1. What is MMT?

Modern Monetary Theory is an analytical framework that seeks to update the lens through which we understand the monetary system and the policy options that are available in the post Gold Standard era. According to MMT-scholars, there are policy options that opened up since we stopped using the Gold Standard or fixed exchange rates and we are not taking advantage of them.

Contrary to mainstream economics, MMT argues that a sovereign government that issues its own currency is not like a household or a firm in terms of financing. The government is the only legal issuer of the thing that it demands for payment of taxes. Therefore, if a government issues its own currency, imposes tax liabilities or any other liabilities in that currency, spends and issues debt only in that currency, it basically can never run out money. This means it is always able to make payments when they are due. For instance, any payment that it has promised to make, whether it is social security retirement pay, interest payments on government debt denominated in its own currency, it can always make those payments.

2. Why MMT?

Unlike other schools of thought MMT is a lens through which we can analyse the inner workings of the monetized economy, it further puts monetary arrangements at the center of its analysis and has been proven to be effective in evaluating policy in the following ways:

• It helped identify the risk and predicted the global financial crisis
• It explained that quantitative easing (central bank purchase of financial assets in order to inject more liquid assets (central bank money) into the banking sector) would not be inflationary.
• It predicted that the recovery after the great financial crisis would be slow.
• It explained that Japanese government bond yields would not be affected by any downgrade.
• It identified the flaws in the euro-zone and predicted it would lead to crisis.

This track record explains why MMT should be a discussion that more governments should be having.

3. What is money according to MMT?

MMT describes money as a unit of account that helps to record debts and credits (IOU = I owe you). Hence, money is a social relation and not a commodity. The acceptance of IOUs depends on its liquidity and the solvency of the debtor. Obviously, the governments IOUs rank highest in terms of liquidity because only governments IOUs can be used to settle legal obligations within a specific jurisdiction: Taxes, Lawsuits, damages, fines, fees and all sorts of other court ordered monetary payments.

It’s important to understand how money works because it gives a deeper understanding of the inner workings of the economy as a whole. A good understanding of money can help explain circumstances like unemployment, inflation etc that affect the day to day lives of citizens. It also enables the government to develop policies that address issues in a country.

In understanding the value of money according to MMT it’s essential to define what's required to obtain fiat money and how its requirement changes overtime. For example if value would be derived from labour activities the value of money to the workers would be defined as a unit of the currency workers need to perform x amount of socially necessary labor.

4. What are the institutions and their roles related to money? What kinds of money are there? What is the difference between state money and bank money?

monetary sovereignty. Banks, however, can only issue debt obligations backed by the government whose value is derived from the economic success of the private sector. If the economy is growing as a whole then the private and the bank sector will grow in such an amount that is representing this success or shrinking in case of crisis. In the latter case the money created by the banking system is at risk. If it is no longer accepted as representation of value only state money can fulfill these obligations and put in place the corresponding value in the manner that happened in the great financial crisis 2008 or nowadays in the corona crisis. But policy implications from MMT are not only the lender of last resort role by the central bank. There is also a prominent role for fiscal policy for determination of the money supply and further implications regarding the relationship between control over money and sovereign power shown by their predictions regarding the Euro crisis.

5. What is the history of money? How is the value of money linked to the Gold standard according to MMT?

We start from a generic understanding of money, unlike the orthodox perspective who describes money from a functionalist perspective. MMT wants to describe the inner working of the monetary system, the way it evolves in the system of accounting within the banking system. It starts to explain the creation of money as a creditor-debt-relationship (IOU) and emphasizes the interaction between central bank, commercial banks, government (treasury) and private sector in creating IOUs. Out of this perspective we have different sorts of IOUs, not just money in the way it is referred to in the neoclassical approach. We also outline that banks play a more complex role then it is described in the neoclassical approach where the banking system works mainly as intermediary between savers and investors. In contrast to that MMT is in the first place a lens through which we can analyze the economy and by that money is not so much a tool, it is a social relationship within a legal framework, expressed as a debtor-creditor relationship which you can keep track in the accounting of the banking system. The permanent evolution of this relationship makes money understandable as embedded in a social system unless a pure tool that enables market participants to carry out their transactions more smoothly.

Another aspect is the role of the government in providing the economy with money. Spending above taxation and making deficits are net injections for the economy by increasing aggregate demand and there is no restriction and by definition no debt burden for future generations as long as the government is indebted in their own currency.

As already mentioned, money is by definition a creditor-debt-relationship and thus the hierarchy of money is represented by the institutional usage of money. Only federal states can issue a currency and create demand for it by making legal obligations (taxation, fines and so on) and thus provide the banking system with money. The banking system can create bankmoney by issuing debt obligations and thus creates credit for the private sector. The private sector is able to create IOUs but is not able to create the means to settle legal obligations imposed by the government. The position in the hierarchy of money depends on the level of liquidity of the IOUs. The main difference between state and bank money is that the state can always fulfill their obligations within their jurisdiction given its monetary sovereignty.

1. What causes inflation from an MMT perspective? How does MMT deal with inflation? Does fiscal sustainability have anything to do with the level of inflation?

From the MMT perspective there isn't a unique answer to what causes inflation. First of all, inflation is not considered a purely monetary phenomenon but is closely linked to distributional claims of different interest groups within the economy, e.g. capital and labour. It will depend on the specific situation and it could be generated by wage-price spiral. It is important to know if the inflation comes from the Supply side or from the Demand side.

When it comes from the Supply side it could mean that there is a speculation process or that the higher prices are caused because market power induces inflationary tendencies. This could be to increase their profits or pass on costs to price (Fullwiler, Grey & Tankus, 2019).

On the other side, if the inflationary process comes from the Demand side, it means there is an excessive demand for the same resources and goods available. This can be caused by government spending as much as by expenditures of all other actors in the economy. In order to avoid demand driven inflation, once reached full employment, the government spending should be scaled down, or it could also control it via automatic stabilizers, such as a progressive income tax.On top, MMT-proponents suggest measures to anticipate the capacity utilization of the economy prior to discretionary government spending in order to avoid inflationary pressures.

To deal with inflation, first of all, you have to know where inflation comes from:

• Against supply side driven inflation: tightening financial and credit regulation (credit constraining) on unsustainable sectores (which will then decline and will free up resources for others), anti-trust (avoiding situations of abuse of market power), and creating new alternatives of production outside of the giant fossil fuel, real estate, defense and financial industries sectors that have created an amount of power that allows them to influence in the price definition (Fullwiler, Grey & Tankus, 2019).
• Against excessive demand driven inflation (income): automatic stabilizers and taxation taxation can be an option to lower general demand.

2. What causes unemployment from an MMT perspective? How does MMT deal with unemployment?

Involuntary unemployment is defined as people seeking paid work. This means that the currency user desires more of the currency than is issued. As the government is the only source of currency, when unemployment occurs it means that government spending is not high enough to cover the need to pay taxes and the desire to save. Thus, taxes by design create unemployment if the government does not issue enough money to pay the taxes. Then the governments created more demand for the currency, that is more sellers of their working force, than they wanted to hire.

Unemployment is also considered a sign that the economy is below its production capacity and potential in both material and non-material wealth. Additionally, unemployment is inherent to a market economy. Workers are costs for firms and as they try to minimise their costs they only hire so much workers they need to produce the output that they expect to sell to gain profits. Also wage cutting causes unemployment because wages determine demand and demand determines the firms profits – and thus the number of workers they are willing to hire. So if the demand goes down due to wage cuttings, firms will produce less and reduce their number of workers - which causes unemployment.

A solution to this problem is to make adequate use of fiscal policy to manage aggregated demand. Implementing a job guarantee from the state to everyone who is willing to work would adjust the federal budget automatically to a level that is large enough to please the demand for the currency issued and thereby ensure full employment.

1. What is monetary sovereignty and why is it important in MMT?

Monetary Sovereignty is a spectrum depending on a sovereign state’s ability to:

• Issue their own fiat currency
• Enforce federal tax collection in their fiat currency
• Ensure that the currency is not promised for a fixed rate in foreign currencies or precious metals (i.e. the gold standard)
• Ensure that the currency does not issue debt instruments denominated in foreign currencies

In consideration with these four qualifications, a state with monetary sovereignty, as a currency issuer (as opposed to a currency user) can create money with no scarcity constraints according to the MMT lens. A state with monetary sovereignty only has inflation as a spending constraint, and as such can spend without the risk of becoming insolvent. A certain degree of monetary sovereignty is a prerequisite to introduce MMT based policy.

2. How does MMT interpret and use Fiscal Policy?

According to MMT, fiscal policy is not about achieving any particular number for the economy, but rather about achieving functional aims. These are meant to ensure that there is sufficient spending in the economy to maintain full employment.

Within fiscal policy, there are two main tools: taxation and spending.

• Create demand for the domestic currency
• Establish a means to lower aggregate demand for goods (this controls demand-side inflation)
• (Dis)incentivize certain behaviours
• Address inequality, better democracy

With these goals of taxation in consideration, MMT makes clear that taxation is not a means of collecting money for government spending. Rather, it is about legitimizing the sovereign currency and controlling demand-side inflation.

3. How does MMT interpret and use Monetary Policy?

The most important tools used in Monetary Policy in order to manage the economy and control inflation is the interest rate. Other tools include open market operations. Looking at the interest rate, the Central Bank sets an interest rate for reserves it sells to commercial banks. This so-called overnight interest rate affects the interbank rate, the rate at which banks lend reserves or Central Bank deposits against each other. According to mainstream views, interest rate-based policy is a good tool to manage the economy. By lowering the interest rate, credit demand increases which triggers investment and is therefore expensionary. Vice versa, a higher interest rate lowers credit demand, harms investment and has a contractionary effect.

MMT criticises that approach. A higher interest rate might turn out to be expansionary through the so-called fiscal channel. The government is a net payer of interest to the economy. That means that higher interest payments by the government lead to more income for the private sector and vice versa. Additionally, profitability and revenue considerations are more important factors for investment decisions than credit conditions, which weakens the tool of interest rate policy further from an MMT perspective.

The following graphic is an attempt to visualize the mainstream and MMT view of interest rate policy. An animation to play around with can be found here.

4. What is the relationship between Fiscal and Monetary policy according to MMT?

According to MMT, monetary policy is not able to address employment, inflation, and other issues in a targeted way. On top, today’s monetary policy builds on the NAIRU (non-accelerating inflationary rate of unemployment) concept, closely related to the idea of a natural rate of unemployment. The MMT lens rejects the notion that there is a natural rate of unemployment, rather suggesting that a government can have full employment, while offsetting the risks of inflation, by utilizing fiscal policy. Proponents of MMT would therefore recommend a shift to more fiscal policy, which directly puts money into people’s pockets and a passive approach to monetary policy, which usually only creates incentives for the private sector to take on debt (putting the private sector into deficit).

5. How do government budgets work? What should the overarching goal of government monetary and fiscal policy be, compared to what it is now?

The purpose of government economic activity (fiscal & monetary policy) is to balance the economy, not the budget. The process and goals of budgeting according to MMT is to prioritize:

• Functional goals and political priorities (such as determining the size of the public sector)
• Inflation constraints
• Automatic spending stabilizers (i.e. Job Guarantee, compensation schemes, etc).

The priorities according to MMT are not to balance the budget, as conventional economic thought would suggest, as a government with monetary sovereignty does not need to worry about budget deficits or surpluses as long as the economy is strong and inflation is avoided.

6. From the MMT lens, what is the aim of trade policy?

According to MMT, trade is the process of obtaining real wealth, i.e. the accumulation of goods.

Real wealth = domestic production + imports - exports

While exports are real costs (sending goods abroad), imports are real benefits (getting goods from abroad). The purpose of the economy is consumption, not production. Nations export in order to import. That is the primary purpose - not to create jobs or income. In real terms of trade, the goal is to get the most imports from your exports. The goal of international trade therefore is to import, not export, which means that trade deficits are not necessarily bad ― it depends on the context. While a trade deficit might result in a depreciated currency in foreign exchange markets, the nation has accumulated more wealth, as real wealth from a macroeconomics view is not about what one dollar buys (a distributional issue which can be addressed with fiscal policy), but what all dollars buy (macro issue). MMT therefore recommends nations revalue the goals of economics; ultimately, it is about making a nation and its citizens better off.