What is Modern Monetary Theory?

Modern Money = Endogenous Money + State Money + Credit Money + Functional Finance

MMT is a description of of how monetary mechanics actually work or modern monetary plumbing as one actuary described it.

MMT is a “theory” not because it is “hypothetical”. It is because it draws causal implications from generalized data constructed as model that is explanatory and predictive. That is what “scientific theory” means in philosophy of science.

Tom Hickey


5 responses to “What is Modern Monetary Theory?

  1. Pingback: What is Modern Monetary Theory? | Modern Money Mechanics | The Money Chronicle | Scoop.it

  2. The very first sentence claims Chartalism to be a monetary standard and fiat money a unit of wealth. Let it be explained how we can call it an standard or unit. Free floats are known to be tokens that represent variabel quantity of wealth. It neither has any intrinsic value nor any known or definite or definable purchasing power. Market measure wealth using money as the measure of wealth. therefore common medium of exchange must satisfy technical requirement for unit and that require it be precisely defined quantity of what it measures. It must also be noted that measurement is a scientific issue and the opinion that really ought to be considered is the opinion of scientists and technologists. I am of the view that calling Chartalism a monetary standard and fiat money as unit of wealth is foundation of worst fraud against humanity and it must be challenged.

  3. I thought MMT’s definition of money was “Tokens of debt obligations in units of account between parties in the economy.” It is used as medium of exchange in debt-obligated exchanges: “I give you $100. You give me new TV”. “I work 8 hours, you pay me $800. I am a professional.”

  4. Money is also used to pay taxes, and the government is obligated (a debt obligation) to accept your use of its money to pay your taxes.

  5. According to MMT, Chartal or “state” money aka currency is a liability of the state. In a convertible system, the liability is for the object of conversion, previously gold, at a fixed rate of exchange. In a non-convertible floating rate system such as now prevails, the liability is to exchange an amount of currency for another of the same value, like making change.

    The state authority aka government establishes the rule governing its currency. Generally speaking in a modern monetary economy, the government only accepts liabilities issued by the state in the unit of account, i.e., its currency, in settlement of liabilities to it, which are mostly tax obligations but include tariffs, fines and fees.

    This creates demand for the currency by all those who have liabilities to the state that they need to satisfy in the unit of account established by the state. This need is met by the state exchanging its currency for privately owned resources, thus moving private resources to public use through voluntary exchange in markets.

    According to MMT founder, Warren Mosler, the most important point and one which has been largely overlooked, is that the state is the sole provider of its currency, hence, enjoys a monopoly as currency issuer. This is of fundamental importance in that it results in the distinction between currency issuer and currency users that lies at the basis of MMT analysis. For example, this means that in a non-convertible floating rate system, a currency sovereign that does not borrow in other’s currencies cannot become insolvent.

    The constraints are the non-financial one of availability of real resources and the financial one of price and currency stability. This provides much more policy space than a fixed rate system, although not unlimited policy space.

    Being the currency monopolist enables the state authority to set the own rate of the currency, that is, the interest rate, also known as the policy rate. In the US, this is the Fed funds rate set by the Fed. It also enables the state to set the price it will pay for resources in the market. This authority come with the obligation to maintain relative price stability domestic and currency stability externally through its policy.

    Government can set the rules as it wishes so within the general case of the currency monetary system, there are many special cases depending on the policy choices of different governments. For instance, in the UK, the policy rate (Libor) was delegated to a consortium of banks instead of being set by central bank.

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