Friday, February 14, 2020

Toward a Comprehensive MMT

The name Modern Monetary Theory (MMT) implies that we have a comprehensive theory of fiat money and monetary policy. Unfortunately, most MMT authors limit their discussions to the creation aspect of money, thereby avoiding the mundane (but more important) discussion of using money for everyday transactions. To be comprehensive, MMT needs to embrace theory describing both the creation of money and the use of money--two distinctly different monetary events.

Two Distinct Events

Why might we think these are two distinctive monetary events? The study of economics is interested in exchanges between individuals. Money exchanged for something else is a monetary exchange. On a daily basis, during private trade between individuals, there is an expected increase in wealth of both traders, else they would not trade. However, there is no increase in macroeconomic wealth. Because there is no increase in macroeconomic wealth, a private trade of money for something else may as well be a barter trade.

On the other hand, the creation of money is an event of quite a different character:

First, in a macroeconomic sense, money springs into existence from nothing, with sudden appearance.

Secondly, at the first trade of money, nothing (fiat money has an intrinsic cost of near zero) is traded for something of value (another macroeconomic event).

Thirdly, the creation of money represents an increase in the ambient amount of macroeconomic wealth.

The second point (nothing is traded for something of value) is the reason that the creation of money is reserved to government responsibility. If every citizen could create money, money would have no reliable value as a standard of trade.

To differentiate the two models within one theory, we will call call the creation model MMT creation (MMTc). The daily use model will be called MMT daily (MMTd). We will discuss MMTd first.


Daily monetary trade gives every thinking citizen a background by which basic economic theory can be understood. Economic axioms like "money is a store of value", "money is a medium of exchange", and "money is a unit of account" are quickly comprehended by most students and attentive listeners. The three axioms each result as a consequence of some degree of expected monetary stability of monetary value over time. The importance of daily monetary stability is a harder concept to introduce and comprehend.

Figure 1 is a crude attempt to depict a stable economy. Production morphs into supply. Supply is exchanged for money. Money diffuses back through the production stream to be reused for consumption.

Figure 1. A stable economy. [Money flows opposite to production/supply as time slips by. There is a division of material consumption and money between the private sector and government. Production/supply comes from the private sector. Government provides a stable (or unstable) framework wherein the private sector may flourish (or not). Because the private sector cannot create money, the amount of money present in the economy is constant irrespective of money flows.]
Modern daily economic life is filled with stable predictions involving the future value of money. The (stable) monthly social security check received by the elderly can pay the (stable) rent. With monetary stability, products taking months to build (like food) can have predicted sale values (allowing for replicated yearly production if predictions are realized). Basic consumer economics can be described as (mostly) stable replications of past exchanges, each exchange fulfilling human needs and desires.


Daily monetary trade gives every thinking citizen a background by which the creation of money can be understood but with initial misdirection. Citizens work or sell assets to obtain money--only counterfeiters 'create' money.

The creation of money is the opposite of stability. Creation is something from nothing, a sudden monetary impulse into the monetary cycle.

Well, (not only counterfeiters!) governments also 'create' money and may do so in such a slow, replicated fashion as to create an illusion of monetary stability. For example, a replicated annual four percent increase in the money supply can become the stable, expected macroeconomic condition of the economy. [The path of money entry is by government spending more that it stability extracts in the form of taxes and fees.]

The stable creation of money can be compared to the function of a gasoline engine in a car. The explosive ignition of air and gasoline can be harnessed to provide a smooth flow of propulsion forward. The key to success is predictability which results in stability (or is it stability which results in predictability--which should come first?).

MMT writers need to assimilate the  notion that modern industrial economies have been steadily stimulated with newly created money  injections since the WW2 period. This is Keynesian stimulation, MMT style (but not Job Guarantee style), for the past 80 years (more or less). Modern fiat economies have been distorted from the stable MMTd model for such a long time that actual monetary stability is nearly incomprehensible.

Political MMT

Much of MMT writing begins with MMTc and goes on to describe the Job Guarantee program. The concept advanced is that the full productivity of the economy is not reached with workers idle. If the private economy cannot employ all wanting work, then government should employ the idle. In a nutshell, the proposal is for government to provide jobs and create money to pay the ensuing wages.

An absurdity flows from the notion that expanding government by employing more workers and paying wages with newly created money can help the private sector with more income which turns into wealth. The reality is that additional newly created money would disturb the stability of the present (MMTd) economy, transferring more labor and resource wealth from the private sector into the government sector than we presently find. How that would play out in terms of increasing disparity of incomes and increasing disparity of remainder-wealth* is a subject needing more attention from MMT writers.


Modern Monetary Theory is a great title for a theory that sounds modern about money. In reality, as presently discussed by most writers, only MMTc is advanced. The effects of MMTc on MMTd are overlooked with the result that Political MMT  is the outcome.

*Remainder-wealth is the monetary/wealth overhang that results when money is created. When more money is placed into the macro economy each year, private wealth increases unavoidably. Private wealth is attached to ownership, unavoidably. The notion that the public 'wants to save, therefore refuses to spend' is nonsense when government is trying to increase the amount of money in existence.

(c) Roger Sparks 2020

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