To understand how the modern monetary economy operates we need to take a step into national accounting. First, a modern monetary system has three essential features:
- A floating exchange rate, which frees monetary policy from the need to defend foreign exchange reserves).
- A government which has a sovereign monopoly over the provision its own, fiat currency.
- Under a fiat currency system, the monetary unit defined by the government has no intrinsic worth. The government makes no commitment to convert it, for example, into gold as it was under the gold standard. The viability of the fiat currency is ensured by the fact that it is the only unit which is acceptable for payment of taxes and other financial demands of the government.
Within a modern monetary economy, as a matter of national accounting, the sovereign government deficit (or surplus) equals the non-government surplus (or deficit), also known as the private sector (and here includes the international sector). The failure to recognise this relationship is the major oversight of the current orthodox analysis.
In aggregate, there can be no net savings of financial assets of the non-government sector (private sector) without cumulative government deficit spending. The sovereign government via net spending (deficits) is the only entity that can provide the non-government sector (private sector) with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment.
Additionally, and contrary to current orthodox rhetoric, the systematic pursuit of government budget surpluses is necessarily manifested as systematic declines in private sector savings.
The decreasing levels of net private savings which are manifest in the public surpluses increasingly leverage the private sector. Adopting a growth strategy that relies on increasingly leveraging the private sector is unsustainable. So you have to trace the private indebtedness back to the conduct of the government sector.
The analogy current orthodox economics draws between private household budgets and the government budget is false. Households, the users of the currency, must finance their spending prior to the fact. However, government, as the issuer of the currency, must spend first (credit private bank accounts) before it can subsequently tax (debit private accounts). Government spending is the source of the funds the private sector requires to pay its taxes and to net save and is not inherently revenue constrained.
With that in mind, modern monetary theorists develop a theory of unemployment based on the conduct of fiscal policy. In a fiat monetary system, unemployment occurs when net government spending is too low. As a matter of accounting, for aggregate output to be sold, total spending must equal total income. Involuntary unemployment is idle labour unable to find a buyer at the current money wage.
In the absence of government spending, unemployment arises when the private sector, in aggregate, desires to spend less of the monetary unit of account than it earns.