Modern monetary theory (MMT)

Modern monetary theory (MMT) is an economic theory whose key implication is that governments should fund public spending by creating as much money as they need.

Conventional economics assumes that governments need to raise money either through levying taxes or by borrowing (usually through issuing bonds) before spending it. MMT instead focuses on the distinction between currency users and currency issuers. People and businesses cannot create their own currency; they must get enough money in a recognised currency, such as sterling, to pay for what they need. If they can’t get enough, they will default on their obligations. Governments are currency issuers. The British government controls the supply of sterling and can ultimately create as much as it needs to pay its debts.

Hence advocates of MMT argue that treating a currency issuer like a currency user is too restrictive and forces a government to limit spending on services or investment to what it thinks it can afford, rather than what is needed to ensure full employment and the long-term health of the economy. Governments should base their decisions on what is required, and issue enough currency to pay for it.

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The most common objection to MMT is that governments that create their own money without restraint to fund their spending have tended to end up fuelling runaway inflation. Examples include Weimar Germany in 1921-1923 and, more recently, Venezuela and Zimbabwe. MMT supporters claim that spending decisions can take inflation into account, and taxes can be used to mop up excess money supply.

After the global financial crisis and again during the Covid crisis, central banks have funded governments by directly buying new bonds. To a large extent, this is MMT by the back door. We can expect more of this in future, so that we should eventually find out which view is right.