What is MMT?

An often misrepresented theory accurately describes how politics and finance relate to one another

MMT is a macroeconomic theory that recognizes that financial relationships are always subject to political agreement and/or social contract, and that the value and resolution of modern fiat accounts, is continuously and automatically adjusted through opposing processes of interest and inflation.

MMT evaluates the unique implications of these opposing processes(interest and inflation), in the context of political and monetary sovereignty, as part of a generalized and coherent macroeconomic framework.

Background Concepts

Financial relationships are always subject to political agreement

Imagine that you owe Mark Spitz $5 as part of a contract. But then the government passes a law nullifying all private debts.

You may still consider that you owe Mark, and he may still consider that

you owe him, so if you both want to honor that debt, you are free to do so.

But at this point, the debt is no longer legally binding.

This is something called a debt jubilee. Debt jubilees were common in ancient times. Debt jubilees would have likely been used to address issues of inequality, predatory lending, and financial instability. There are modern proponents for debt jubilees, such as Steve Keen, who argues that private debt is still a significant driver of financial instability, recessions, and social inequality.

While a debt jubilee is an aggressive policy, there are many other ways in which private financial relationships are subject to laws and regulation. Regulations may limit the rate of interest that lenders can charge, as an attempt to address usury.

In general, it is not only true that financial relationships are subject to political agreement, but also all forms of property and property rights. Property exists because we mutually agree to respect legally defined boundaries.

This is not to say that I support arbitrary changes to property rights or financial contracts. Indeed quite the opposite. I would generally like to see a high degree of stability and consistency in how we deal with private property and financial contracts. Ideally, complete overhauls are kept to a minimum and dramatic changes are only done in the case of exigent circumstances. I don’t believe policies like debt jubilees are the best approach to addressing financial instability, but rather policies that can be applied consistently and continuously.

Some ways in which modern political authorities make adjustments to

property rights are through the imposition of taxes, exercising eminent domain, and applying new rules and regulations.

Because accounting is subject to political agreement, all accounts function as a historical record used in determining current political and legal resource allocation practices.

Even people who may not agree politically, can sometimes come to agreement on a mutually recognized set of facts. This is the purpose of accounting, to establish the historical facts which we use legally and politically to enforce resource rules.

When a worker works a number of hours at a given wage, their employer has agreed contractually to pay them that amount. Based on the record keeping of employee and employer, this becomes a historical fact, that is legally enforceable in a court of law. If the employer fails to pay the employee, they can be sued, and the testimony of other employees and other evidence may be considered in the enforcement of that historical fact.

So the purpose of accounts, is always to establish some kind of historical fact that is used for political and legal resource determinations. Ultimately,

the historical facts are only as meaningful as the legal consistency and political stability under which those facts were established, and how the applicable rules are applied.

Currency accounts are a record of the net accumulation of assets, wherein the account balance, and not necessarily the specific events, are of interest. Your balance is honored the same whether you earned it as a baker or a bricklayer.

Issuing and honoring fiat currency accounts always requires inflation management and other price dynamics.

No matter what system of monetary accounting you use, you must always deal with the issue of inflation. Because currency is used to compare distinct things on a common scale, changes in prices meaningfully change the use and application money or currency.

Many people advocate some kind of definition of money and inflation that makes dynamically responding to price changes unnecessary. Using a gold or silver standard is one way people try to address these issues. But the price of commodities like gold and silver can change, and furthermore, using precious metal to conduct accounting removes these commodities from other applications, and does not negate the need to deal with the consequences of price changes.

Interest on public debts is a political choice

One of the most important consequences of the fact that all financial relationships are subject to political agreement, is that the rate of interest paid on public debts is always a political choice. Notably, governments do not depend on bond markets to acquire a currency when they control its issuance.

It is important to recognize, on the other hand, that governments do not directly control price levels, exchange rates, or currency acceptability. But they can and should consider these variables when deciding when and how to issue currency.

In the modern world, it is usually national governments that issue currencies, but there are cases where smaller or larger political entities issue currencies as well. The European Union is a notable example. The creation of the Euro has impacted political and economic relationships significantly, most notably making it more difficult for countries to achieve balance of trade through currency adjustments.

Alternatively, local and state governments face unique constraints as well. Typically, local or state governments will operate within a larger political environment that impose conditions or rules on their operations. In most cases, these local public entities do not issue their own currencies. Because of these limitations, they must pay interest and sell bonds in order to finance any spending that is not covered by taxes. In this case, the interest they pay on debt and the conditions of their financing are still a political choice, but they are dependent on external political agreements moreso than internal political agreement. On the other hand, countries that issue and spend and tax and are endebted in their own currency are financially constrained only by internal political agreements, and their need to trade for external resources.

For political entities with complete legal and monetary sovereignty, they have complete and final authority over their own debts.

Taxes are always a meaningful use for currency; tax liabilities can ensure the value of fiat currency

Because political authorities have a unique role in the administration

of accounting practices, when they impose taxes, that becomes a universal

use case for a currency. Regardless of other factors that affect the currency value or prices, the currency will always have a viable use case in the payment of taxes.

Because currency is accepted for taxes, political authorities that issue currency will often not require any other mechanism to ensure currency acceptability and general value. Many other policies and variables may affect the value of currency, including the amount issued, what it is issued for and the price level of the spending when it is issued, but taxes are generally a sufficient condition for currency acceptability and value.

Under most modern political arrangements, only monetarily sovereign states have both the flexibility and responsibility that comes with managing the inflation of a currency

The ability to adjust the value of a currency is powerful. The responsibility to maintain the value of currency is significant.

Changing currency value affects contracts and savings, and should be managed carefully, but it also gives you the flexibility to avoid complete failure or default, in the case of unexpected resource shortages.

Monetary sovereigns don’t directly determine the value of their currencies, but they do control when and how it is issued, as well as determining auxiliary policies like tax programs and the prices offered in public contracts.

Because accounts are merely a historical record, fiscal issues and fiscal sustainability primarily require responding appropriately to current resource conditions.

While inflation can vary and is hard to predict, when there are resource shortages, inflation will result if people try to spend more than the resources available. If everyone works really hard and earns a lot of money, but a hurricane wipes out resources and infrastructure, all the money people earned won’t be able to buy the same level of goods and services, even if it was duly earned.

This becomes a significant resource issue. We can advocate that people conserve and reduce their consumption, in which case it may be possible for people to hold their money until more resources are developed again. We can just let inflation take its course. We could also use taxes and emergency programs, or rules such as quotas. We could sell bonds to try to convince people to save their money for the future and not spend it now.

The fact is, even under the same behavior and choices, often we must deal with unexpected contingencies. Sometimes random chance can work in our favor, we may make a scientific discovery or develop a new technology that allows us to live at a much higher living standard, and avoids compromises. Sometimes it works against us, and we are forced to compromise even if we made the best possible choices.

Often, people complain that we are “stealing” from our children and grandchildren, by issuing public debts. It is physically impossible to move resources from the future into the past. Everything consumed today was produced earlier. What is true, is that our actions today affect the future. The future will have our historical record of all the accounts from the things people did to earn money, but it is up to them what to do about that.

The worst way we can fail following generations is by not understanding the decisions we are making, both politically and financially.

Some Details of Modern Financial Systems

Modern Financial Systems Try to Use Banking to Generalize the Rules of Currency Issuance

Most developed countries operate with some kind of central bank that directly manages the issuance of currency. In this arrangement, the banking system mediates how and when currency is created. Currency is issued in exchange for interest bearing debt or other financial assets.

Such arrangements seek to neutralize the unique accounting role of the political authority, such as the U.S. government, so that currency is equally accessible to all economic actors through interest bearing debt agreements. The implication assumed by this arrangement, is that this makes both public and private parties subject to the same rules.

However, effectively, this supposed neutrality of currency, is negated by the

fact that the political authority is uniquely responsible for inflation,

and must deal with the consequences of inflation whether good or bad,

regardless of any role the central bank plays in monetary policy.

Effectively, this means that when the monetary political authority spends,

their only limit is inflation, and inflation will enforce political accountability

on the sovereign, regardless of their ability to otherwise secure “financing”.

Trying to make the public and private entities have equal access to currency is negated by the process of political accountability, because only public entities bear responsibility for inflation. Not recognizing this can lead the private market to create financial bubbles, or unduly limit the spending of public entities, creating recessions. A central bank cannot inherently limit the spending of the political authority more than the inflation constraint(because politics already trumps these supposed limits), nor can they shield it from responsibility when there is inflation.

Inflation is the universal mechanism of budgetary and debt accountability.

Many complain that if you let the political authority simply create money, there would no way to hold them accountable for their spending. In reality, they are already accountable for inflation. Inflation has a significant effect on all economic and financial relationships, and is hugely impactful on voter behavior. Staying within a debt limit will not lead constituents to ignore the bad effects of inflation, and equally unlikely will exceeding any self-imposed debt limit be met with political consequence in the absence of inflation.