What is Modern Monetary Theory (MMT) — And Why It Matters
Money is created when the government spends. When people pay taxes, they effectively destroy money.
Modern Monetary Theory, or MMT, has rapidly become one of the most talked-about—and misunderstood—concepts in economic circles today. Critics often misrepresent it, and even some supporters stretch its implications. But at its core, MMT offers a powerful explanation of how modern economies with sovereign currencies actually function.
Let’s unpack what MMT is really about—and why it’s reshaping how we think about public spending, debt, and inflation.
Rethinking Money: What MMT Actually Describes
Contrary to popular belief, MMT isn’t some radical or futuristic ideology. It’s best understood as a description of how money works in a modern fiat currency system. In economies like the U.S. or the U.K.—where governments issue their own currency through a central bank—MMT explains how money is created, spent, and recycled.
According to MMT, money is created when the government spends, not when it taxes or borrows. This flips conventional thinking on its head. Governments don't need to "raise money" before they can spend—it’s the other way around.
Government Spending and Money Creation
In an MMT framework, when a government needs to spend, it simply instructs its central bank to make a payment. The bank credits the accounts of recipients, increasing the government's overdraft. That overdraft is the creation of new money.
Does that mean governments can just spend endlessly? No. MMT recognizes that inflation, not insolvency, is the real constraint. But in a sovereign currency system, the government cannot "run out" of money. It issues the currency.
And since the central bank is owned by the government, any debt owed to it is essentially owed to itself. That debt doesn’t need to be repaid in the traditional sense—because the money created is now part of the economy's money supply.
The Real Role of Taxation
A key misconception about MMT is that it ignores inflation. In fact, MMT is obsessed with inflation control—and it argues that taxation is the primary tool for managing it.
When people pay taxes, they effectively destroy money that was previously created by government spending. This tax-and-cancel mechanism helps keep the money supply in check.
Taxes also give currency its value. Why? Because people need the national currency (like the pound or dollar) to settle their tax obligations. That requirement forces the currency into use, anchoring its value in the economy.
Beyond inflation control and value support, taxes also serve familiar purposes: addressing inequality, influencing behavior, and shaping society. But under MMT, revenue-raising is not their primary function.
Deficits Aren’t Dangerous—They’re Necessary
One of MMT’s more provocative claims is that government deficits are not just harmless—they’re essential in a growing economy.
A deficit simply means the government is spending more than it taxes. That extra money becomes income for households and businesses. If the government balanced its budget, it would be pulling out as much money as it puts in—leaving no room for private sector growth.
Governments may still issue bonds—not because they need to borrow, but to provide a safe savings vehicle for investors, banks, and pension funds. In this context, bonds are a public service, not a fiscal necessity.
Interest Rates, Inflation, and Full Employment
Under MMT, the main lever to control inflation is taxation, not interest rates. In fact, MMT economists often argue for low or near-zero interest rates for several reasons:
It reduces government interest costs.
It makes borrowing and investment more attractive.
It minimizes wealth transfer from the public to the wealthy via interest payments.
This approach allows governments to pursue full employment by using public spending to activate idle resources—like unemployed labor—without automatically triggering inflation. However, if the economy is already at full capacity, further spending could cause prices to rise. In that case, taxation must increase—not to raise funds, but to cool demand.
The Job Guarantee: Policy or Principle?
Many MMT advocates also support a Job Guarantee—a program offering employment to anyone willing to work at a living wage. This would serve as both a social safety net and an automatic stabilizer in economic downturns.
While some see it as a core part of MMT, others, including the source video, view it as a desirable policy option, not a defining feature of the theory itself.
Final Thoughts: MMT as Description, Not Prescription
Modern Monetary Theory challenges the household analogy that treats governments as financially constrained. It doesn’t claim that deficits don’t matter—but it reframes what matters about them.
MMT says:
Governments create money when they spend.
Taxes control inflation, not fund spending.
Deficits support private sector growth.
Central banks and governments operate as one sovereign entity.
At its heart, MMT is not about utopian policy. It's about better understanding the mechanics of our modern monetary system—and using that understanding to shape smarter, more humane economic decisions.