “how the economy actually works” is not known?

    Your assumption would be partly correct – mainstream economic models need to do cartwheels and backflips to attempt to explain events in the economy. They need artificial constructs like NAIRU (non-accelerating inflation rate of unemployment) to support the prescribed size of the unemployment pool they think stops wages breakout.

    MMT just explains how it works – I think many within finance departments, treasuries and central banks understand how it works, but doggedly maintain the status quo because they fear the effect of the truth in the hands of politicians (as Kaye Lee mentioned earlier).

    A couple of examples from recent times – mainstream economic theory says that when government ‘borrows’, it ‘crowds-out’ the private markets causing interest rates to rise. Lo & behold, as soon as governments started going deeper into ‘debt’, interest rates dropped dramatically!

    Likewise, the mainstream said governments spending into the economy by running large deficits would cause higher and higher inflation – once again, exactly the opposite happened; governments are unable to get anywhere near their ‘desired’ rates of inflation. Did the mainstream change their thinking? Of course not – they tied themselves in knots trying to explain why their models didn’t work…

  23. diannaart

    I can see how the federal government uses a form of MMT already – no gold standard to see here, we have had a fiat currency for decades.

    All we need to do is find a watchdog to ensure the government spends on and for Australia and not just themselves and wealthy vested interests.

    Easy peasey.

  24. Ken Wolff

    Bacchus: thank you for your explanations of areas where MMT certainly seems to provide a better explanation of current economic circumstances.

    Harquebus: you may also be interested in this piece ‘Time for a new economic model’ which describes the initial failure of Keynesian economics to explain the stagflation of the 1970s and how Milton Friedman’s monetary theories and supply-side economics are failing to explain the current economic woes. What that leads me to (like you) is a general view that economists are not very good at explaining the real world – or as an old joke goes, ‘for economists, the real world is an exception’!

  25. totaram

    For those who are worried about neoliberals using MMT to spend on their favourite toys and friends:

    That is what they do anyway! Look at the history of what Ronald Reagan did. The point is that the neoliberals (those who control the show) know that MMT describes how the economy actually works, but they don’t want to admit that because the current neoliberal mumbo jumbo (based on outright untruths) is used by them to justify their “trickle-up” policies like “budget repair”, “austerity and “belt-tightening” etc. You only have to see how the current govt. talks endlessly about “budget repair” while happily setting aside billions for all their favourite items, like tax-cuts for the big corporations, submarines and fighter jets (all made overseas). The “budget repair” mantra is used to justify cuts to welfare, health, education and infrastructure. Once you accept the MMT description of the macroeconomy as the real deal, “budget repair” is seen for the nonsense that it is, but we can’t have that can we?

    If people accept that MMT describes how the economy actually works, all this talk of “debt” (notice how it is often not specified whose debt it is) would be meaningless. There is govt. debt and private sector debt, and the two are completely different animals. The three sector financial balance identity (the one in the photo) tells us how they are related, and this identity holds irrespective of what kind of currency you have. It is just accounting arithmetic, which says that if I have a surplus, someone must have a deficit.

    The neoliberals would like to focus on govt. debt (when they say “debt” in general, it is always govt. debt they come back to). This deflects attention from Private Sector debt, which is the real problem, but that is where all the banks make their money – the more the better! The govt. debt is not really a problem if it borrows in its own fiat currency, because it can never default. And if the private debtors default the govt will bail the banks out, (using its fiat currency) as happened in the GFC. So it is all working very well, and don’t let MMT rock the boat please, and you will therefore find well-funded attacks on MMT in the blogosphere and even from academic economists. After all Milton Friedman was nicely co-opted into the neoliberal game and became one of its chief standard bearers. You will notice that most “attacks” on MMT are just opinion – no data, no numbers, no actual analysis. The text books (Mankiw of Harvard) have a description of how banks make loans, which is completely mythical, but that is what gets taught in the Universities, and even propagated further by many economists and most notably, economics commentators in the MSM.

  26. John Kelly

    The main objections to MMT that I have encounted, have stemmed from misinformation. Every article I have written on the subject has been criticised on the grounds of simply, “printing money”. Antagonists seem unable or unwilling to advance beyond this misunderstanding. In fact we already live in an MMT world. We just don’t acknowledge that debt issuance is nothing more than providing a short term deposit facility. The money received is not used to finance net government spending. It sits in a multitude of accounts at the RBA. ALL GOVERNMENT SPENDING is newly created money. A lot more could be spent without issuing bonds. There is an ideological logjam with politicians and classical economists who can’t bring themselves to reverse current “household management” thinking.

    MMT, in fact, has a moral dimension that says every person who wants a job should have one. The inflationary argument is a false one. We have always had inflation, but we have rarely provided a job for everyone who wants one. The NAIRU is a neo liberal construct to maintain a pool of unemployed. It is a purely selfish construct that serves private interests well but does not serve the nation well.

  27. Harquebus

    Okay Ken.
    I read the article.

    “Energy” did not occur even once and “growth” did thirteen times. Any ideology or policy that incorporates growth is doomed to fail. Any society whose future is based on having a constant supply of finite resources is, just like the economic systems so far designed, also doomed.
    Growth, the philosophy of cancer, is only required by governments so as to reduce the debt/GDP ratio and increase taxation while inflation, another unnecessary, erodes savings and reduces purchasing power. Gotta keep them workers poor and coming back to work while enriching the upper crust.
    Those with first access to newly created currency are able to purchase assets before the resulting price increases from expanding the currency supply take effect.

    I do not have any respect for economist, financial wizards and other money eggspurts nor their modern monetary unicorn shit theories. They are wannabe respected dunces whose equations and theories do not factor physical limitations nor external costs.

  28. Kaye Lee

    “The money received is not used to finance net government spending. It sits in a multitude of accounts at the RBA. ALL GOVERNMENT SPENDING is newly created money.”

    See that just isn’t true. Money is deposited in and withdrawn from government accounts at the RBA. You really lose me when you say stuff like that because it is NOT how it currently works.

  29. Harquebus

    I am sure that MMT advocates have their data and I would be interested is seeing some.
    Has MMT ever been implemented anywhere? If not then, one can not complain when someone else expresses an “opinion” about what is after all, just a “theory”.

  30. Jennifer Meyer-Smith

    Thanks Ken,

    for the article and impetus to this enlightening discussion.

  31. Kaye Lee


    ” Workers have become so deeply indebted on their home mortgages, credit card and other bank debt that they fear to strike or even to complain about working conditions”

    That is exactly what Marx said was the basis of capitalism.

    Marxists see the conflict between the bourgeoisie (those that own the means of production) and the proletariat (those who sell their labour) as crucial to the maintenance of capitalism. Its function is to create an obedient, docile, uncritical workforce who will work to support the upper-class’s lifestyle and the economy. Keeping wages low, or debt pressure high, means workers will be less likely to complain or make demands. As workers struggle to provide their families with all the temptations that a capitalist society offers, they become far less likely to risk their employment, and less able to improve their situation.

    The demonisation of unions is very deliberate and has nothing to with corruption and everything to do with disempowering the labour force who become individuals with no collective bargaining power.

  32. John Kelly

    Yes Kaye, it IS HOW IT CURRENTLY WORKS. Yes, all that you say about deposits and withdrawals is true, but that is purely cosmetic. That keeps accountants happy. The I’s are dotted and the T’s crossed. But, beneath that a simpler principle is in play. That principle says that no matter how much money is spent, the RBA will NEVER bounce one of its own cheques.

  33. Kaye Lee

    Not according to the RBA

    It is not possible to ensure that the Australian Government’s need for funds are exactly matched day-by-day by issues of securities to the market. For one thing, issues generally occur only weekly. To overcome this mismatch between daily spending and financing, the Treasury keeps cash balances with the Reserve Bank that act as a buffer. The Reserve Bank also provides an overdraft facility for the Government that is used to cover periods when an unexpectedly large mismatch exhausts cash balances. The agreement between the Treasury and the Reserve Bank places strict controls on access to the overdraft facility, as well as imposing a market-related interest rate on the facility. The overdraft is used infrequently, generally to cover unforeseen shortfalls in cash balances, and is extinguished at the next Treasury Note tender.

    For “Overdraft”, read “you are always covered because we can create as much as you need”

  34. totaram

    Kaye Lee:
    “See that just isn’t true. Money is deposited in and withdrawn from government accounts at the RBA. ”

    I am prepared to accept that this might be true. In fact from my investigations, I suspect this is what actually happens. Perhaps what happens in the US is what is being referred to in other descriptions.

    The point is, does this really change anything? This is just accounting. Whether the taxes go into a black hole and all govt spending is issued anew or whether there is an account where the taxes go along with the proceeds from bond sales, and that is then used to “fund” govt spending. It is similarly an accounting requirement that all govt. deficits be funded by issuing bonds. Do those bonds have any specific assets against which they are issued? That is what would happen if a corporation issued bonds. I haven’t managed to check this, but my guess is that there are no specific assets against which these bonds are issued. The Commonwealth of Australia is the asset which backs these bonds, and that tells you all you want to know. Namely, the issuance of bonds is no different from the issuance of fiat currency. The only difference: the bonds pay interest. It is similarly “the Australian Commonwealth” which backs the fiat currency issued by the RBA and that is operationalised by the levying of taxes that can only be paid in this same currency, the AUD.

    Finally, consider this simple thought experiment: the govt runs balanced budgets for a decade, so every dollar spent by govt. is a dollar obtained as revenue (taxes mostly). Thus the number of fiat dollars in the economy remains fixed, say 1 trillion. Assume that in this decade the GDP of the economy doubles, to two trillion. Do you see any problem?

  35. Kaye Lee

    I agree with most of what you said totaram until this bit….”that is operationalised by the levying of taxes that can only be paid in this same currency, the AUD”. If I need to pay a bill to another country I just pay it from by bank account and they use the currency exchange to convert it to the correct amount of foreign currency. It is all just key strokes.

    I don’t have an answer to the last paragraph.

  36. Bobbette McDonough

    Thank you for your in puts I have found them to be very interesting and I have learnt quite a bit from them ,

  37. Matters Not

    totaram, re your last paragraph. So the ‘value’ of the economy doubles. More bridges, houses, roads (physical assets – and I won’t go into patents, intellectual advancements and the like) so it stands to reason that more ‘dollars’ ( perhaps double) need to be created to represent the increased value? Is that what you are arguing?

  38. Harquebus

    “Assume that in this decade the GDP of the economy doubles, to two trillion. Do you see any problem?”
    Yep. In order to maintain that level of growth, the GDP will need to quadruple from current levels in following decade.

  39. Kaye Lee

    “For “Overdraft”, read “you are always covered because we can create as much as you need”

    They COULD but they don’t – any temporary shortfall is made up by bond issuance and the RBA charges interest until it is made up.

  40. Iain Dooley

    MMT is tremendously simple. Instead of everyone saying they are trying to wrap their heads around it I would recommend changing the language to trying to unwrap conventional economics from around your head so you can see how simple and axiomatic these statements truly are.

    There is so much to respond to in these comments and I don’t have time to do it just now but will hopefully get to it on Sunday. Each of your concerns deserves a detailed response and it’ll take a while but it will be worth it.

    Hopefully you all get notified or come back to view those responses but even if you don’t I think it is important to record them for future visitors so they don’t end up thinking MMT is some kind of wild crackpot mumbo jumbo that is so crazy it just might work, but rather the most accurate description we have of how all successful money systems have worked for at least 4,000 years.

  41. Ken Wolff

    G’day people

    You have certainly been having an interesting discussion while I’ve been away from my computer. Sorry I missed it in real time. Just shows you don’t really need me here!!

    Kaye: to go back to your comment @ 8:34. I think there is an historical explanation. From WW2 until the 1970s we had Keynesian economics and many governments following a social democratic approach, so wages were rising in real terms (and the gap between rich and poor was actually falling) and governments were more involved in social infrastructure – the British nationalisation of the health system was a classic example. In that sense, I see the neoliberal emphasis on debt as a response, a new way to put workers back in their place (mortgaged to the hilt, spending on credit) and also to stop governments pursuing more socially responsible policies. In your terms, it was the bourgeoisie reasserting control – they had not lost total control in the previous decades but their control had been reduced.

    And your comment @ 9:40. An overseas transaction is not paying taxes – you still need $AU to pay your tax. The same goes for importers and exporters. They are using foreign currency and $AU in their transactions. Many exporters sell in $US and then convert that to $AU here in Oz (which is why they prefer a low $AU). But none of that changes the need to hold $AU to pay Australian taxes. As to just requiring keystrokes, that is also how much money is moved around between Treasury, the RBA and banks.

    totaram: thank you for your insightful comments. They are extremely helpful – at least they have also helped me better understand MMT and I hope they have helped others.

    John K: welcome to the ‘debate’. I will admit that I expected you may have entered earlier. MMT is a hard concept to grasp, perhaps because we have had four decades of neoliberal and monetary control of the debate and so much emphasis on ‘debt and deficit’ and ‘household budgets’ and it will take time for people to see that there is another way of understanding the operation of the economy. I think Bacchus’ approach is one that MMT proponents should be adopting – namely explaining how MMT is better describing what is currently happening to Western economies than monetary and neoliberal theories. As I said in an earlier comment, I think that is the debate we need to be having – which theory better explains the real world.

  42. Ken Wolff

    Iain: sorry I didn’t include you in my previous response but it must have come in while I was writing. I will certainly look forward to your comments. And I agree that the issue of describing the real world should be central to this debate.

  43. Don A Kelly

    People need to understand modern monetary principals and its application to macroeconomics, then they can know if the politicians and media are being truthful.
    Fundamental economic facts: Spending = Income = Output. The spending that creates output creates employment.
    There’s no such thing as creating economic growth through spending cuts. There’s no such thing as growth friendly austerity. Neoliberals believe this is not true. What they do is preserve a problem of unsustainable private debt and say that it is unsustainable public debt that is the problem.
    There is nothing ‘leftist’ about applying the basic rule of macroeconomics – that spending drives output and employment which generates growth. What the government does with the spending might reflect its values (left or right) but either end of the political spectrum cannot avoid that basic rule.
    I would like to see a debate between Scott Morrison, Chris Bowen and Prof. Bill Mitchell.
    One of John Maynard Keynes’s favourite quotes: “The difficulty lies not in accepting new ideas but in escaping from old ones”.
    “We cannot solve our problems with the same thinking we used when we created them……Albert Einstein.

  44. Ned

    MMT is not a new economic theory, it is a description of how the monetary system actually works. As someone has already explained in these comments, there have been unnecessary accounting additions made to the system to keep the neoliberals happy and confuse everyone else. If we rid ourselves of these neoliberal conventions we open the policy space to deal with some of the major problems we have in todays economy.

    Before you use flawed neoliberal economic thinking to justify your position, you will need to note that there is a huge debate in economics right now and MMT like thinking is about to change the way we do economics, in one form or another.

    One of the biggest misconceptions people have of MMT is this. If we allowed ourselves to deal with the truth, that sovereign issuing currency nations like Australia were not restrained with their spending it would lead to chaos and inflation. However, even a quick glance at the history of hyperinflation would show this not to be the case. Hyperinflations are caused by a) nations having their currency pegged to gold or another currency and b) the destruction of their productive capacity so money floods the system and their is no production to absorb it, therefore short supply goods (no production) become very expensive (too much money) see Zimbabwe, Weimar and Argentina for examples of all these.

    This would not be possible in Australia unless the government kept spending once full productive capacity had been met. “Ah, but what’s to stop ill disciplined pollies from just spending will-nilly”. Taking the focus off GDP and focusing on unemployment and inflation for a start. If these were the key metrics politicians could rightly refuse to spend money because unemployment was 1-2% and inflation was 5 or 6%. If they didn’t, then the opposition could launch a genuine campaign that we were living beyond our means, rather than the ridiculous pronouncement they make now when there is so much more capacity to solve problems like poverty, youth unemployment etc.

  45. Kaye Lee

    “you still need $AU to pay your tax.”

    I do not understand this at all. Why isn’t it just keystrokes as basically all transactions are? When I pay any bill, even to the government, I just do it on the computer – the money goes out of my account and into the account I designate, even if I am paying to another country – the bank just works out how much to debit my account to cover the other currency bill using the exchange rate. I personally don’t have to have US$ to pay a US bill. Why are taxes different to any other bill? Why couldn’t an American wishing to make a payment to the government just do exactly the same thing? Or are you saying the banks have to have electronic stocks of other currencies and if so, why? I don’t get it.

    Once again, we become embroiled in minutiae.

    I have so many problems. Everyone keeps saying that MMT is an explanation of what we do now rather than a suggestion of what we could be doing differently. I don’t see it. They say accounting doesn’t matter – that it is purely cosmetic – but accounting is the numerical reconciliation of where funds came from and where they go – you cannot talk about spending and revenue without accounting.

    The way I see it is that we could, instead of issuing bonds to cover deficit spending, just electronically credit an account at the RBA to cover spending on productivity enhancing initiatives. We don’t have to trade in bonds to influence overnight cash rates – this could be achieved by other methods – possibly by the RBA offering interest on short term deposits or even legislation/regulation of some description.

    I understand the inverse correlation between public and private debt and I think that is something worth stressing when governments talk about reducing spending in an underperforming economy.

    I still have my previously mentioned concerns about politicians having the control of an unlimited treasury – I don’t trust them to invest wisely. You talk of rising interest rates being a check on spending but, as I mentioned before, near full employment usually leads to interest rate rises.

  46. diannaart

    Earlier I suggested the need for a politician “watchdog” – not sure if it was this topic or on another MMT discussion.

    Given that our current monetary system is as arbitrary as opponents of MMT claim MMT is, before moving towards any reform, we need to establish a method to ensure political accountability and given the largesse being taken, we need it urgently.

    We need checks and balances applied to politicians to ensure they are governing for their electorate and in the national interest of well-being of our population and the environment.

    Some checks have been suggested such as, unemployment rate – this can also include the number of full-time jobs being created in industries that will either remain viable into the future, such as IT, and in industries which reflect a sustainable approach to doing business.

    Other checks include; how well governments are monitoring the reduction of pollution by industry, attention to transport requirements, education, health – in other words what governments are supposed to do.

    There are far more markers by which governments must be held to account – instead of an avalanche of party grandstanding at election time – we need to see evidence of investment into the betterment of Australia – not just cries of “vote for me, just coz”.

  47. Harquebus

    “Hyperinflations are caused by a) nations having their currency pegged to gold…”
    Can you provide some examples? I am still searching.

    “By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.” — John Maynard Keynes

  48. Don A Kelly

    Kaye Lee
    “you still need $AU to pay your tax.”
    When Pres.Nixon abandoned the ‘gold standard’ in 1971, Australia began issuing its own ‘fiat’ currency as the basis of the monetary system which is not backed by anything having no financial constraints at all. The characteristic of fiat currency is that its face value is worthless. It has no value where previously it was backed by gold which had value. Why would we accept a currency that is worthless? The reason we accept it is because governments impose a tax liability on us that has to be relinquished in that currency.The government is the issuer of the currency but it has to get us to accept it and the way we accept it is because it forces us to relieve our legal obligation. The only way we can get their currency is if they spend it into existence first, because they issue it. So, taxation can’t be funding the government spending because we need the government to spend it before we can get hold of it.
    Much of what Keynes wrote in 1936 is out of date.

  49. Ned

    Kaye Lee. This is on the ATO website regarding payment from O/S:

    “Transfer from an overseas bank account

    Contact your overseas financial institution for advice on how to make your payment through SWIFT. The payment must be sent in Australian dollars.”


  50. Ned


    I understand your concerns about growth, however, even without growth, societies still need to feed, clothe and house their populations. MMT provides the policy flexibility for governments to do this. Work needn’t be based around consumption. There is still plenty of labour that is required for the greater good. MMT allows for this to be taken care of.

    “I am sure that MMT advocates have their data and I would be interested is seeing some.
    Has MMT ever been implemented anywhere? If not then, one can not complain when someone else expresses an “opinion” about what is after all, just a “theory”.

    Unfortunately MMT is badly named. It’s not a theory. It is a description of the monetary system as it exists. So in that sense it has been implemented in any country with a sovereign currency. What neoliberalism does is ‘covers up’ the description with veils to make the obvious solutions that can come from the system harder to see.

  51. Ken Wolff

    Cngratulations people. More excellent comments.

    Ned and Don, thank you for your explanations which add to our understanding. Ned, your point about using different metrics as the basis for economic policy decisions by governments is well made. I have made similar comments in previous articles (even without referencing MMT) as it is clear that GDP is an insufficient measure of economic well-being. MMT certainly sees the link between inflation, aggregate demand and government spending.

    I have also read about a ‘liquidity trap’ (but decided not to go into that in the article) and there appears to be an element of that in the current situation in some countries. They have fed additional money into the system (quantitative easing) but the money is not being spent or invested – low interest rates contribute. In those circumstances, monetary policy is ineffective. Another argument, as I see it, for accepting MMT.

  52. Harquebus

    “Unfortunately MMT is badly named. It’s not a theory. It is a description of the monetary system as it exists.”

    Well what the f are we arguing for then? The current monetary system as it exists is not only not working, it is on life support and deserves to die before it destroys everything with it. I can’t understand why anyone would want to support it.

  53. Jennifer Meyer-Smith


    I’m obviously no expert on MMT but someone above has already said neoliberal politicians and Treasury lackeys disguise the benefits of how effective fiat currency could work in the current system. Those idiots are denying the benefits of MMT to operate naturally and for the benefit of us all.

  54. Bacchus

    Exactly Jennifer – the problem is the way the economy is being deliberately misused to support a neoliberal agenda. Understanding how the system actually works opens up possible policy positions that don’t suit the ‘elites’.

  55. Harquebus

    So, if no one really knows how the system actually works and MMT is a description of the monetary system as it exists then, one can only conclude that, either no one can understand the description or it is false.

  56. Jennifer Meyer-Smith

    How did you work that out from what reasonable people are trying to explain to you?

  57. Harquebus

    No one understands the system which, MMT apparently is supposed to bring, an understanding.

    I hate to be picky but, you stated this:
    “MMT doesn’t offer policy solutions (the exception being the Job Guarantee) but seeks to describe how the economy actually works.”
    Now this:
    “Understanding how the system actually works opens up possible policy positions that don’t suit the ‘elites’.”

  58. Jennifer Meyer-Smith

    So H,

    start suggesting how MMT can offer policy solutions that address the needs of the Australian people and the environment.

    The rest of us can see where it can start being applied. I challenge you to show that also.

  59. Harquebus

    That is for the MMT experts to do, not me. Physical limitations and externalities are not factored in MMT.
    I don’t support fiat currencies in any way. They have a habit of ending badly.

  60. Ned


    Let me explain it this way. Suppose you had a motorbike that worked really well, it was better than using a car. However someone decided because it worked well it may be a threat to those who liked to drive cars. So that the bike didn’t become too popular they decided that anyone who used the bike could only half fill it with petrol. MMT describes how well the motorbike works when it is full of fuel.

  61. Ned

    The Job Guarantee is the major policy option that is possible under MMT. For instance, one example is that the government could recruit thousands of out of work people to work on environmental rehabilitation projects that the private sector won’t touch because it isn’t profitable.

    Physical limitations and externalities are not meant to be factored into MMT because MMT isn’t a policy platform. What MMT does do is give you more options. You may decide, for instance that reducing consumption and the way we treat the environment is a good thing or a bad thing. If you decided it is a good thing then you could do something about it if we used our system more transparently by not artificially restricting government spending. Alternatively, if you decided it was a bad thing, the government could set policy agendas that may exacerbate your concerns. However, the way our currency operates is not a factor in these decisions once the veils that neoliberalism has attached to it are lifted.

    Can I suggest most respectfully Harquebus that you need to do more reading on MMT because you appear to be jumping to conclusions based on a lack of understanding of what it actually is.

  62. Bacchus

    Not to mention putting words in others mouths that weren’t there (and take a GIANT leap of warped logic to arrive at).

    No-one, except you Harquebus, has said “no one understands the system”.

    Ned is correct, you don’t seem to have any idea of the subject you’re arguing so vehemently against.

  63. Harquebus

    Excuse me Bacchus. Did I not quote you correctly?
    Do you understand the current monetary system? You must, MMT describes it. If you don’t then, either MMT has failed or you’re not up to it.
    Fiat currencies is what I argue so vehemently against.

  64. Ned

    What is it about fiat currencies that you feel the need to argue against?

  65. Harquebus

    I have done quite a bit of reading on MMT and have always concluded that it is hyperbole. I know and have stated before that MMT does not factor physical limitations nor externalities. Those who say they understand MMT and advocate it do so without factoring the real world. This is why it fails the logic test. The rich resources of old that have provided decades of growth are not there any more so, you’d all better start factoring that or else be prepared pay for the consequences of economically inspired overshoot.

    Physics trumps political and economic ideologies every time as our world is currently demonstrating.

  66. Harquebus

    Fiat currencies are intrinsically worthless, enable the creation of perceived wealth without effort and do not store value over long periods of time. They come, they go.

  67. Don A Kelly

    A Sovereign Government’s finances are nothing like those of households or firms. While we often hear the statement “If I ran my household budget the way that the Federal Government runs it budget, I would go broke”, followed by the claim “Therefore we need to get the government deficit under control”. This is a false analogy. A Sovereign, currency-issuing government is NOTHING like a currency-using household or firm.The Sovereign Government cannot become insolvent in its own currency; it can always make all payments as they become due in its own currency.
    Sovereign Governments don’t need to borrow their own currency in order to spend.
    Australia has been the monopoly issuer of its own fiat currency since 1971.

  68. Harquebus

    How much value has the Australian dollar lost since 1971? But hey, it’s okay. We can prints lots more.

  69. Michael Taylor

    H’, don’t forget that the dollar wasn’t floated until the early 80s. Not sure if it matters though (my economic skills are fairly rusty).

  70. Don A Kelly

    Michael….. One of the main characteristics of fiat currency is that it supports a flexible exchange rate. We haven’t been on a fixed exchange rate since 1983.

  71. Bacchus

    Did I not quote you correctly?

    You quoted me correctly and then proceeded to add 2+2 to get 5!

    MMT doesn’t offer policy solutions (the exception being the Job Guarantee) but seeks to describe how the economy actually works.

    Understanding how the system actually works opens up possible policy positions that don’t suit the ‘elites’.

    The first statement just says MMT is a method of understanding how the macroeconomics of a sovereign, fiat monetary system with a floating currency not tied to any fixed commodity works. Simple.

    The second statement doesn’t say “no-one understands MMT” – it says that MMT opens up policy options for the political class to use. The one advocated by MMT proponents is the Job Guarantee, but even this is further open to how it is implemented. Are the jobs used to clean up the environment? To provide common facilities for communities to use? Something else? The macroeconomic perspective is that idle capacity in the economy is put to work. The microeconomic reality of HOW this is done is an area for policy consideration – what’s the best, most productive way to use the information MMT has provided?

    The other elephant in the room is taxation – MMT says the government doesn’t need to collect tax before it can spend. So what is the purpose of taxation? As Ken points out, this is to do with controlling aggregate demand within the economy to control inflation (macroeconomic perspective) amongst other things.

    So now take that to a policy (macro and microeconomic perspective) level – what COULD you do with that information? Could you, for example, put price on carbon to alter industry and consumer behaviour to cut carbon emissions? Could you incentivise industries to implement strategies that no only cut their pollution, but save them money – make them more efficient? (CEFC anyone?)

    Could our economy and environment be in much better shape now if the Howard government understood how it was harming the economy during the mining and housing booms? What might our manufacturing and tourism industries look like now if some form of taxation had been applied to cool the overheated mining industry? (MRRT anyone?). Would housing be a little more affordable if the CGT and negative gearing incentives to pour money into unproductive speculation had been curtailed early on?

    Come on Harquebus – instead of continually adopting a ‘Chicken Little’ persona, how about you think in terms of solutions for a change?

  72. Bacchus

    Harquebus is talking about inflation, as if inflation didn’t exist under a gold standard (or Bretton Woods). The mistake he makes is to assert that ‘printing money’ is inherently inflationary – it’s not. Inflation is caused when you have too much money chasing too few goods and services. While the economy is operating at below its productive capacity, inflation isn’t an issue.

    The mainstream uses blunt force to attempt to control this (NAIRU) – keep a pool of people unemployed (and underemployed) to limit wage increases and then demonise them as ‘leaners’ or ‘dole bludgers’ to keep them in their places.

  73. Jennifer Meyer-Smith

    H, Bacchus is correct.

    Thanks Bacchus,

    for putting the explanation @ 12.33pm into several such positive, safe, nation-building solutions that would be possible with correct application.

  74. Kaye Lee

    I am going to try again.

    I understand all the stuff about sovereign currencies and gold standards and household budgets and flexible exchange rates etc I have absolutely no problem with any of that and I understand that our spending is not constrained by taxation revenue.

    Currently, our governments choose to issue bonds in an amount equivalent to their deficit spending. There is no need for them to do that. That’s why I say MMT is not really describing our current situation.

    Issuing bonds can withdraw excess funds from circulation and it can help affect interest rates but this could be achieved by other methods.

    We have a whole industry employing very smart people who waste time and resources in this most contrived exchange. Also, much of the interest paid (which I understand we have no problem paying) goes to foreign investors, stimulating their economy rather than our own. It all seems so wasteful.

    As Bill Mitchell; says:

    “On balance, public debt markets appear to serve minor functions at best and the interest rate support can be achieved simply via the central bank maintainng current support rate policy without negative financial consequences.

    The public debt markets add less value to national prosperity than their opportunity costs. A proper cost-benefit analysis would conclude that the market should be terminated.”

  75. Harquebus

    Thank you for spending the time to respond so thoroughly. I have read it twice.
    I understand the basics of currency creation. You and totarum have stated that, MMT describes or seeks to describe the current monetary system. Who want’s to stick with the current system? I am wondering who out there that understands MMT can say that they understand the system it describes.
    With no predictive capabilities, changes like those you consider would have to be made first and only after would your model be able to map the effects.

    The bottom line to me is, global GDP has over taken the Earth’s ability to grow it. It doesn’t matter what any economist, financial adviser, banker or whatever says or thinks. Until they start factoring diminishing returns and environmental damage in their economic/financial equations, MMT advocates are wasting their time and energy because, there’s not going to be any economy.

    I have been reading as well. The longest a paper currency has survived was in Egypt for 1000 years until conquered by Alexander who implemented coinage. It was backed by grain and could be converted at any time.
    China and Japan have mostly always had fiat currencies but, there has been a lot of them. Almost as many as they have had emperors and warlords.

    I have posted my solutions here many times, if you really want, ask again and I will put them up.

  76. Harquebus

    Inflation originally referred to the expansion of currency supply which, usually results in higher prices. It is only recently that it has been taken to represent the effect of the currency expansion on the CPI.

  77. Bacchus

    Are you making up your own economic definitions and confusing cause and effect Harqubus? 😉

    “Inflation is the continuous rise in the price level. That is, the price level has to be rising each period that you observe it. So if the price level or a wage level rises by 10 per cent every month, then you have an inflationary episode.”

    Expansionary economic policy may, in certain circumstances, lead to inflation, but expansion of currency supply has never been the definition of inflation! It is not now, nor has it ever been defined as ‘taken to represent the effect of the currency expansion on the CPI.’

    “Inflation occurs when there is chronic excess demand relative to the real capacity of the economy to produce.”

    Now, using that, think about the supply side of what happened in Zimbabwe and the Weimar Republic and any other ‘failures of fiat currencies’ you claim. I think you’ll find it was the economies that failed, not the currencies.

  78. Harquebus

    Could it be that economies fail because they are supported by fiat (aka nothing)?

    “historically it referred to an expansion in the quantity of money”
    “modern Misesians are being quite faithful to Mises’ position when they argue that it is very unfortunate that people use “inflation” to mean “rising consumer prices.””

  79. Bacchus

    I stand corrected – the Austrian school did define inflation as an expansion in the quantity of money. This however, bears no relation to the way we discuss inflation today. Such a definition can really only be used to obfuscate, not to provide clarity, a position too many economists are guilty of.

    Other schools probably rejected this definition because it’s a nonsense:

    The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation-the rise in prices-are disguising their endeavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practicalIy make things worse.

    [bold mine]

    Even modern Austrian school scholars admit that is a nonsense – price rises are not an inevitable consequence of money supply expansion.

  80. Ken Wolff

    I won’t go out for the day again!! Too much happening here. But at this late stage I won’t try to buy too far into the discussion that has been taking place.

    Nothing in economics is simple. As Bacchus said, it is not just a simple relationship between the money supply and inflation, but one that also draws in aggregate demand and the resources in the economy. As I pointed out, the extra money and demand created by government spending can lead to dangerous levels of inflation if an economy is already running at capacity. But as we are seeing at the moment, quantitative easing (QE – putting more money into the economy) is not creating inflation – that is also where the ‘liquidity trap’ I mentioned can come into play. MMT would say that in the current situation, governments, rather than just undertaking QE, should be purchasing goods and services to utilise resources not currently being used. It is the current ‘monetary’ approach that leaves central banks with interest rates as the main (often only) lever to address economic slow downs and that has been shown time and again not to be enough.

    Harquebus: I see nothing inherently wrong with a fiat currency. The main issues going into the future are how we understand it (that’s where MMT comes in) and how we decide to use it (that is where policy/political decisions come in). The problem is that at present, although most countries operate fiat currency, the prevailing monetarist and neoliberal approach gives too much power to the financial institutions to control the currency – the government’s role has been reduced when in fact it should have been enhanced. As some others have suggested, the current approach favours the economic elite and so there is a vested interest in ensuring the population still thinks a government budget is like a household budget despite the existence of a fiat currency.

    And might I go back to the basic MMT equation. It simply represents a basic accounting process relating to sectoral balances and it is accepted by many economists. It is just that others it seems, using monetarism, express it in different ways and draw different conclusions from it.

  81. Harquebus

    All fiat currencies, those currently in use excepted, have as far as I am aware and for one reason or another, failed and you see nothing inherently wrong them, even as currencies in use all over continue to devalue.
    My pessimism about the future is warranted.

  82. Jennifer Meyer-Smith


    what if MMT and its fiat currency stance (used correctly and controlled by government – NOT the financial institutions), was utilised to reduce consumption of the Earth’s resources by sensible and efficient management of resources already in use or at our renewable disposal?

    Would you still be so skeptical?

  83. Ken Wolff

    Harquebus: you ignored the rest of my comment. Yes, fiat currencies can fail but usually from circumstances that have little to do with the currency which in turn leads to poor decisions by the governments. What I found interesting when researching this, however, was that when fiat currencies have failed it did not mean a country reverted to the gold standard, they simply devalued and continued with a fiat currency. And we were on the gold standard when the Great Depression hit in the 1930s but that did not save us. So I go back to my point, which you seemed to ignore, that it depends on how the fiat currency is understood and used.

  84. paulwalter

    JM-S That is delightful rational.

    For some reason I just get sadder, as if watching an ocean liner sail past the metaphoric desert island when it looked so close to getting here.

  85. Harquebus

    Fiat currencies are not a solution.
    “used correctly and controlled by government” will produce exactly the same result. Fiat currencies are perceived wealth only.

    What you don’t realize is, that for whatever the reason, they all fail and what you also fail to consider is that, the use of a fiat currency might actually be the catalyst for those differing types of failures.
    In our case, whether is through hyper inflation or war, our currency is also going to collapse.
    Eventually it will be realized that, you can not print food, resources and energy. The physical world can not be fooled with economic conjuring tricks.
    Gold that was used as currency 2000 years ago is still being used today. How many fiat currencies have come and gone in that time.

  86. Jennifer Meyer-Smith


    “perceived wealth” is totally acceptable, if used for incentivising creative solutions to problems we have now, as long as it those solutions are managed according to available and safely replenishable resources.

  87. Harquebus

    A lot of problems that we have today are the result of solutions solving past problems.
    Fiat currencies work until they don’t. A crisis in confidence is all it takes to bring them down.
    Currencies are a medium of exchange and free us from lugging around large trade items. When no one wants worthless paper anymore, what are you going to do? I have bullion, other small trade items, can produce food and have water.

    What is wealth?

  88. diannaart


    Fiat currencies work until they don’t. A crisis in confidence is all it takes to bring them down.

    A crisis in confidence brings down precious metals based currencies also.

    In fact, one can posit that all monetary systems work right up until they don’t – there remains a plethora of reasons for currencies to fail, from the barter system which worked up until we humans became more populous, to various wars and other political manoeuvrings that wreck a currency.

    Nothing is perfect. Everything require monitoring and regulation. Laissez-faire does not work either.

    Now, I started a migraine yesterday afternoon, I am going back to bed now to finish it.

  89. Jennifer Meyer-Smith

    Get better, diannaart.

  90. Harquebus

    “A crisis in confidence brings down precious metals based currencies also.”
    Nope. Only if the currency is debased with cheaper metals in which case, it is no longer precious or the value is inflated away through currency creation. Printing more money than there is gold to support it.
    The real deal, pure gold and silver in your hands, is the only real money.

  91. Jennifer Meyer-Smith

    Your thinking is too blinkered, H. That disappoints me coz I thought you could think better than that.

  92. Harquebus

    I used to think that world needed saving. Now I think that it needs to die.
    I’ll wait until the demolition can not continue any further and see who is still standing, if I’m still around that is.
    The proverbial hitting the fan in a big way and soon is probably the only way to halt CO2 emissions and give the survivors some chance.

  93. Jennifer Meyer-Smith

    That’s sad, H.

    Don’t try and take us down with you.

  94. diannaart

    Thank you Jennifer, I always do (get better).

  95. Iain Dooley

    Hi all, I decided to write an article which I think might help clarify some of the points about MMT by explaining the state theory of money.

    I also went through and replied to each comment here (although I left some out) — I have shared the Google Doc so that anyone with the link can add a comment, so feel free to highlight and comment on anything you’d like to discuss:–s-zxS2vJgTf0B3ARi8-6jYM/edit?usp=sharing

    I’m going to submit this to the AIMN as an article in the hopes that they publish it. Thanks!

  96. Ned

    I find it disconcerting that Harquebus is using Austrian economics to argue for an environmental economic position. Isn’t that like a priest using strippers to get more people to church?

  97. Harquebus

    Others are doing that more successfully than I ever could.
    Here is something for you.
    “The End of the World, and How to Deal with it”

    There is good and bad in just about everything.

    I just popped in to post these for those that are interested.

    ” A declining money supply typically indicates deflation because there is less money to be spent, which causes prices to fall. But despite all of the quantitative easing, money printing and deficit spending, the velocity of money has been declining steadily since the credit crisis.”

    “Economically, interest is nothing but an expectation of further growth; that is, original principal plus increased value. Our entire financial system is predicated on future expansion to support the interest. Yet without oil-based energy, growth cannot continue.”

    We have enveloped our finite planet and exhausted natural resources. It’s about time that you economic types realized that, “The economy is a wholly owned subsidiary of the environment, not the reverse.” — Herman E. Daly, and had better start factoring it. Diminishing returns is a one way street.

  98. Ken Wolff

    Harquebus: not really much point in continuing this discussion. One point, however, that even the gold standard has problems. If gold is in private hands then those individuals can exercise complete control of the currency. Governments on the gold standard have often confiscated gold (or purchased it at the government’s, not the market’s, price) so as to avoid such problems. So we can go back on to the gold standard, as you seem to wish, and the government will ‘confiscate’ your gold!!!

  99. Harquebus

    Ken Wolff

    I don’t know about other states but, in S.A. if one buys less than $4000 worth, it is not registered.
    The government will have no way of knowing and I for one will not be stupid enough to hand it over.
    If it wasn’t worth anything, governments would not confiscate it.

    Come and have another say here:

    The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 1)


  100. abbienoiraude

    Do I dare?

  101. diannaart

    Excellent link abbienoiraude

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