Modern Monetary Theory (MMT)

What is Modern Monetary Theory (MMT)?

Modern Monetary Theory (MMT) is a school of economic thought that challenges mainstream views about government spending, taxation, and public debt. 

According to MMT, a government with full economic sovereignty – meaning it issues its own currency, doesn’t peg it to another currency or commodity, and doesn’t borrow in foreign currencies – doesn’t need to rely on taxes or borrowing to fund its spending. Instead, it creates money as it spends. From this perspective, countries and policies shouldn’t be driven by fears of rising national debt.  

This view contrasts with traditional economic thinking, which often treats government budgets as similar to household budgets: taxes equal money in, spending equals money out, and borrowing fills the gaps.

A brief history of MMT

Modern Monetary Theory was developed by Warren Mosler, a former Wall Street trader and hedge fund manager who began constructing the theory in the 1970s. The framework draws on various intellectual traditions, including Chartalism, post-Keynesian economics, and functional finance. 

One of Mosler’s central claims is that taxation doesn’t fund government spending in the way we commonly assume. Instead, taxes serve as a way to remove money from circulation, manage inflation, and create demand for the government’s currency.

Mosler published his ideas in essays such as The 7 Deadly Innocent Frauds of Economic Policy, and later, Soft Currency Economics in 1993. His work was largely ignored at first, but later embraced by a small group of economists, including Australian economist Bill Mitchell who helped bring these ideas into academic debate. 

Over time, economists such as L. Randall Wray and Stephanie Kelton developed the MMT framework even further. 
MMT theoretical framework 
The main principles of Modern Monetary Theory state that a government issuing its own fiat currency: 

● Creates new money when it spends
● Removes money from circulation through taxation
● Cannot be forced to default on debt denominated in its own currency
● Is only constrained by demand-pull inflation, which accelerates once the economy reaches full use of its real resources (labour, capital, and natural resources)
● Can use taxation and automatic stabilizers to manage inflation and demand
● Issues bonds as a monetary policy tool and savings device for the private sector, rather than to fund spending.   

The majority of these points don’t conflict with how mainstream economists understand money creation or how inflation works in practice. The two schools of thought mainly diverge when it comes to government deficits, especially the idea that deficits necessarily push up interest rates or ‘crowd out’ private investment.

MMT & government debt

Modern Monetary Theory argues that a government that issues its own currency can never run out of money. Because it’s the sole issuer of that currency, it can always print money to meet its obligations. From this perspective, a sovereign government cannot be forced to default on debt denominated in its own currency unless it makes a political decision to do so. 

Under the MMT framework, government debt isn’t the same as borrowed money in the household sense. It’s money that the government has already spent into the economy but not yet removed through taxation. 

This turns the concept of public debt on its head. Rather than viewing public debt as a risk or burden, MMT views it as a record of the private sector's savings in the form of government bonds. In other words, a government deficit is a private sector surplus.

MMT & taxes

Unlike traditional thinking, MMT doesn’t see taxes as a source of funding for government spending. This is because a government that issues its own currency doesn’t need to collect money before it can spend, it creates new money when it spends. 

Instead, Modern Monetary Theory sees taxes as serving three main functions: 

1. Creating demand for the currency: Taxes create demand for a nation's currency, since people need it to pay their tax obligations.
2. Controlling inflation: Taxes remove excess money from circulation. This helps prevent demand from rising faster than the economy’s ability to supply goods and services (also called demand-pull inflation).   
3. Shaping economic behavior & inequality: Different tax structures can influence how much people work, save, invest, or spend, and can help redistribute income if needed.

MMT & government bonds

In mainstream economics, governments issue bonds to borrow money. But in MMT, a government that creates its own currency doesn’t need to borrow in order to spend. Instead, MMT views bonds as a tool that supports monetary policy and provides a safe space for the private sector to park their savings. 

When the government spends money, it adds liquidity to the banking system. This increases bank reserves, which can push short-term interest rates lower than the central bank’s target. Issuing government bonds allows those excess reserves to be exchanged for interest-bearing securities, helping the central bank maintain its desired interest rate. 

So from this point of view, bonds are a way to control interest rates rather than source funding. They also provide a low-risk way for investors, pension funds, and financial institutions to hold money. In fact, Warren Mosler describes them as essentially being ‘savings accounts at the central bank’.

MMT & inflation

Many people misunderstand Modern Monetary Theory as encouraging limitless spending with no consequences, while in traditional finance we’re taught that excess money supply leads to inflation. But MMT does place a limit on government spending, not through a lack of money but in the availability of real resources.  

To explain this, we can imagine a government wanting to build a $100 billion railway system. In traditional economics, we’d ask where the money was coming from and whether we’d have to increase the national debt to pay for it. From an MMT perspective, however, the question isn’t whether there’s enough money (since the government always has access to money) but whether there are enough engineers, steel, and construction workers to build the railway system. 

If there are enough workers and materials available to build the railway, the government can spend that $100 billion into existence without causing inflation. But if the economy is already at full employment (meaning every engineer is already busy and every ton of steel is spoken for), then the government’s spending will spark a bidding war and drive up prices. 

So in MMT, inflation comes from a shortage of resources rather than a shortage of money. If the government increases spending when there are idle workers and underused resources, output and employment can rise without causing inflation. But if it continues to spend even after the economy has reached its capacity limits, prices will rise.

MMT policy implications 

MMT’s belief that governments aren't limited by finances, but by real resources, can have a major impact on policy discussions – particularly when it comes to large-scale public investment. 

For example, programs focused on green energy, healthcare, childcare, or affordable housing are often dismissed as being too expensive to implement. But according to MMT, the question isn’t whether the government can fund these programs but whether the economy has the capacity to carry them out effectively and sustainably.

The Job Guarantee

The Job Guarantee (JG) is an essential part of MMT policy. In mainstream economics, central banks often use unemployment as a ‘buffer stock’ to control inflation. If wages rise too fast, the Federal Reserve raises interest rates to slow the economy and put people out of work, which cools down price hikes. 

MMT proposes the opposite: focusing on a buffer stock of employed people. Essentially, this would mean the government offers a job at a fixed base wage (i.e. minimum wage) to anyone who wants one. So when the private sector lays people off during a recession, they move into the Job Guarantee program instead of becoming unemployed. This keeps money flowing into the economy and helps maintain workers’ skills.

Fiscal policy over monetary policy

Until now, we’ve typically relied on monetary policy (i.e. central banks adjusting interest rates) to  manage employment levels. MMT, however, suggests fiscal policy (government taxing and spending decisions) should be the primary way to achieve full employment.

Activating idle resources

Mainstream economics asks whether the government can afford to spend money on a new project, but MMT focuses on whether there are idle resources (i.e. unemployed people, unused factories, or available raw materials). 

For example, if a town wants to build a bridge and there are 100 unemployed construction workers and the materials required to build it, the government should create and spend the money to build the bridge. This would allow the workers to be paid and idle resources to be used. 

But wouldn’t that cause inflation? No, because inflation tends to occur when there’s more money circulating but the same amount of goods and services. In this situation, the new money is matched by the building of a new bridge, preventing inflation. 

Criticism of MMT 

Modern Monetary Theory has been getting a lot of notice lately, but it’s still a highly contested school of thought with its fair share of critics. 

Economist Thomas Palley argues that MMT’s appeal lies in its usefulness during economic downturns, describing it as a ‘policy polemic for depressed times’. He has criticized the theory’s suggestion that interest rates remain near zero and questioned whether it adequately accounts for political complications arising from vested interests.  

Another economist, the Nobel Prize-winning Paul Krugman, is another prominent critic. In 2011, he wrote a New York Times op-ed warning that relying too heavily on money creation could lead to hyperinflation investors refused to buy U.S. bonds. 

Another critic is Michael R. Strain of the American Enterprise Institute. Strain has criticized MMT’s reliance on taxation as a means to control inflation, arguing that raising taxes during inflationary periods could deepen economic downturns by reducing demand too quickly. In his view, this could increase unemployment and slow the economy down even more.

Difference between MMT and mainstream economics

To summarize, let’s break down the main differences between Modern Monetary Theory and mainstream Keynesian economics. 

AREA	MAINSTREAM ECONOMICS	MODERN MONETARY THEORY
Funding Government Spending	Spending is constrained by revenue earned from taxes and borrowing	Governments spend by creating money; taxes and bonds don’t fund spending
Purpose of Taxation	Funding public services, redistributing income, stabilizing business cycles, correcting market failures	Creating demand for currency, controlling inflation, reducing income inequality, limiting bad behavior (i.e. smoking or pollution)
Primary Policy Tool	Monetary policy (interest rates)	Fiscal policy (spending, taxes, employment programs)
Achieving Full Employment	Indirectly via interest rates	Directly via fiscal expansion and a Job Guarantee
Budget Deficit Impact on Interest Rates	Higher budget deficit can crowd out investment when at full employment	Deficit spending can decrease interest rates and encourage investment
Inflation Control	Managed through interest rates	Managed through fiscal policy and increasing taxes
Government Debt	High debt may crowd out investment	Deficits add to private-sector savings
Role of Government Bonds	Borrowing to fund spending	Managing interest rates and providing a safe space for savings