Modern Monetary Theory (MMT) is a heterodox school of macroeconomics which argues that a government that issues its own currency, lets it float and borrows in that currency cannot be forced to run out of money or default on its debts. For such a government, MMT says, the real limit on spending is the economy's capacity to produce goods and services, shown by inflation, not the size of the budget deficit or the national debt.
MMT was developed from the 1990s by the investor Warren Mosler and economists L. Randall Wray, Bill Mitchell and Stephanie Kelton, whose book The Deficit Myth (2020) brought it to a wide audience. It draws on older ideas, including chartalism (Georg Friedrich Knapp's 1905 state theory of money), Abba Lerner's "functional finance" of the 1940s and the work of Hyman Minsky and Wynne Godley. It is distinct from Keynesian economics and sharply opposed to monetarism, and most mainstream economists reject its strongest claims.
Modern Monetary Theory in plain terms
Think of the company that runs a theme park and prints its own tokens. It can never "run out" of tokens, because it makes them. What it can do is print so many that the rides become overcrowded and the park has to charge more tokens per ride. MMT says a currency-issuing government is in the same position: its problem is not finding money but avoiding too much spending chasing too few real resources.
In this view, taxes are less about paying for spending and more about creating demand for the currency, since people need it to pay their tax, and about cooling the economy by taking spending power out when prices start rising.
Core claims
- Monetary sovereignty. A country that issues a floating fiat currency and borrows mostly in it can always pay debts in that currency. This does not apply to countries in the eurozone, which share a currency, or to those with heavy foreign-currency debt.
- Spending comes first. Government spending creates money, and taxes and bond sales drain it afterwards, rather than funding spending in advance.
- Inflation is the constraint. Fiscal policy, not the central bank, should be the main tool for managing demand, raising taxes or cutting spending when inflation threatens.
- A job guarantee. Many MMT economists, notably Pavlina Tcherneva, propose a public job offer at a fixed wage to anyone who wants work, acting as a buffer stock of employment and an automatic stabilizer.
- Low interest rates. Some MMT writers favor holding the policy rate near zero permanently.
Sectoral balances
MMT makes heavy use of Godley's sectoral balances, an accounting identity from the national accounts:
- is private saving minus private investment, the private sector's surplus.
- is government spending minus taxes, the budget deficit.
- is exports minus imports, roughly the current account balance.
Example: if the government runs a deficit of 5% of GDP and the country has a trade deficit of 2% of GDP, the private sector must, as a matter of accounting, run a surplus of 5% − 2% = 3% of GDP. MMT uses this to argue that government deficits are often what allow households and firms to save. Critics accept the identity but note that it says nothing about cause and effect.
Reception and criticism
MMT drew public attention in 2019–2020 through its links to US progressive proposals such as the Green New Deal, and Kelton advised Senator Bernie Sanders's presidential campaigns. The response from mainstream economists was largely negative. In a March 2019 survey by the University of Chicago's IGM Forum (now the Kent A. Clark Center), none of the 38 responding US economists agreed that countries borrowing in their own currency need not worry about deficits or can finance unlimited real spending by creating money. Federal Reserve Chair Jerome Powell told Congress in February 2019 that the idea that deficits do not matter for such countries was "just wrong".
- Inflation control. Critics doubt that legislatures would raise taxes quickly enough to stop inflation, given political delays.
- Interest costs and markets. Large deficits can raise interest rates, weaken the currency and invite capital flight, especially in emerging economies.
- Central bank independence. Mainstream economists warn that relying on monetary financing erodes monetary policy independence, with hyperinflation as the extreme case.
- The 2021–23 inflation after large pandemic deficits was cited by critics as a warning; MMT economists replied that the surge was mainly driven by supply shocks and energy prices.
MMT supporters argue that critics attack positions they do not hold, since MMT accepts that deficits can be too large and treats inflation as the binding limit. They point to Japan, where government debt is well above 200% of GDP yet interest rates stayed very low for decades, as consistent with their view; others attribute Japan's experience to its domestic savings and deflationary history.