The Deficit Myth According To MMT

At the center of frustrations with today’s economic policies, one term seems to boil to the top more than any other: Modern Monetary Theory (MMT).

Sure, you can google that term and get lost in a sea of vague economic rambling, but it’s not apparent why this term is linked to the race-to-the-bottom policies on display today. Moreover, let’s take a perspective that I haven’t seen many take the time to ponder: what do MMT advocates actually believe? Are they crazy? Or are there things we can glean from their economic theory?

This week, we’ll look at the role of government, debt, currency, and economic policy from the eyes of an MMT economist. Central to all of this, we will explore the MMT view of a government budget deficit, and why increasing a deficit is viewed positively by MMT advocates. Of course, what we cover might be contrary to what you believe or know, so try to come at this from an open mind — especially because theory can be just that: theory. Let’s begin.

So, MMT takes as its starting point a simple and incontrovertible fact: our national currency, the US dollar, comes from the US government, and it can’t come from anywhere else — at least not legally.

Both the US Treasury and its fiscal agent, the Federal Reserve, have the authority to issue the US dollar. This might involve minting the coins in your pocket, printing up the bills in your wallet, or creating digital dollars known as reserves that exist only as electronic entries on bank balance sheets. The Treasury manufactures the coins, and the Federal Reserve creates the rest. Once you appreciate the significance of this reality, you will be able to unravel many of the deficit myths on your own.

Even though you may not have given it much thought before, something inside you probably already understands this basic truth. I mean, think about it. Can you create US dollars? Sure, you can earn them, but can you manufacture them? Maybe with high-tech engraving equipment you could set up shop in your basement and produce something that looks very much like the US dollar. Or maybe you could hack into the computer at the Federal Reserve and type up some digital dollars.

Regardless of how you try and create US dollars, you already know you’ll end up in an orange jumpsuit if you get caught creating counterfeit dollars. As an interesting side note, the feit of counterfeit and the term fiat we use to refer to currencies without hard asset backing (e.g., gold) are both passive forms of the Latin word facere, which means “to make it so”, or quite literally to “let it be done” regarding the jump from asset-backed currency to faith-based currency. So, based on the root words, counterfeit literally means “against fiat”.

Anyways, you simply can’t create US Dollars, even if you created perfect copies. That’s because the US Constitution grants the federal government the exclusive right to issue the currency.  As the Federal Reserve Bank of St. Louis put it, the US government is “the sole manufacturer of dollars”, i.e., they have a dollar monopoly.

The term monopoly refers, of course, to a market in which there is only one supplier of some product. Since the federal government is the sole manufacturer of US dollars, we can think of it as having a monopoly over the dollar itself. It’s kind of like a being given a super copyright (one that never expires) over the ability to make additional copies of the dollar. It’s an exclusive power, articulated by our founders. It’s not something households, businesses, or state and local governments can do. Only the federal government can issue our currency. Everyone else is merely a currency user.

That distinction between currency users and the currency issuer lies at the heart of MMT and has profound implications for some of the most important policy debates of our time.

To take full advantage of the special powers that accrue to the currency issuer, countries need to do more than just grant themselves the exclusive right to issue the currency. It’s also important that they don’t promise to convert their currency into something they could run out of (e.g., gold or some other country’s currency). And they need to refrain from borrowing (i.e., taking on debt) in a currency that isn’t their own. When a country issues its own nonconvertible (fiat) currency and only borrows in its own currency, that country has attained monetary sovereignty. Countries with monetary sovereignty, then, don’t have to manage their budgets as a household would. They can use their currency-issuing capacity to pursue policies aimed at maintaining a full employment economy.

Now, does this mean that MMT applies to countries outside the United States?

Even though the US dollar is considered special because of its status as the global reserve currency, lots of other countries have the power to make their monetary systems work for their people. To advocates, MMT can be used to describe and improve the policy choices available to any country with a high degree of monetary sovereignty—the US, Japan, the UK, Australia, Canada, and many more. MMT also offers insights for countries with little or no monetary sovereignty—nations like Panama, Tunisia, Greece, Venezuela, and many more. MMT helps us to see why countries that fix their exchange rates, like Argentina did until 2001, or that take on debt denominated in a foreign currency, like Venezuela has done, undermine their monetary sovereignty and subject themselves to the kinds of constraints faced by other currency users, such as Italy, Greece, and other eurozone countries.

When countries with little or no monetary sovereignty fail to prioritize budget discipline, they can face unsustainable debts — just like a household would.

In contrast, the United States never has to worry about running out of money.

Let me repeat that for emphasis.

According to MMT: the United States never has to worry about running out of money.

It can always pay the bills, even the big ones. The US can’t end up like Greece, which gave up its monetary sovereignty when it stopped issuing the drachma in order to use the euro. America is not dependent on China (or anyone else) for financing. Most importantly, having monetary sovereignty means that a country can prioritize the security and well-being of its people without needing to worry about how to pay for it.

Welcome to the basics of MMT.

Tomorrow we’ll discuss government taxes, spending, annual budgets, and budget deficits — and how none of them are relevant under MMT for the reasons you likely believe.