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What I’ve Been Wrapping My Mind Around

Neo-Chartalism, or Modern Monetary Theory

For the uninitiated, the best primer I can find is here.

I love economics because a 90 year old theory can suddenly become “new” and “hip”. Dismal science indeed.

Essentially, MMT is the ramification of the abandonment of the gold standard. It studies the issuance of fiat currency with floating exchange rates (meaning the market sets the exchange rate, rather than the government… i.e. the Euro floats, the Renminbi does not).


Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government’s activities per se.

On the surface, this might seem to go against all common sense and imply that running federal budget deficits doesn’t matter, but that is not the case. MMT merely implies that a government that issues its own currency cannot go bankrupt in the same sense that individuals or firms go bankrupt because it can print as much money as it needs to pay that debt. So while not constrained by debt or interest rates, governments are constrained by the specter of hyperinflation. Once a currency becomes hyperinflated, the government that is issuing the currency loses legitimacy and the business community will install a new government. The acknowledgement of the role of the business community in legitimizing government makes MMT (or rather, the Functional Finance Theory that is derived from MMT) all the more interesting to me.

From the aforementioned primer:

Functional Finance is an economic theory based on the following principles:

  • The government is an entity created by the people and for the people. It exists to further the prosperity of the private sector – NOT to benefit at its expense. If this entity is allowed to exist for its own benefit or becomes corrupted by a concentration of power, it will become susceptible to dissolution via the populace’s rejection of that government.
  • Governments should be actively involved in regulating and helping build the infrastructure within which the private sector can generate economic growth. The economy is a complex dynamical system with irrational participants. It cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but necessary. But ultimately, it must be the private sector that is the driver of economic growth. While government can aid in this process it cannot be expected to be the primary driver of innovation, productivity and growth.
  • Money is always created by the state and must therefore be regulated by the state; however, ultimately the private sector must accept this legal tender as the currency unit. Therefore, the private and public sectors should best be thought of as being in partnership with one another and not opposing forces. Government by the people and for the people is not the antagonist in this story, but rather an entity that should be best utilized to maximize private sector prosperity.
  • Government deficit spending and tax collection should be maintained at a rate that does not impose financial hardship on the private sector. Because the Federal government is not a state or household it should not manage its balance sheet for its own benefit. Rather, taxes and government spending should be managed in a way that most benefits the private sector and encourages private sector prosperity, productivity, innovation and growth.
I haven’t been this excited by monetary economics since I first discovered the Austrian school in 2008. For the last week or so I’ve been combing through the blogs of L. Randall Wray and Warren Mosler. I know that a lot of my economic ideology is schizophrenic, but MMT seems to bring it all together for me.
Categories: Economics, Money
  1. Clonal Antibody
    August 26, 2011 at 2:12 pm

    You may also consider reading the Modern Money Primer and the MMT Wiki

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