The Deficit Myth (and the Free Lunch Fantasy) of MMT

“Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.” ~ Milton Friedman

Right now, Modern Monetary Theory (aka Magic Money Theory, aka MMT aka a new branding for monetary stimulus) as popularised by Stephanie Kelton’s The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy , is one of those ideas lying around (along with its fellow Neo-Keynesian financial socialism fiscal stimulus policies,UBI and doughnut economics); and a very tempting idea it is too.

After all, who would say no to a free lunch? Or to increased government spending that does not have to be funded with unpopular (anti-populist) tax increases?

In short, the theory (loosely) goes as follows:

Since a government that issues its own sovereign currency has an effective monopoly on that currency, and the means to enforce both market acceptance of that currency and tax collection in that same currency, in theory, that government can issue as much money as it likes to pay for whatever it needs to purchase (including lovely vote-buying, voter tempting fiscal policies like universal basic incomes and shiny Green New Deals) .

MMT theory maintains that government spending is not, therefore constrained by taxes collected, rather taxes are enforced to maintain that monetary monopoly, by forcing the market to accept and collect the money government issues in order to pay the taxes demanded in the currency demanded.

Furthermore, the theory points out that since public sector deficits result in private sector surplus (and vice versa); and trade account deficit translates to a capital account surplus; deficits are effectively costless to the economy, and national debt should not be an issue of major concern to policy makers or voters.

In short, according to MMT, a sovereign fiat-issuing government has no real constraints on spending (other than inflation), and there should be no real limit on government or trade deficits. Rather, fiscal spending is only limited by the spectre of inflation; but even then, according to the theory, as long as the economy is operating under capacity, that is, if there is involuntary unemployment or there is a negative output gap, inflation is not a significant risk to fiscal stability.

Alas, once we read between the lines, we see that MMT is not a blank cheque after all, rather it is a way to transfer wealth from savers, investors, future generations and less wealthy nations that are not blessed with local monetary sovereignty or local fiat denominated debt towards the present economy; this is because MMT does devalue the fiat currency. MMT can make more financial, nominal money available, and it can redistribute real value from future to present, from one sector off the global and local economy to another, but it cannot create more value in the real economy – value, of course is tied to real resources (time, labour, natural elements – the stuff we have real limits on that cannot be multiplied at the touch of a button). This makes MMT a useful elastic bandaid in tough economic times; but a tempting refillable cookie jar to politicians the rest of the time.

(You can read more on the hidden catches in this much more in depth technical review of The Deficit Myth here: )

Indeed, in spite of what its proponents say, there is still no such thing as a free lunch. We can only debate who pays for it (what groups, where in the world), and when (the young, the old, or future generations).

As a futurist, I am always sceptical of policies that transfer pain from the present to the future, and from the in group to out groups. MMT is a policy that, like most monopolies (and financial sovereignty is a national state-owned monopoly, ergo, my term “financial socialism”)  in the long run, is likely to make the rich and powerful more rich and powerful, and impoverish the future to fund the present.

That said, also speaking as a futurist, MMT, like UBI, is an idea that’s time as come. I expect MMT to become a very popular populist narrative with politicians and populations in the decades ahead. So read the book.

“Blessed are the young for they shall inherit the national debt.” ~ Herbert Hoover