Modern monetary theory (MMT)

published 14 July 2020

Modern Monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".)

Central to MMT is the fact that it is governments that designate the one official currency for a country by accepting only that currency for the payment of taxes. And "monetarily sovereign" governments ie, those that issue their own currency, such as the US and Britain, as opposed to those that don't, such as Greece, which uses the euro can print as much of that money as they like. They do not need to tax or borrow they can just issue more money. Monetarily sovereign governments do not, it is obvious from this analysis, face constraints on their ability to create money and spend it.

Rather, the danger is that if they do too much of that then they will spark inflation. The government, then, should not worry about how it raises money or about balancing budgets, but should keep an eye on inflation instead and clamp down on it if it looks like it might be getting out of hand. The idea is that governments should be trusted to print and spend as much money as they see fit, on projects of their own choosing, and then cause a recession by, say, raising taxes, if things start to get a bit too hot.