Thanks, Rachel - this has been a topic I have been on the edges of for a while so it was interesting to get a more in depth explanation. It does seem to be a theory that produces at lot of heat in the world of the economists, predictably - but not exclusively - by Neo classical adherents. Reading the comments here and on Youtube it's clear (if that's the right word!) that this is very complex area as layer upon layer of economic devices and practices have built up over the centuries to create an entity that seems to have a life of it's own. It's a sort of economic beast that is poked and coaxed by various actors to induce it to disgorge wealth which it does sometimes and at other times gobbles it up. Economists, it seems, are the equivalent of lion tamers in a circus ring claiming to be able to bend this beast to their will.
I did a little thought experiment which was what if there were no money and we acted in a communal way. We would just be restricted by resources. Within the commune, provided there were sufficient resources there would be no need for money, just perhaps a way of ensuring those resources were not hoarded by any individual for personal gain. If the commune got bigger it might need a way of ensuring that everyone got their fair share so you might issue a token that could be exchanged for those resources. Do you see where I'm going with this! MMT seems at least to have some validity if, as Steven says, it uses resources as its anchor point.
I've spent time considering similar ideas. At a family or small community level the free exchange of labour and resources works easily, everyone does their bit and the world is good :)
Introducing a token seems to be where the problems start. It doesn't have to be problematic, a dynamic system of rules that prevent accumulation and inequity would help. It hasn't worked in the past, but with a little effort, attention and diligence it could, maybe?
There are of course several alternative economic schemes that have been in operation for decades such as the Totnes pound, the Letts scheme, and the universal free exchange you mentioned. While some of these are token based they at least bear a relationship to work done or locally agreed value of common items. Should the economy collapse it would be useful to have such schemes in place and trusted - as well as having local access to the basics for life. I’m part of a group of parishes and organisations in Suffolk who are developing a model of resilient communities based on sound ecological principles. Early days - just need the economy to stagger on a bit longer!
Local support schemes can have benefits but won’t provide major services like the NHS or schools. Local schemes also tend by their nature to be protectionist, their communality being tightly geographically limited. You’d better hope the wider economy does keep going!
Such schemes might be needed if the economy collapsed but in reality they seem more a way of protesting against the imposed economic model. Local autonomy is, though, something I feel strongly about as part of a meaningful devolution of power which properly assigns responsibility to the different levels of local, regional and national government.
I’m glad some people find this basic information, but I’m on my third listen and I’m still absorbing details! I tend to focus on climate science and social change and avoid economics as I find it abstract and unhelpful to our predicament. But this was good at explaining the unnecessary restrictions that governments place on green investment. I was reminded of Theresa May’s “There’s no magic money tree”, which of course there is as was shown during Covid pandemic.
It would be useful to have a follow up to cover what the stages may be economically towards a society that is ecologically aware, with public luxury and private sufficiency, a protection of universal basic income, and politics that respects all humans and life on earth. 50 mins should be fine ;-)
Margaret Thatcher seeded a huge number of neoliberal myths about money and economics into the UK and global psyche/zeitgeist. It's a shame she was dead wrong in all of them! That won't prevent present Tory and Labour leaders repeating them _ad nauseam_, of course
Whenever I hear an explanation about economics, I’m always left with more questions than answers, and this was no exception. I really struggled with the concept of tax money just disappearing into a bin. Surely It must end up on a balance sheet somewhere? Also, I’ve heard in other conversations that most of the money that comes into existence is created by commercial banks, whereas Steven Hail seems to focus more on money created by governments. This needs more studying on my part obviously.
Federal taxes end up as a liability of the central bank, an asset of the federal government, and net out across the broad government sector which includes both. Basically, when federal taxes are paid, the government sector retires an IOU. The currency itself, including in electronic form, is a liability of the broadly defined government sector. When we use it to meet our tax liabilities to the federal government, private and public liabilities to each other cancel out.
You can find out more about MMT on The Rogue Scholar, Real Progressives, Macro'n Cheese, or MMT Mondays on YouTube. Stephanie Kelton also has several great videos on YouTube about it. I know she has one with a bathtub to illustrate "money" going into and out of the economy.
It sounds like you're having a bit of cognitive dissonance about taxes just disappearing into a bin, and that's not surprising, given that you've been told all your life that the government needs taxes to pay for things.
Yes, I know that some people claim that banks create money by getting interest on loans, so maybe we should make our language clear: banks can create "money"; the government creates the *currency."
The great advantage to knowing all of this is that you can't be fooled by all of the lies that politicians and billionaires tell you because they rely on citizens not knowing how the monetary system works.
"We don't have any money for that" is a lie. (Funny that they always have money for wars.)
"We'll have to raise your taxes." (Whenever we want something for ourselves. They never say to the US Joint Chiefs of Staff that they will raise THEIR taxes when they come to Congress with their hands out.)
"The country is going broke." (I heard Barack Obama say this.) Now that you have read this article, you know that the country can never go broke if it incurs a debt in its own currency.
Thanks for this Susan. It's obviously an area that I need to investigate further. I think I need a simple high level diagram that shows the flows or can you recommend a decent book?
I certainly hit a few of those "Wait, what?" moments, I might give it another listen.
Regarding commercial banks versus governments creating money, another one of those moments. As a non-economist, my vague understanding is that banks effectively bring money into existence BUT under the regulation of government (you can imagine the state of the world if banks could create money as they pleased)
I assumed that there was a financial mechanism that exists between a countries' central/reserve bank and commercial banks that acts like a tap to control the amount of sovereign currency available to the market. Something like bonds, maybe? I'm not sure. And of course, different nations would have different ways of generating currency.
Thanks for getting Steven Hail on. I'm not sure if I ever got around to emailing you Rachel requesting you get Steven on, or it came to you some other way. But thanks for embracing a discussion of MMT and ecological economics, and Stevens attempt to brig these two schools of thought closer to each other.
Thank you, Steven. QE is just an asset swap, so it impacts long term interest rates, but beyond that is not in itself inflationary. It is not free money for anyone. I think you are aware both why China built up reserves and why the USD dominates the global foreign exchange market to this day.
I am well versed in MMT, so I didn't need another introduction. Did he mention the $9 triillion that the FED is holding through its QE program. None of this is counted in the deficit, but it sure has an impact on inflation..
Also, what is the explanation for China to hold so much USA government debt, when it has hardly any need to pay taxes to the USA?
It used to be that the safest form of savings was a US Treasury bond. They are for sale. Anyone can buy them, if you have $10,000 just lying around waiting to be put to use. Wealthy individuals can buy them. Foreign governments can buy them.
The reason why they are considered a form of US government debt is an artifact of double-entry bookkeeping: on one side of the ledger is an asset, but on the other side, it's counted as a debt.
When someone buys a Treasury bond, it counts in their portfolio as an asset. Therefore, it will count in the government's side of the ledger as a debt.
China has invested in US Treasury bonds. It doesn't have anything to do with paying taxes.
(And it might be possible that China will divest itself of those bonds, if BRICS comes up with something similar.)
From a Modern Monetary Theory (MMT) perspective, money in a sovereign currency system operates as a public monopoly rather than a scarce resource. Its primary function is as a mechanism to mobilize real resources and labor, with its allocation determined by institutional and political structures. Consequently, the authority to direct monetary flows—a function intertwined with fiscal and monetary policy—holds significant implications for long-term socioeconomic and ecological outcomes.
Central banks historically employed tools such as credit guidance (or "window guidance") to influence sectoral credit allocation, steering capital toward strategic priorities.
Under MMT, this underscores the potential for public institutions to align monetary creation with democratically determined objectives, such as ecological transition, constrained only by real resource limits. However, current EU policy trajectories suggest an inversion of this framework. The European Commission’s “ReArm Europe 2030 Plan” (March 19), which exempts military expenditures from VAT and relaxes Maastricht deficit constraints for defense investments, signals a deliberate reallocation of fiscal and monetary resources toward militarization. This is compounded by the ECB’s adherence to treaty restrictions on direct state financing, necessitating opaque credit-channeling mechanisms akin to informal window guidance to prioritize defense capital.
Notably, the proposed integration of defense sector investments into the EU’s ESG Taxonomy—framed as part of a "strategic" green transition—reveals a structural shift toward privileging private military-industrial capital under austerity constraints. Such measures mirror historical precedents: the austerity regimes of the 1920s, which catalyzed authoritarian consolidation to preserve capitalist hierarchies (preserve capitalism as an economic and social order to counter strong labor and social movements after WWI), now recontextualized through securitized industrial policy.
The concurrent imposition of fiscal retrenchment on non-military sectors risks exacerbating inequality and eroding democratic accountability, effectively subsidizing defense capital through regressive fiscal adjustments.
For ecological economists as for climate and environmental activists this underscores the imperative to analyze militarization as a core component of austerity-based capitalist reproduction. The diversion of real resources toward low-productivity military output—a deadweight loss on ecological and social capacity—demands rigorous critique of the growth-security nexus embedded in contemporary policy. Strategic engagement with peace economics, emphasizing the opportunity costs of militarized spending (e.g., foregone green infrastructure investment in terms of real resources), offers a critical avenue to contest the political economy of perpetual crisis management.
In summary, the EU’s pivot to a war economy exemplifies the tension between monetary sovereignty’s emancipatory potential and its weaponization to entrench oligarchic power.
Civil society must interrogate the distributional consequences of sectoral credit guidance and advocate for transparent, democratic frameworks to govern money’s role in achieving biophysical and social stability.
The coercion of workers was clear in the motto of austerity that was formulated at two pivotal international financial conferences, in Brussels (1920) and in Genoa (1922): “work more, consume less.”
League of Nations. Brussels Financial Conference 1920.
While it's good to see what people who support MMT think, don't get too drunk on the kool-aid. While it's great that Steven Hail mentioned the Austrian economist Hayek, he overlooks the Austrian School critique of MMT.
Yes, all of the neoclassical, university economists love to critique MMT, because it undermines their very methods.
It's empirical, so it examines how an economy with a fiat currency works in real time. Their method is to follow the thinking of a Great Man.
Then, their thinking takes them down several wrong roads. Anything that doesn't fit into their scheme is dismissed as "an anomaly." Poverty, for example. In their economic fantasy, poverty should simply not exist. However, we all know that poverty does exist. They explain this by declaring poverty to be "an anomaly."
Modern Monetary Theory can include all of these uncomfortable realities in its scope, because it isn't theoretical, it's empirical.
This is why I think MMT should be called MMP: "P" for Practice, rather than theory. What I read about MMT is simply a set of explanations for how the real world works, not how it should work according to some theory.
Wow this was very interesting.
Thanks, Rachel - this has been a topic I have been on the edges of for a while so it was interesting to get a more in depth explanation. It does seem to be a theory that produces at lot of heat in the world of the economists, predictably - but not exclusively - by Neo classical adherents. Reading the comments here and on Youtube it's clear (if that's the right word!) that this is very complex area as layer upon layer of economic devices and practices have built up over the centuries to create an entity that seems to have a life of it's own. It's a sort of economic beast that is poked and coaxed by various actors to induce it to disgorge wealth which it does sometimes and at other times gobbles it up. Economists, it seems, are the equivalent of lion tamers in a circus ring claiming to be able to bend this beast to their will.
I did a little thought experiment which was what if there were no money and we acted in a communal way. We would just be restricted by resources. Within the commune, provided there were sufficient resources there would be no need for money, just perhaps a way of ensuring those resources were not hoarded by any individual for personal gain. If the commune got bigger it might need a way of ensuring that everyone got their fair share so you might issue a token that could be exchanged for those resources. Do you see where I'm going with this! MMT seems at least to have some validity if, as Steven says, it uses resources as its anchor point.
Well said.
I've spent time considering similar ideas. At a family or small community level the free exchange of labour and resources works easily, everyone does their bit and the world is good :)
Introducing a token seems to be where the problems start. It doesn't have to be problematic, a dynamic system of rules that prevent accumulation and inequity would help. It hasn't worked in the past, but with a little effort, attention and diligence it could, maybe?
There are of course several alternative economic schemes that have been in operation for decades such as the Totnes pound, the Letts scheme, and the universal free exchange you mentioned. While some of these are token based they at least bear a relationship to work done or locally agreed value of common items. Should the economy collapse it would be useful to have such schemes in place and trusted - as well as having local access to the basics for life. I’m part of a group of parishes and organisations in Suffolk who are developing a model of resilient communities based on sound ecological principles. Early days - just need the economy to stagger on a bit longer!
Local support schemes can have benefits but won’t provide major services like the NHS or schools. Local schemes also tend by their nature to be protectionist, their communality being tightly geographically limited. You’d better hope the wider economy does keep going!
Such schemes might be needed if the economy collapsed but in reality they seem more a way of protesting against the imposed economic model. Local autonomy is, though, something I feel strongly about as part of a meaningful devolution of power which properly assigns responsibility to the different levels of local, regional and national government.
MMT produces a lot of heat among neoclassical economists because it blows their theories out of the water.
That’s really interesting Rachel, thank you.
I’m glad some people find this basic information, but I’m on my third listen and I’m still absorbing details! I tend to focus on climate science and social change and avoid economics as I find it abstract and unhelpful to our predicament. But this was good at explaining the unnecessary restrictions that governments place on green investment. I was reminded of Theresa May’s “There’s no magic money tree”, which of course there is as was shown during Covid pandemic.
It would be useful to have a follow up to cover what the stages may be economically towards a society that is ecologically aware, with public luxury and private sufficiency, a protection of universal basic income, and politics that respects all humans and life on earth. 50 mins should be fine ;-)
Margaret Thatcher seeded a huge number of neoliberal myths about money and economics into the UK and global psyche/zeitgeist. It's a shame she was dead wrong in all of them! That won't prevent present Tory and Labour leaders repeating them _ad nauseam_, of course
Very interesting Rachel, thanks !
Whenever I hear an explanation about economics, I’m always left with more questions than answers, and this was no exception. I really struggled with the concept of tax money just disappearing into a bin. Surely It must end up on a balance sheet somewhere? Also, I’ve heard in other conversations that most of the money that comes into existence is created by commercial banks, whereas Steven Hail seems to focus more on money created by governments. This needs more studying on my part obviously.
Federal taxes end up as a liability of the central bank, an asset of the federal government, and net out across the broad government sector which includes both. Basically, when federal taxes are paid, the government sector retires an IOU. The currency itself, including in electronic form, is a liability of the broadly defined government sector. When we use it to meet our tax liabilities to the federal government, private and public liabilities to each other cancel out.
You can find out more about MMT on The Rogue Scholar, Real Progressives, Macro'n Cheese, or MMT Mondays on YouTube. Stephanie Kelton also has several great videos on YouTube about it. I know she has one with a bathtub to illustrate "money" going into and out of the economy.
It sounds like you're having a bit of cognitive dissonance about taxes just disappearing into a bin, and that's not surprising, given that you've been told all your life that the government needs taxes to pay for things.
Yes, I know that some people claim that banks create money by getting interest on loans, so maybe we should make our language clear: banks can create "money"; the government creates the *currency."
The great advantage to knowing all of this is that you can't be fooled by all of the lies that politicians and billionaires tell you because they rely on citizens not knowing how the monetary system works.
"We don't have any money for that" is a lie. (Funny that they always have money for wars.)
"We'll have to raise your taxes." (Whenever we want something for ourselves. They never say to the US Joint Chiefs of Staff that they will raise THEIR taxes when they come to Congress with their hands out.)
"The country is going broke." (I heard Barack Obama say this.) Now that you have read this article, you know that the country can never go broke if it incurs a debt in its own currency.
"The deficit is too high/the debt is too high."
Thanks for this Susan. It's obviously an area that I need to investigate further. I think I need a simple high level diagram that shows the flows or can you recommend a decent book?
I suggest that you go to Real Progressives or one of the other sites I mentioned and ask them. They are the experts and I am the mere disciple.
"How are we going to pay for it" is another lie.
Hi Tim,
I certainly hit a few of those "Wait, what?" moments, I might give it another listen.
Regarding commercial banks versus governments creating money, another one of those moments. As a non-economist, my vague understanding is that banks effectively bring money into existence BUT under the regulation of government (you can imagine the state of the world if banks could create money as they pleased)
I assumed that there was a financial mechanism that exists between a countries' central/reserve bank and commercial banks that acts like a tap to control the amount of sovereign currency available to the market. Something like bonds, maybe? I'm not sure. And of course, different nations would have different ways of generating currency.
Thanks for getting Steven Hail on. I'm not sure if I ever got around to emailing you Rachel requesting you get Steven on, or it came to you some other way. But thanks for embracing a discussion of MMT and ecological economics, and Stevens attempt to brig these two schools of thought closer to each other.
Thank you, Steven. QE is just an asset swap, so it impacts long term interest rates, but beyond that is not in itself inflationary. It is not free money for anyone. I think you are aware both why China built up reserves and why the USD dominates the global foreign exchange market to this day.
I am well versed in MMT, so I didn't need another introduction. Did he mention the $9 triillion that the FED is holding through its QE program. None of this is counted in the deficit, but it sure has an impact on inflation..
Also, what is the explanation for China to hold so much USA government debt, when it has hardly any need to pay taxes to the USA?
It used to be that the safest form of savings was a US Treasury bond. They are for sale. Anyone can buy them, if you have $10,000 just lying around waiting to be put to use. Wealthy individuals can buy them. Foreign governments can buy them.
The reason why they are considered a form of US government debt is an artifact of double-entry bookkeeping: on one side of the ledger is an asset, but on the other side, it's counted as a debt.
When someone buys a Treasury bond, it counts in their portfolio as an asset. Therefore, it will count in the government's side of the ledger as a debt.
China has invested in US Treasury bonds. It doesn't have anything to do with paying taxes.
(And it might be possible that China will divest itself of those bonds, if BRICS comes up with something similar.)
From a Modern Monetary Theory (MMT) perspective, money in a sovereign currency system operates as a public monopoly rather than a scarce resource. Its primary function is as a mechanism to mobilize real resources and labor, with its allocation determined by institutional and political structures. Consequently, the authority to direct monetary flows—a function intertwined with fiscal and monetary policy—holds significant implications for long-term socioeconomic and ecological outcomes.
Central banks historically employed tools such as credit guidance (or "window guidance") to influence sectoral credit allocation, steering capital toward strategic priorities.
Under MMT, this underscores the potential for public institutions to align monetary creation with democratically determined objectives, such as ecological transition, constrained only by real resource limits. However, current EU policy trajectories suggest an inversion of this framework. The European Commission’s “ReArm Europe 2030 Plan” (March 19), which exempts military expenditures from VAT and relaxes Maastricht deficit constraints for defense investments, signals a deliberate reallocation of fiscal and monetary resources toward militarization. This is compounded by the ECB’s adherence to treaty restrictions on direct state financing, necessitating opaque credit-channeling mechanisms akin to informal window guidance to prioritize defense capital.
Notably, the proposed integration of defense sector investments into the EU’s ESG Taxonomy—framed as part of a "strategic" green transition—reveals a structural shift toward privileging private military-industrial capital under austerity constraints. Such measures mirror historical precedents: the austerity regimes of the 1920s, which catalyzed authoritarian consolidation to preserve capitalist hierarchies (preserve capitalism as an economic and social order to counter strong labor and social movements after WWI), now recontextualized through securitized industrial policy.
The concurrent imposition of fiscal retrenchment on non-military sectors risks exacerbating inequality and eroding democratic accountability, effectively subsidizing defense capital through regressive fiscal adjustments.
For ecological economists as for climate and environmental activists this underscores the imperative to analyze militarization as a core component of austerity-based capitalist reproduction. The diversion of real resources toward low-productivity military output—a deadweight loss on ecological and social capacity—demands rigorous critique of the growth-security nexus embedded in contemporary policy. Strategic engagement with peace economics, emphasizing the opportunity costs of militarized spending (e.g., foregone green infrastructure investment in terms of real resources), offers a critical avenue to contest the political economy of perpetual crisis management.
In summary, the EU’s pivot to a war economy exemplifies the tension between monetary sovereignty’s emancipatory potential and its weaponization to entrench oligarchic power.
Civil society must interrogate the distributional consequences of sectoral credit guidance and advocate for transparent, democratic frameworks to govern money’s role in achieving biophysical and social stability.
The coercion of workers was clear in the motto of austerity that was formulated at two pivotal international financial conferences, in Brussels (1920) and in Genoa (1922): “work more, consume less.”
League of Nations. Brussels Financial Conference 1920.
https://t1p.de/40opt
Genoa economic-financial conference (April 10–May 19, 1922).
https://t1p.de/nvrac
(Alexander Leipold 26.03.2025)
While it's good to see what people who support MMT think, don't get too drunk on the kool-aid. While it's great that Steven Hail mentioned the Austrian economist Hayek, he overlooks the Austrian School critique of MMT.
https://link.springer.com/article/10.1007/s11293-020-09653-7
Yes, all of the neoclassical, university economists love to critique MMT, because it undermines their very methods.
It's empirical, so it examines how an economy with a fiat currency works in real time. Their method is to follow the thinking of a Great Man.
Then, their thinking takes them down several wrong roads. Anything that doesn't fit into their scheme is dismissed as "an anomaly." Poverty, for example. In their economic fantasy, poverty should simply not exist. However, we all know that poverty does exist. They explain this by declaring poverty to be "an anomaly."
Modern Monetary Theory can include all of these uncomfortable realities in its scope, because it isn't theoretical, it's empirical.
This is why I think MMT should be called MMP: "P" for Practice, rather than theory. What I read about MMT is simply a set of explanations for how the real world works, not how it should work according to some theory.
Exactly where can I find the show notes for your podcasts?
The post above.