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The State Theory of Money: Your shortcut to understanding Modern Monetary Theory (Part 4 – final)

By Ian Dooley

Responses to comments

If I respond to the comments on Ken’s post, perhaps that means we’ll get some different comments or questions on this article, rather than hearing the same points made again.

So here goes! The comments are in italics and bold, with my responses below each one. I have omitted, abridged or combined some for the sake of brevity and because some of the comments made no sense or were in agreement with Ken’s article:

Diannaart September 21, 2016 at 2:57 pm

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?

A surplus isn’t even “money no-one is using”. Taxation just destroys money. Similarly, we don’t talk about ticks that we have not written down yet on our chore chart as ticks we are not currently using. Those ticks don’t exist yet. We could imagine a world where we use double entry book keeping when we award ticks, so we have a piece of paper with “our” ticks on it, and when we award one we cross it off “our” list and then write it on the kids chart, but from the point of view of the kids, the ticks just don’t exist.

Troy Prideaux

September 21, 2016 at 3:39 pm

… 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? …

We don’t need to use interest rates to control inflation. Inflation is the result of spending exceeding the capacity of the society to produce. The most effective inflation anchor is a job guarantee that pays a socially inclusive minimum wage and sets government deficit spending at precisely the right level to inject demand to offset the savings desires of the private sector. This is the most “reactive” means of demand management (to use your terminology).

… 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? …

As discussed in my article above, private credit creation is more like banks creating “Disney Dollars”. They create deposits that are valid within their own institution and any settlements or transactions external to their institution (including when you pay your taxes) are done with government money.

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.



Jimhaz September 21, 2016 at 4:09 pm

[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 …

The maintenance of full employment is as good a marker as balancing the budget, for governments to adhere to. In fact, this is what happened from 1945 – 1975. Governments did not over spend, and did not cause inflation. People claimed that Whitlam did but the inflation of the 70s was entirely due to oil price shocks and nothing to do with his fiscal expansion.

We don’t have excessive immigration and at any rate all that would mean is more capacity to get things done. Immigration would be excessive if we had to import food in excess of exports in order to sustain the population but that’s not the case. Australia could get much bigger and still ensure full employment for all its citizens.

… 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 …

Putting the odd obsession with immigration aside, I assume what Jimhaz means by “income producing” is “tax paying”. This is the irrelevant kind of income because the government doesn’t need income in order to spend. All fiscal stimulus in income producing so long as the money is spent; that is spending equals income for you and I. By guaranteeing a job at the lower end of the pay spectrum we can ensure that people will spend the majority of the money they are paid which will achieve the desired fiscal result.

… 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 …

We are already using it. MMT describes how money works, in any legislative or exchange rate policy scenario. But ignoring the fact that MMT is not “being used” by anyone any more than gravity is “being used” by the planets to stay in orbit, this is where I like to bring things like “flat earth denial” into the equation. Someone knows this theory is false because everyone is not already doing it? Well, in fact we did have a policy of full employment in Australia until 1975, so we have, in recent history, conducted our economy in line with what might be termed functional finance, but does Jimhaz honestly not realise that there are countless times in history when the orthodoxy has been completely wrong? Hand washing is a great example

… 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 …

An understanding of the state theory of money helps us to see that QE is nothing more than a liability swap: the government swaps one liability (a bond) for another liability (reserve balances at the central bank). That’s why QE doesn’t achieve anything: it has no impact on demand in the economy because no-one spends the newly created reserves.

Nexusxyz September 21, 2016 at 5:48 pm

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.

Harquebus September 21, 2016 at 6:23 pm

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.

Both of these comments seem to think that MMT is “just another theory” which it is not. If you start by accepting the state theory of money, MMT is the logical extension of it, and all other economic theories are null and void because they reject the state theory of money.

The second point they both make is that we face real resource constraints which is absolutely true, but investing in the “human capital” of our society is just as valuable as investing in other forms of capital.

Kaye Lee September 21, 2016 at 7:47 pm

… 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.

Actually this more or less is the operational reality. When the government right now deficit spends the AOFM issues bonds on the primary market to the same value. This gives the illusion that the government is “borrowing” to “Fund the deficit” but as we have seen above this is a logical impossibility. What it is really doing is first a liability swap (reserves for bonds) then creating more reserves. The bond issues allow the RBA to “soak up” these new reserves to hit its interest rate target, but the bonds themselves are created “out of thin air”, right? And bonds are basically as good as cash. I did a video about this here:

Diannaart September 21, 2016 at 7:57 pm

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.

The government is already operating with MMT. All money systems are described by MMT. What you really mean is that we can’t trust the government to use a model of Functional Finance rather than Sound Finance, which I think is ridiculous because there is no difference between the two. In the first case we have the government set up to spend to the point of full employment, in the second we have the government set up to spend only as much as it taxes, or issue bonds when deficit spending and subject itself to “market discipline” which isn’t actually discipline at all. The government already does what it needs to do in order to hit the sound finance target and is perfectly capable of hitting a functional finance target too.

Harquebus September 21, 2016 at 9:42 pm

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.

There is no difference between a virtual currency and notes/coins. In fact the vast majority of spending already occurs electronically and money has no value outside of the sovereign system which creates it.

Kaye Lee September 22, 2016 at 12:28 pm

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.

What we have is all parties in this country subscribing to the neoliberal world view of sound finance. This means that if a party wants to spend an appropriate amount on various services and maintain full employment, they are vilified in the media circus that is our election campaign. This is why we need the public to understand functional finance and MMT: the Telegraph can’t run a “black hole bill” cover if everyone knows it’s bullshit.

Diannaart September 22, 2016 at 6:15 pm

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.

Aside from the policy choices about how to ensure spending in the public purpose, I just want to clarify that even under a gold standard MMT still describes how money works. Having a floating exchange rate means that we have maximised our domestic fiscal policy space.

Kaye Lee September 22, 2016 at 8:20 pm

“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.

This is what Scott Fulwiler would call the “weak form” of MMT.

When MMT economists explain MMT they usually present the situation as having a conflated central bank and government because, in the end, regardless of the “veil” presented over the top of the operations the reality of how MMT describes economies operating is still true.

However in Australia we do have an Official Public Account run by the RBA and when the government issues bonds, it does “increase the balance” of the OPA, and then “spend that back in”, as indicated in the video I posted above.

However there are a couple of key points: firstly, at the end of the operation the net financial assets of the private sector have increased by the amount spent by the government. Some of those assets are held in bonds, and some in reserves, but it is all a liability of the government. Bonds themselves are very “cash like” — they are liquid enough to satisfy the capital adequacy requirements of private banks and for all intents and purposes can be considered to be reserves on which we pay interest (sort of like a term deposit).

The other thing is that the OPA is a self executing consolidated fund. That means that the RBA will never “bounce a cheque” from Treasury. So the “balance” of the OPA is just an accounting trick, similar to my comment above about using “double entry book keeping” to issue ticks on our chore chart.

Harquebus September 22, 2016 at 8:21 pm

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”.

MMT describes how all money systems work and has thus existed everywhere as long as money has existed. Functional finance, full employment policies and employment guarantee schemes have been implemented such as in Australia from 1945 – 1975, and the Jefes programme in Argentina, with spectacular results.

Kaye Lee September 23, 2016 at 9:54 am

“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.

I explained this a bit in the section on private banking. When you pay taxes, the settlement occurs in exchange settlement funds at the RBA. Only government (or “high powered”) money can be used to pay taxes to the Australian government.

Foreign exchange is a little more complicated but basically central banks all have accounts with each other. So for example, the Fed has an account with the RBA, and that is where the Fed holds their AUD reserves. Likewise for the Bank of China etc. When you buy from China, you transfer AUD to the BoC account at the RBA, and at the other end the RBAs account at the BoC gets debited and the same amount in RMB gets paid to the vendor you purchased from.

All AUD reserves are on account at the RBA, all USD reserves are on account at the Fed and so on.


From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy, L. Randall Wray

Making Money: Coin, Currency, and the Coming of Capitalism, Christine Desan

Here is a short video by Christine explaining this new creation story of money.

I created a video to illustrate the “chore chart” example here on the Australian Employment Party YouTube channel.



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  1. bobrafto

    just thinking MMT maybe should be changed to MMS, modern monetary system or you will forever be arguing.

  2. Iain Dooley

    Damn I screwed up the video link here too.

    Sorry I’ll email Michael now but this is the video that shows how the AOFM issuing bonds on behalf of treasury still just creates net financial assets in the private sector:

  3. Jason

    Thanks Iain you’re doing a great job as I totally understand MMT and frankly if people knew how mainstream economics they would be shocked; no money only barter, no limits to the world (finite resources ignored), everyone 100% rational and has all information at hand etc etc. Absolute make believe mathematical complex models instead of the real world.

    MMT is really really simply describing the real world. Once u understand that then the challenges like overspending etc become real rather than theoretical. It’s a much easier debate when it’s reality and once you can undo neo-liberal brainwashing of household budget analogies I think people can debate what’s real like govern,nets sounding to inflation. That’s easily seen. Ever notice war is never asked “how do we pay for it?” It’s the only thing that kept us out of recession in separate quarters under hockey end Morrison yetnot a peep. Pretty logical to hire people instead to keep us out of recession and do all the things we need. It’s endless if you stop and think.

    Iain I’d prefer you use Mitchell’s analogy of pints at a sports game not running out. Ticks I find confusing personally just my input. Thank you for trying to fight up hill against mass right wing propaganda.

    TBH I’m a bit sad so many on aimn are so negative and not as open as I’d like. They’re only feeding the neo-liberal narrative without even knowing it, it’s so ingrained you almost need a revelation to snap out of it as we are programmed to think in household or tribal budgets.

    This Warren Mosler short Ebolk (free link) is essential and easy reading: as a starting point then Bill Mitchells blog is full of a wealth of information.

    Harquebus if you’re here on aimn pls can you try to open your mind and tone down the debate as I truly feel it’s fighting for something I don’t think u want. By all means share your thoughts but don’t shoot it down. If u learn mainstream theory you should be tearing wholes in it much more than MMT as its quite open and clear and doesn’t need imaginary assumptions so far from reality to explain. MMT is fought by big powers and started well before the oil shocks do it was ready to take over. Prior to the pill shocks we had governments that understood it far better although constrained by gold standards.

    If we want a clean green world then MMT can lead us there. Without it humanity will destroy the only planet it has needlessly. I hope we stop before it’s too late.

    Thanks all. Check out my hyperlink by clicking on my name. Much more info and a real political party pursuing those policy goals. We need members please join if you want to change our system. We need to do it one at a time.

  4. Harquebus

    Absurd nonsense.

    Any system that requires constant growth or inflation is doomed to fail.

    “The greatest shortcoming of the human race is our inability to understand the exponential function.” — Prof. Albert Bartlett

    More people need a better understanding of physics and the relationship between energy and the economy. They would then realize what farce modern economics is, including MMT.

    Energy creates wealth, currencies do not, diminishing energy returns destroys it and currencies can not substitute.

    “Ignore if you must climate change, biodiversity collapse, the depletion of water, soil, minerals, oil; even if all these issues were miraculously to vanish, the mathematics of compound growth make continuity impossible…” — George Monbiot.

  5. Harquebus

    I would like to recommend this series to all advocates and opponents alike.

    Hidden Secrets Of Money Season 1 Official Playlist

    This one I haven’t seen yet but, will soon.

    Hidden Secrets Of Money Season 2 Official Playlist


  6. Iain Dooley

    Oh man, I was going to ignore any further comments from Harquebus but MIKE MALONEY!?

    He runs a website for trading gold and silver.

    Talk about a conflict of interest!

    You’re too far gone Harquebus.

    A complete lost cause.

    You’re one quarter of slow economic growth from joining the United Patriots Front.

    Seriously get the eff out of here with that bullshit.

  7. Iain Dooley


    Thanks very much for the kind words. I am trying out the “chore chart” analogy because I was actually at a friends house and we were talking about their chore chart and the analogy really worked for them.

    I think it also does a good job of demonstrating that “the amount of work we can get done is dictated by the number of children rather than the number of ticks”. To me it has more to do with production than the sporting example, but I do use the points one too … ie. “do we ever stop a footy match and leave the players idle because we’ve run out of points?”

    Thanks again

  8. Rossleigh

    The biggest problem I have with MMT is the use of the word “modern”.
    It seems to me that there’s nothing modern about it. Apart from that, yes, it seems that it’s just a description of how things work.

    Just out of interest, Iain, have you read “Debt: The First 5,000 Years”?

  9. bobrafto


    Absurd nonsense.

    Any system that requires constant growth or inflation is doomed to fail.

    try telling that to the Neo capitalists with their record profits for every year mantra.

  10. Harquebus

    Iain Dooley

    Yes, Mike Maloney is a precious metals dealer. That does not alter the message.

    Take a look and then criticize. I will listen. Otherwise, take your own advice.


  11. Rossleigh

    Gee, Harquebus, how does the shopkeeper react when you take your bullion down and buy things with it?
    Of course, having the same value throughout the world must make it easy to calculate, but does he chip a bit off and give you the rest back.
    And isn’t storage a bit of a problem?

    Anyway, after watching just a few minutes of that video on gold and silver trading, I think I should tell you that there’s an interesting little thing called ‘scientology’ which you might want to take a look at. Should be right up your alley.

  12. Harquebus

    There won’t be any shopkeepers. Traders maybe but, no shops.
    The video is about money, not the mechanics of bullion trading.
    Go ahead and laugh. You will learn the hard way.

  13. Rossleigh

    Yes, Harquebus, I may learn the hard way, but that’s one thing you’ll never do, because a mind as closed as yours always knows and therefore is incapable of learning.

  14. Harquebus


    You are not the only one that is going to learn the hard lesson. What about your family? Do they echo your Cornucopian delusions.
    You are mistaking others unwillingness to accept your pathetic nonsenses as an incapability.

  15. Harquebus

    Möbius Ecko

    I know that Iceland refused to bail out its banks and jailed the bankers but, when I saw that link, wow! When did this happen?

    “First, Iceland did not forgive the debt of its entire population. Second, there was no media blackout imposed on U.S. news outlets about covering the financial crisis in Iceland.”

    I don’t know which is correct. Further investigation needed.


  16. Senexx

    The word Modern is used in an economic context
    Keynes once said something like all money from the past 5000 years is chartal (tokens) and the word “Modern” is being used as in the last 5000 years.

  17. CommonA

    In trying to understand all this economics, I wondered, if the Government mandating superannuation, basically guaranteed a government “deficit” to match…. I mean, if government bonds were all that a super fund could invest in.. then the super fund buys the bonds, government spends the money keeping us employed, but that money cannot be returned in tax for up to 60 years…. so rather than have an undisclosed pension liability, we have a government “deficit” “pension” liability – so you could consider the government “debt” to be a measure of how well we are saving for retirement?

  18. Möbius Ecko

    Harquebus. Snopes is normally reliable in its debunks and I delved no further than the article.

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