MMT Broke My Brain, But is It Real?
Creating and deleting money, no big deal
MMT, or Modern Monetary Theory
There’s a theory of money that broke my brain recently, and I thought I’d share it with you. I first heard about it in a Cory Doctorow article, but then listened to most of The Deficit Myth, which is one of the better breakdowns of this theory I’ve come across.
I won’t argue whether I think it’s real or better than other theories; instead I view this theory as a lens through which to view government spending, borrowing and taxation. Let’s walk through some of the highlights.
1. The Federal Government Does Not Tax to Fund Its Programs
This is the part that really broke my brain. I think most people (myself included) were fed the idea that the government collects tax dollars to fund the programs it runs, from Social Security, to the Military, to paying federal employees.
This model is known as TABS (Taxing and Borrowing, then Spending). Basically, the government is broke, until it collects money from taxing and borrowing (bonds), which allows it to have cash, that it can then spend.
But our government spending for this year looks like this.
So I was of the mind that the government is just borrowing and borrowing to fund this deficit, which has grown to a staggering 36 trillion dollars. But MMT says… that’s not how it works.
The Federal Government is a Currency Issuer, which gives it a very special status. The book states that the Federal Government is not a regular player of the game, but the banker, i.e., the banker in a game like Monopoly.
In Monopoly, when you start, you are given $1,500 in cash, and every time you pass the “go” space, you are given $200. This money is simply taken from the bank. It is not “generated” by anything; it represents money that is simply printed. Even if the bank runs out of money:
The Bank never “goes broke.” If the Bank runs out of money, the Banker issues IOUs for whatever amounts are required by writing the amount on a piece of paper. IOUs can be exchanged for cash whenever cash is available; otherwise they are simply counted in the assets of the player holding them.
The US Government can do one better: it can decide that more money exists. And every year the US government has a deficit, it makes this decision. It doesn’t even need to print it, it can simply tell banks that “there’s more money now” with a few keystrokes at the Fed transfers securities and dollars around to fund Federal programs.
This is STAB, or Spend, then Tax and Borrow.
The function of taxing and borrowing is NOT to fund the Federal Government’s spending.
It’s the banker. It can’t run out of money.
Taxing prevents inflation from going crazy; taxation removes money from the overall supply, whereas State and Local Governments rely on taxes to fund their programs (they cannot print money).
The IRS is basically the banker in Monopoly, putting the money back in the box; it serves two very important purposes
- To control inflation (i.e. not let the money supply grow unbounded)
- To create a demand for dollars
Side Note: Money does not exist to replace bartering
This demand for dollars is an interesting concept. In the book, they give the anecdote of an economist talking with their family. The economist says “I want you to do some chores for me, but I’ll only pay you in my business cards.”
Business cards? Pfft, silly. Nothing gets done, obviously.
The story then takes a turn: “Same deal, but now, to live in this house, you have to pay 10 business cards a month. If not, you’re out. Forcibly.”
Suddenly, the chores got done. And there was a demand all of a sudden for these business cards.
Taxes form that same sort of demand for currency.
When the Federal government demands taxes from its citizens, (in the form of income tax, and all the other tax the government can levy), it does so at the end of a gun barrel.
You don’t pay, you go to jail. (Don’t pass go, don’t collect $200).
You might say, well, if I’m just a person out on the street, or living paycheck to paycheck, i.e., I don’t have to pay federal income tax, then I don’t care about that demand, right?
Well, you do; all the systems you rely on (the businesses, the people who do pay federal income tax, state and local governments) also either pay or collect taxes, creating further demand for dollars. And the Federal Government has plenty of other systems to demand tax, excise taxes like gas taxes or cigarette taxes.
The idea I’d believed for a long time was that bartering is bad/dumb, money is more efficient. But I think the explanation given by the book is probably a bit closer to the truth: that centrally controlled currency creates power for a government (since they alone control it), and taxation creates incentive for its citizens to use that money.
2. Federal Debt is Not Bad, In Fact, It’s Good?
When the US government has a 37 trillion dollar debt, that means that there are 37 trillion dollars of different types of debt available for purchase.
US Debt is largely thought of as a terrible thing; these securities, which can be purchased by other nations, mean that they can “hold us accountable” or some such drivel. Thoughts like: China “has our number” and is “winning the trade war.”
But think of it this way. China is sending us a bunch of physical goods for digital currency or debt (i.e., US Dollars or Federal Treasurys, yes apparently that’s how you pluralize it). The author uses the term “green and yellow dollars” to describe dollars and treasurys, because at the end of the day, the Federal governments controls the interests that it pays out on these treasurys, and the number of dollars that exist in the world.
When countries buy our debt, they are saying “I want to give you some dollars, so that you will give me MORE dollars in the future.” The fact that our debt is large, our government is (relatively) stable and trusted, means that the US dollar (and its debt based equivalent, US treasurys) are the world’s reserve currency.
If we didn’t have this massive debt on the other side of this massive production of currencies, other countries would be fighting over a constrained resource, and it would be difficult for the US dollar to maintain its dominance as the world’s reserve currency.
Besides this dominance, the debt has the added effect of injecting money into the world economy. Money allows things to happen (buildings to be built, people to be employed, etc.) Stagnant economies are deflationary, as I’ll get into this next section —
3. Money is a Mutable Construct, But Jobs and Resources are Not
The value of the dollar can change. It is affected by creating or (in the case of a budget surplus) removing dollars from existence. We tend to think of things like gold, or crypto, or Fiat money, as having “real value”.
The US was on all sorts of different money standards before the 1970s that were based in some part on being backed by money, i.e., gold or silver. The benefit is that the Federal Government was limited; it was a currency issuer but it couldn’t just print more money without changing the standards, because it didn’t have additional gold/silver to back the money it printed.
The US printed Greenbacks to fund the Civil War (which drove up inflation), but pulled them out once it damaged the US economy significantly.
The graph above is from the 20th century and has an obvious state change; basically since ~1970 (1971 was the gold standard removal), the US has been entirely inflationary. Some view this as a universal evil, but I think there are greater evils.
The years following WWI and leading into WWII are notable, because they have significant deflation, where the value of currency goes up, but, more more importantly, we have this graph:
This means one in 4 people weren’t working in the Pre WW-II years, i.e., the great depression. The Federal Government had little power monetarily to do anything, and in fact created lots of programs like Social Security and the FDIC to stop something like this from happening. This was a major deflationary period, and the US economy struggled.
What MMT brings as its focus is these two numbers: unemployment and inflation. Those things are real and multifactored, meaning that they matter to people and many things influence them. The dollar is a single entity that the Federal Government (and more directly, the Federal Reserve) has direct control over creating it, and essentially the IRS has direct control over destroying it.
Too much inflation means people’s earning power is eroded, but too much unemployment means the economy is struggling. The Federal Reserve creates money and lends (interest rates) to try and reach “good inflation” and “good unemployment” numbers, which are both a bit squishy.
Similarly when it comes to the trade war, we can keep making money, but the goods we purchase are finite (i.e., there’s a fixed amount of oil that will currently exists, as well as good of certain kinds, like an iPhone).
It’s easy to say we’re losing, but the things the US is importing are real goods, whereas the money we issue is based on the trust in the US Treasury to keep the dollar a stable currency; something that we already mentioned is very good for the US.
While the world can produce more oil or more iPhones, doing so requires using real people to do real jobs… and the incentive for these people to perform these jobs is of course, money. Ideally USD.
Summary
Money is “real” but it can be changed (i.e. the US government can simply issue more). Debt is not inherently bad, as it represents a way for the US to have more users of the dollar in the world economy. Jobs and goods are real and much more impactful than money, which is the construct that binds together disparate nations and incentives.
