Elephant in the Room

MMT, Modern Monetary Theory, Modern Money Theory is a macroeconomic theory or framework that explains how the monetary system works, in systems where the government issues its own currency (basically most countries in our current world).

It is very often intentionally or unintentionally misrepresented by media, politicians or even economists (shame on you).

The founding members of MMT ( mainly Warren Mosler, Bill Mitchell , Randall Wray and Stephanie Kelton) tend to split the framework into 2 parts: A descriptive part and a normative part.

The descriptive MMT explains/asserts how the monetary system works: what money/currency is, how money is created, how taxes work, how government spending works and so on.

The Normative Part on the other hand, recommends concrete policy based on the descriptive foundation.

Let's have look at it.

Short description

Surprisingly, MMT is not so modern at all (Wray branded it modern as a marketing strategy), but rather a new interpretation of old, forgotten and ideologically suppressed ideas.

It's main argument are, debatable, extremely simple and intuitive, although nowadays very counterintuitive due to mainstream narrative(Insert buzzword here):

Money is a creature of the state: All money comes from the state/government/central bank. Yes, the central bank is a state institution, not a private one (even tho economic ideas want to imagine it as one). Yes, there is no such this as "commodity money" even historic examples of it were not commodity money, but rather state issued money that was "backed" by commodities such as gold.
Money is created when the government "spends" it into existence.
Therefore, taxes (no matter which form they take) cannot logically fund government spending. Rather, it's the other way around: One cannot pay taxes without the government first funding the taxpayers with money.
Government spending is definitely not constrained by taxes, it cannot be. Because the money first has to be spent before it can be taxed. It's actually limited by the availability of actual real resources such as labor, capital, materials, etc.
Inflation (demand-side) will occur if there is more demand on real resources than there are available. This is especially important to understand, because most intelligent being view inflation as "printing money causes inflation", which is counterfactual and not verified by studies.
A government deficit "means" only that the government spent more that it taxed in a time period. This maybe seen as natural or necessary, because there is money in the private economy(i.e. money spent which has not been taxed yet).
The function of taxes is to create a base demand for the currency. Only with taxes, people have a reason to accept the currency in the first place. It's kind of a "forced" demand for the currency. Yes, this can be viewed critically from a moral perspective, but it is a fact of the current monetary system if you want it or not.

Conclusion to draw

MMT's relevance is so high, because it gives exposing answers to highly relevant questions in current politics.

"How can we pay for this?", "This is too expensive", "We cannot afford this", "Future generation will have to pay all this mess", "We'll have to raise taxes".

All questions that are in the lense of an MMT-understanding irrelevant and misleading.

When a political decision is made that has a mappable "cost" nominated in the state currency, the question of the ability to pay for it is misleading. The government, represented by an actor who makes the political decision, literally has infinite money to pay for it, because it can create the money "out of thin air"(This is not controversial or morally annotated). The actual feasibility of the decision is not a question of money, but rather a question of availability real resources: Are there actually enough resources available to implement the decision?

Example: The german government want to increase the military budget to 5% of GDP. This will for example increase "cost" from 100 billion to 300 billion per year. The german government (simplified as the sole creator of the EURO) cannot run out of the EUROs to to spend, BUT it can run out of soldiers to recruit, factories/companies to build weaponry and so on. If it knows there is enough resources available, it can implement the decision without any problems concerning the monetary aspects.
Of course, there are secondary aspects to consider, such as the additional wages/profits funded by the government that can additionally increase demand in other parts of the economy. If this occurs, there can be inflationary pressure: There is overall a higher demand for real resources than there are available. The excess demand will bid prices up, which is classical inflation. But understand, "paying for it" never is a part of the problem.

This is so important to understand, because it is the basically the basis of all political decisions that are made currently. Actual political discussion are left out, because we cannot get there when deciding "how to pay for it".

Frustrating to MMT-folks is that left-progressive actors tend to use the argument of taxation of the higher income/wealth classes to fund for government programs/spending. From an MMT perspective, this is in an intoxicating argument, because it leaves the impression that the government is constrained/angewiesen by the money given by those rich/wealthy. However, this is not the case, because the government can create money out of thin air. Every tax a sovereign government collects, is immediately "destroyed" and does not fund any spending. Spending and taxation are two separate processes that do not depend on each other. So when the government taxes the rich, it does not fund any spending, but rather destroys the money that was just created by the government in an earlier point of time. MMT does not say, we should or should not tax this and that, it just says the taxes in general are not needed to fund any program. You want to build new houses or schools or whatever? Just do it, you have the money to do it, because you can create it. Hire the workers and companies, buy the material, pay everything with your money they accept. Done.

There is no debt crisis

This is trivially true, because the government creates money.

But hold on, what does debt mean here? The term government debt is interesting. The "debt" the government has accumulated is actually just the money it has spent in the past and not yet taxed back.

For example: Let's say we have a new country called Supermanland and superman is the government. Superman declares the Supercoin as its currency and demands that every citizen has to pay taxes in Supercoins (say, a land value tax or an income tax). Superman wants to build the Justice League headquarters, which costs 100 Supercoins. He hires the Green Lantern Corps to build it and pays them 100 Supercoins. In the end of the year the Green Lantern Corps has to pay 50 Supercoins in taxes, so it leaves the Green Lantern Corps with 50 Supercoins. The government on the counter-side has spent 100 Supercoins, but only taxed back 50 Supercoins. It has a deficit of 50 Supercoins. So is there now a debt crisis in Supermanland? Supermanland has a debt of 50 Supercoins, it cannot service its debt any more. Why should Superman care? He is the government, he could theoretically create as many Supercoins as he wants.

But wait, Hal Jordan just swapped his 100Supercoins for some Supermanland Treasury Bonds, on which he gets 5% interest per year. Now Superman has to pay Hal Jordan 5 Supercoins in interest every year. Well, Superman is still the issuer of the Supercoin, so he can just create the Supercoins every year to pay Hal Jordan.

You see where this goes.

There cannot be a debt crisis in a sovereign currency issuer that is indebted in its own currency. How could there be one? And even if the so called debt to gdp ration increases, it does not mean anything in terms of the state being able to "pay" the debt. Of course, it is worth of discussion why the debt or its derivatives rise or fall. For example, high debt means that there is much interest to pay (a bunch of private actors hold government bonds that earn interest if the interest rate is greater 0), which has arbitrary effects.

Fun-fact: There is fear-mongering about government debt crises since centuries, yet it never occurred (Please keep in mind debt in foreign currencies is different).

Why so frugal?

Most governments who have practically sovereignty over their currency (looking at you, Eurozone and UK) tend to be very (frugal) with their spending (For the obvious wrong reasons). This is a political decision, not an economic one. In almost every country, we have a political narrative that the government has to be frugal ("sparsam") with its spending, because it is "our money" or "we have to pay it back", which we now know is just false. The effects are tremendous. Unemployment, underinvestment in public and private sector, smaller economic outcome, less "Wohlstand" (prosperity) and so on.

Permanently, there are available, willing to be used resources in the economy, but the government does not use them, because it does not want to "spend too much money". Wow. So imagine is at this way: There are people and companies offering their work in exchange for the money you are the only issuer of. And you still just reject it because you're afraid you cannot pay/get back your own money? That's actually hilarious. That's dumber than the racist snakes in Rick & Morty. But stay serious. These people and companies are willing to work, because the government set up a system that demands them to pay taxes in the currency it issues. But you do no let them do this. This is a bad actor in a game, breaking the rules actually.

Also, the outcome: Unused labor and resources, time passes by where there could have been built stuff, any kind of stuff, good stuff, bad stuff, whatever. Some houses, Some schools, some roads, some hospitals, some research centres. Anything. And you consciously let the Unemployed have not enough income to live a decent life. More hilarious, you cut funding for the unemployed and scapegoat them for the problems in your whole country. Bravo! These countries have a condition of permanent lack of aggregate demand (buzzword), leaving the economy in a state of stagnation and underperformance.

Concrete policy recommendations

MMT is tough:

Full employment of resources: Increase spending or cut taxes until that there is enough aggregate demand
Demand-side inflation: Cut spending or increase taxes until that there is no excess aggregate demand
Hardcore automatic stabilizers: Implement a Job Guarantee, so that the government is the employer of last resort. Every person willing to work must get a job: Remember? You set up taxes that can only be paid by income from work or capital. So offer it.
Unemployment is a choice, not an economic necessity.
Austerity is a choice, not an economic necessity.

Current Relevant Discussions

US-Tariffs: The US government implements/abolishes (switches all the time) tariffs on imports from China and other countries. MMT perspective is a classic sectoral balance sheet perspective. The US-government want to decrease its deficit by importing less from the foreign sector. With tariffs, the government can increase the price of imports, which leads to a decrease in demand for those imports. This should, at least temporarily, lead to a decrease in the trade deficit, as the US imports less from the foreign sector but also increase prices as the private sector could not compete with the prices offered by the foreign sector (inflation).

The trump premise, however, is counterfactual: He wants to decrease (or does he really?) decrease the government debt. If the US became a net exporter (export more than it imports), it could use those currencies to "get back" dollars it spent in the past.

Understand, there is no general reason to reduce your deficit although there is more strategy involved when it comes to international trade.

Mosler, especially, argues that a trade deficit means you get more real stuff from the foreign sector than you give them in return, which leaves the importing country in a more wealthy real state. He additionally mentions that this does not mean you should just import everything and there is more to it (as Steeve Keen claims of him).
"Wettbewerbsfaehigkeit" (Competitiveness): The german party system (leaning economically outer-right-wing) is obsessed with the idea of "Wettbewerbsfaehigkeit" of the german economy. The narrative by all parties besides Die Linke/BSW is that Germany has already lost its "Wettbewerbsfaehigkeit" and that we should to do something about it. This is hilarious, because the german economy is (still) one of the most competitive economies in the world. The term "Wettbewerbsfaehigkeit" can be read as "how well can we compete with other countries in the world market" which in turn can be literally seen if you look at it from a sectoral balance sheet perspective. You immediately see: Germany runs a huge trade surpluses. Maybe too competitive. It actually is aggressively competitive, which is not a good thing to other countries as it "out-competes" them with not so cool measures (such as internal devaluation). Also connected to the term "Exportweltmeister" and "Export von Arbeitslosigkeit". I guess this is too much for politicians to understand who leave it at "export gut, import schlecht".
Inflation and Interest rate policy: Traditional economic theory (neoclassical) argues that inflation must be controlled by the central bank, which raises interest rates to decrease demand in the economy. So far, so good( I don't want to explain the whole theory here, but you can read about it in any economics book). The problem with this perspective in recent years is that "we" (Germany, EU, partially USA) did definitely not have an excess demean in the economy, but rather a LACK of aggregate demand. You should know know: This means no demand-side inflation. Nevertheless, these countries did have inflation (supply-side-driven) and still, the central banks raised interest rates to "fight" inflation. The inflation was caused by "supply-side shocks", such consequences as the pandemic and the war in Ukraine, which led to higher prices for energy and ,in second order effects, for other prices( nearly everywhere). Now, the central banks raised interest rates to "fight" inflation. What is the narrative those interest rates do? Decrease private sector lending/demand/activity, create so unemployment, some saving and so on. Problem is, this does not help at at all. The private sector was already in a state of low activity as a reaction to the price shock(s). It just worsened the economic situation, it created more unemployment, less investment and finally, more political instability. Unfortunately, the price shock is just a temporary one, which will eventually fade away, so the politicians can just argue that the interest rate hikes were successful. (Post hoc ergo propter hoc) An interesting side-effect of the interest rate hikes is: Holders of government bonds (the more wealthy you are the more you mostly hold) are now getting more interest on their bonds (basically free money), which means they have more money to spend in the economy.
Rating Agencies

Rating agencies are private companies that rate the creditworthiness of entities, also countries. When the US or Germany or any other country make a deficit creating fiscal decision, the rating agencies can downgrade the country, which means they think the country is not able to pay back its debt. We know this is hilarious and useless.
Voter/Citizen Empoerung

Often voters tend to think that some government program is funded by "their" taxes, which they express in some annoyed, frustrated way. For example, when USA sends weaponry to Ukraine or Israel, some voters think that this is funded by their taxes. Or other people don't want to see "their money" being spent on "foreigners" or Unemployed (Arbeitslose, "Buergergeldempfaenger, Schmarotzer). This is obviously a misunderstanding of the monetary system, they should rather be annoyed by the government's concrete decisions to send weaponry to those countries and support a **** or that the government is too self-effacing with its fiscal policy.

The MMT perspective turns the argument around: Citizens need the government spent into the the economy, so they can pay their taxes.

Note

This is just a blog entry in progress, unscientific, not complete and not well structured. Just wanted to move my thoughts onto the blog, so I can forget it and come back to it later.