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Jude Murdoch and Steven Hail argue modern monetary theory offers desperately needed clear thinking and fresh ideas for our society and our democracy

Jude Murdoch and Steven Hail argue modern monetary theory offers desperately needed clear thinking and fresh ideas for our society and our democracy

By Jude Murdoch and Steven Hail*

What is modern monetary theory?

Modern monetary theory (MMT) is a lens for properly understanding how the government funds its spending in a country that controls its own currency. MMT accurately describes how money, debt, and taxes actually work in our modern economies. Yet MMT is often badly misunderstood and misrepresented, so let’s expand on what it means.

At its heart, MMT shines a light on two core truths about a government that issues its own currency, known as ‘fiat’ currency. These truths aren’t theories or suggestions about how we should or could run our economies. They don’t belong to either the political left or right. They simply describe what happens in the real world, right now. And they apply to our government as the issuer of the New Zealand dollar.

A government is nothing like a household: it creates the money it spends

First, a government issuing its own currency has no true financial limit on what it can spend on goods and services for sale in that currency. It doesn’t have to earn or borrow money before spending it, like a household does. Taxes have a number of important roles (as we explain below), but, contrary to the popular myth, they don’t finance government spending. As the currency issuer, when a government spends it simply creates new money. It’s as easy as entering numbers in a spreadsheet. The idea that such a government is like a household is therefore a complete myth.

Any government issuing its own currency has ‘monetary sovereignty’ provided it also meets two other criteria: the currency has a floating exchange rate, and there is no substantial government debt issued in a foreign currency. As well as New Zealand, countries like Australia, the UK, Japan, Canada, and the USA all have monetary sovereignty. Countries with monetary sovereignty can never run out of their own money.

But other countries can. Greece or Italy or any other member of the Eurozone are not monetary sovereigns, because the European Central Bank - not the individual member states - issues the Euro. Similarly, while countries like Argentina issue their own currency, they also don’t have monetary sovereignty because they issue significant national debt in US dollars — and they can definitely run out of US dollars.

MMT focuses on the real spending limits: a country’s people and its resources

Second, while a government with monetary sovereignty is not financially constrained, it still faces real limits on how much it can spend. These are the hard limits on our collective ‘productive capacity’: how many people are available to work, with what skills, our equipment and infrastructure resources, our institutional capacities, and the ecological space for all our activity. If the government and the private sector combined spend too much and go past those limits (which could be in particular sectors), the outcome is inflation.

A common myth usually arises at this point: if governments have no financial constraint, they’ll just keep spending and we’ll end up with ‘hyperinflation’, like Weimar Germany and Zimbabwe did. These two infamous cases show inflation can soar when an economy’s productive capacity is suddenly and substantially cut, while more spending chases that reduced output. Weimar Germany’s productive capacity shrank heavily after World War I. After Germany defaulted on crippling reparation payments in foreign currencies, France and Belgium retaliated by invading and occupying Germany’s key industrial region, the Ruhr. In Zimbabwe, land reforms to redress an unjust colonial legacy caused agricultural production to fall rapidly as inexperienced workers took over 70% of farms. Other industrial contraction followed, and Zimbabwe’s government also had to use foreign currency for food and raw material imports.

Both examples serve to illustrate why real productive capacity and the risk of inflation are central to MMT’s understanding of our economies. As prominent MMT economist Professor Stephanie Kelton recently explained:

If I had to describe the MMT project in a single sentence, I would say it is about replacing an artificial revenue constraint with a real inflation constraint. … The limit [for a currency-issuing government] is the impact of the spending. Not the spending itself, and not the deficit—the limit is inflation. That is central to MMT.

I would go further and say that no school of macroeconomic thought treats inflation more seriously than MMT. We place it at the centre of the analytic framework. Inflation is the binding constraint. … MMT is about identifying the real limits, and not cowering in fear of running out of money or adding to the deficit.

So, inflation is the critical concern. But when there are unused or underused resources in the economy, when there are people who want a job but cannot find one, government spending to harness those resources and create real work will not be inflationary.

Let’s examine other common questions and points of confusion about MMT.

If taxes don’t fund government spending, what are they for?

As we noted above, a government with monetary sovereignty doesn’t use taxes to raise revenue before it spends. The idea of ‘taxpayer funded’ is actually another myth. But taxes provide other vital functions.

Taxes give money value in the first place. By requiring us to pay taxes in the currency it issues, the government creates demand for that money: we need to get some to pay our taxes. To do that, we sell goods and services — and our labour — in return for the government’s currency. Once we realise this, we can readily see the government actually has to spend money into circulation before we can earn it. Again, taxes don’t finance government spending.

Taxes take spending power away from people and businesses. Money paid to the government in taxes is removed from the system entirely; it ceases to exist. Governments can create ‘real resource space’ through taxes, enabling them to spend without creating inflation. Shifting some money from spending on goods or services to paying tax frees up space for the government to purchase and provide those real resources to the public.

Taxes can also redistribute income and wealth, helping reduce inequality in our societies. And taxes or other charges can discourage certain activities like pollution or using up non-renewable resources, while encouraging more beneficial ones.

Government deficits are surpluses for the private sector

When a government spends more than it taxes in a year, it runs a fiscal deficit. In New Zealand and elsewhere, government deficits are criticised using the mistaken logic of household accounting: if businesses and the public have to balance their books and avoid deficits, why should the government be different?

As we explained above, a government with monetary sovereignty is nothing like a household. This criticism is just another part of the myth that governments need to tax or borrow before they can spend. The myth overlooks the crucial fact that the government is a currency issuer, where everyone else is a currency user. In reality, a government deficit is actually a private sector surplus — the government is making a net deposit of newly created money into the banking system when it spends. In fact, a government running a surplus takes money out of the rest of the economy, leaving the private sector in deficit. This is simple accounting.

But won’t repeated government deficits scare off buyers of government bonds and harm the economy? No, this is another common myth. It’s founded in the mistaken belief that investors fund government spending when they buy bonds the government issues as ‘debt’, and can therefore control the interest rate the government has to pay. The myth then assumes these buyers will ‘lose confidence’ in a government’s ability to repay their investment if they see mounting government deficits, demanding higher and higher interest rates in response. These rising costs are then assumed to hurt the economy through inflation.

Japan: the world’s largest level of government debt, but no inflation

We only have to look to Japan to see that repeated government deficits do not harm the economy of a government with monetary sovereignty. In reality, central banks can directly control interest rates on government debt whenever they like, at whatever rate they like — and the Bank of Japan has been doing exactly that for many years. Japan has the highest level of government debt in the world, approaching 250% of its Gross Domestic Product (GDP). In comparison, New Zealand government debt is around 25% of GDP, but expected to rise substantially over the next few years.

Today, the Bank of Japan itself holds almost half of the debt issued by its own government, and it does that by creating new money to buy it. It’s just an accounting operation. Far from having to fight off overseas investors, soaring interest rates, and inflation, Japan has battled the opposite threat for more than two decades: deflation. The reality is Japan will never run out of its own money, and buyers of government debt do not control Japan’s interest rates.

QE is not MMT

In the wake of the 2008 global financial crisis, and now in response to COVID-19, central banks around the world have been buying back large amounts of government debt and some private debt (including the Reserve Bank of New Zealand). This process is known as ‘quantitative easing’ or ‘QE’. It involves central banks creating new money to buy bonds from the financial sector, by crediting the reserve accounts of their private bank in exchange. The aim of this is to lower longer term interest rates and encourage private banks to lend and invest in the economy.

As we noted above, Japan has been doing this at scale for many years. But QE is a form of monetary policy, not the fiscal policy of government spending on real resources — and its severe limitations are evident. In buying up government debt, central banks are simply swapping one form of money (government bonds) for another, central bank reserves. Yet, critically, QE has done little to get money into the hands of those who will spend it, increasing real economic activity. Lower long-term interest rates have no impact if businesses don’t have the confidence to borrow, and private banks do not and cannot lend out reserves directly.

In practice, lower interest rates resulting from QE tend to drive speculative purchases of unproductive assets like shares, other financial products, and real estate. This further inflates asset bubbles, increases inequality, and makes the financial system more fragile. Stern warnings of these effects are already sounding over New Zealand’s heated housing market, prompting the Government to propose explicitly including house price stability in the Reserve Bank’s monetary policy remit. On the same day, the Reserve Bank responded advising that it already considers the potential impact of monetary policy on asset prices, including house prices.

An MMT approach would harness the fiscal policy of government spending and taxation to mobilise all unused or underused resources in the economy. As the currency issuer, the government can put money in the hands of those most likely to spend or invest it on real goods and services, with real public benefit.

We can choose

MMT does away with the myths and misunderstandings that paint governments as households. MMT devotes enormous effort to developing the tools to properly assess when and how much governments can spend without causing inflation. It accurately explains where the real limits exist in our economy, rather than deluding us we can’t tackle our many problems because our government ‘can’t afford it’. As we face the huge challenges of COVID-19 and the enormous threats of climate and ecological breakdown, MMT offers desperately needed clear thinking and fresh ideas for our society and our democracy. We think it's well past time for us all to engage with them.

*Jude Murdoch is a lawyer in the public sector, based in Wellington.

*Steven Hail is a lecturer in the School of Economics at the University of Adelaide, a research scholar at the Global Institute for Sustainable Prosperity, and founder of the Sustainable Prosperity Action Group. Steven's most recent topical mainstream public piece is an article in the Sydney Morning Herald. (He also featured in this video interview in August).

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Adrian Orr needs sacking.

I agree 100%. The sooner the better for the NZ economy and financial system. Orr is NOT doing his job properly, as he is in breach of the main responsibility of the RBNZ, which is financial stability.

He is doing his job,

CPI is between 1-3%
We are at full employment

The governmnent neesds to change the criteria the RBNZ uses to determine monetary policy.

As an alternative. Use monetary policy to target a nominal gdp of between 2-4%.

CPI doesn't include rent so it is a statistical lie. Lies, damned lies, CPI's.

Doesn't include land also. That's not mr Orr's problem though its the govts specifically statistics NZ

actual rentals for housing (from 9.20 to 10.26 percent)
Sounds realistic :)

You're out of your depth, those percentages don't mean what you think they mean.

What do you think the correct percentage should be?

Closer to what the average household spends on rent each month.

Rent or mortgage is most household's single largest expense, yet the CPI doesnt reflect that.

Full employment has much lower un- and under- employment than we have now.

For doing what he is paid to do! That's a PG waiting to happen.

We all know the RBNZ + Governement want inflation (NZ wages etc higher) this is supposedly driving low interest rates.
Well, talk about contradicting oneself. We have a shortage of fruit pickers, so let natural market forces fix it i.e increase wages to attract NZ pickers. But no, the Government turns to globalisation and imports cheap labour from the Islands. More Nuts!

Economics needs an overhaul, MMT is not the answer.
Deflation is good -Your money goes further,
Deflationary spiral is a myth - iPhones are depreciating but we still buy them
MMT spending needs to be allocated arbitrarily somewhere and that's always to the rich.

iPhones going down in price? I got my first for about $1000 and my last for $2000. Deflation is only beneficial to you if you have money before it starts. If you don't then you are in a horrible place.

In the inflationary sense it means that an iphone x is now cheaper than it was when it came out. The new iPhone has more power now so the $ per processing is much cheaper. I don't make the rules that's how it is.
Regarding your second point, that depends on how wages are affected. If you can maintain wages, but you get a better processes to cut costs and make things cheaper, then any income earner is better off.
Currently, with all the advances we have in technology, things getting more expensive is good?

Iphone is now more than a phone. It is a bank, camera, video, computer, share broker, library, book store, music store, dating service, gps, topomap, radio station, scanner, home security system, on and on it goes.

This is why we have deflation. More and more stuff we used to pay for is now free and stuffed in your pocket.

And does it in a fraction of the time

Have you read the Price of Tomorrow by Jeff Booth? If not, you'll like it!

All well and good.....until you consider the critical goods to our economy and way of life available in NZD.

The Modern Monetary Theory is ...Print and Pray. The Exports, Trade, Housing, etc will take care of themselves. Sorted.


What I have learnt from all of this is that there is no point voting ever again. All of the power is in the hands of unelected bureaucrats at the RBNZ who only care about the rich and do not even care if all the poor die in a ditch.

Exactly right!! The so-called "independence" of the RBNZ is a great excuse for unelected bureaucrats to freely wreck the NZ financial system with their reckless monetary policies (policies that have already been proven a failure in Europe and Japan).
Orr is hiding behind his "remit", while disingenuously ignoring that the most important component of the RBNZ remit is financial stability, of which is is in egregious and blatant breach. It is a disgrace and it is going to end badly.

The government is equally or more culpable than the RBNZ. I think your anger is directed at the wrong primary target.

Is Kris Faafoi and The Ministry of Immigration also independent of the Government?

by Orrsum | 27th Nov 20, 10:30am
What I have learnt from all of this is that there is no point voting ever again. All of the power is in the hands of unelected bureaucrats at the RBNZ who only care about the rich and do not even care if all the poor die in a ditch.

My god the comments section is going downhill, even worse, this post has double digit upvotes… Can we really not have an intelligent conversation anymore?

As a few will note I am a fan of MMT, and this article is a great summary of the theory, and interestingly of Stephanie Kelton's book on it. But as to being myth busting, Kelton has created one, and it is perpetuated here, and that is around why we are taxed. That myth is encapsulated in this comment; "we need to get some to pay our taxes." 'some' being money. Now I have never been told, and I don't know of anyone who has, and especially kids in their later years of school are not told that once away from school "you will get a tax bill and therefore you must get a job to pay it." Tax is a consequence of working, not a reason.

So the inclusion of this, while it doesn't undermine the whole theory, is very disappointing, and diverts the debate away from what the true purpose of tax is. I agree that tax is fundamental in setting the value of a currency, but it is not the only thing. It does so by placing constraints on the amount of money in circulation. As the article indicates, other influences are the productive economy - what is produced, what value it has (i.e. demand, return on investment), the ecology and so on. Taxes can also be use to constrain and direct behaviour.

MMT also points to a significant failure of successive Governments and the RBNZ and the impact on the housing market. The group pointing fingers at each other are all collectively responsible for that mess and due to their failure to understand the big picture and how things actually work. Orr should have understood that providing the Trading Banks with a reserve of funds to be lent would result in it going to the banks view of the lowest risk assets, so in effect he has created rampant inflation in a single part of the economy. The Government on the other hand has been in complete denial and too entrenched in the failed 'free market' economic model and unwilling to properly regulate the property investment and rental market.

Tax is to create demand for the currency...all NZ tax is payable in NZD

Agreed it is explained in this comment in my response "It does so by placing constraints on the amount of money in circulation."

I would suggest they are not the same is the 'what' that is in circulation that is critical

Please explain?

How does a currency issuer guarantee demand for their currency?
By demanding that something unavoidable is only payable in that currency....a currency issuer dosnt need the currency but it does need others to want it.

You're perpetuating the myth that taxes come before an income. I don't agree, money is a trading medium, a substitute for goods of a specified value. the value of money used to be set by gold reserves, but today establishing the value of a currency is quite vague and influenced by many things. Take our dollar for example, is it's value over time set by the amount in circulation or the level of taxation imposed by our Government? I don't think so. I do agree that too much of it would help to devalue it, but the real value is set by what people get from and for it, what our country produces or has to offer other people. I suggest that all the factors that influence the value of a currency would be hard to total as a lot, or the dominating influences at any one moment, will be international issues, not controlled or influenced from here.

The value of any currency is determined by the desire to hold it which is determined by what use it is i.e. what it can provide. You or i could issue our own currency tomorrow but it would only be of as much value as others ascribe would you ensure others wanted it?

Look at the middle of my comment and that's my view.

Murray is right.

Let me be frank: Let me be Frank is spot on. Listen to Mosler, Mitchell, Wray and Kelton: a government needs people to provide goods and services to make its society work. To achieve that, the government imposes a tax obligation that can only be met with the currency the government issues. This gives the currency value and creates demand for it, enabling the government to use it to procure goods and services for sale in the currency.

I don't know, MMT seams like a hodgepodge idea to me. I agree that by controlling the money supply governments can always avert bankruptcy by printing. But at the end of the day money is neutral in the medium/long run. A countries real wealth is bases on real production & real consumption. If you don't collect enough in taxes over successive years you have to print the difference. This printing expands the money supply & causes inflation. This inflation devalues the wealth of people & is essentially a tax. The govt can use all sorts of bizarro models to try & hide this inflation but at the end of the day this inflation is real & it exists.
MMT's core idea that you can essentially drive the real economy over the medium/long term is an economic fallacy.

One of the problems I see with MMT is the traditional demand for growth. It is in this that I think the demand for inflation is rooted, and in the past I have questioned this. But I really agree with you that the real wealth lies in resources, and production of goods that are in demand, and this is where the article and theory of MMT falls a little short. To argue that taxation sets the value of a currency is simply too shallow in their thinking. while scarcity does have an impact in some respects just a look at the value over time of the NZ dollar for example and consider what sets it and impacts on it, and it won't be taxation.

You are forgetting the effects of savings on the money supply. Only when the government deficit spends are net financial assets created to finance our savings. Our savings are a representation of the governments debt. Look up sectoral balances.

I see the MMT idea of savings to be somewhat myopic.. ( sectoral balances)
Most savings are NOT in the form of Fiat Money ( financial assets ).
eg. Many people use their house as a form of saving... (Sectoral Balances will never show this )
They borrow to buy a house and then slowly pay off the mortgage.... This is a form of savings. ( deferring consumption, to pay down a mortgage )

The savings u talk about has not so much to do with wealth... . Increasing or decreasing accounting sectoral balances does NOT increase "real" savings... in my view..

eg.. Wealth is a house, not the monetary value of the house

... If house prices go up because of Monetary inflation, one still only owns 1 house ie. his real wealth has not changed.

just my view...

House price inflation is built upon bank created credit which cannot add to our financial wealth as it creates liabilities as well as assets in equal measure. No net financial assets are created. Stock Flow Consistent Modelling tell us that one persons asset must be anothers liability. (Wynne Godley)

I think u miss my point... financial wealth is not as relevant as u think and I'm not talking about house price inflation
Real wealth is in the real stuff.... like houses.
Do u see that paying down the mortgage on ur house is a form of saving.? The house becomes a "store of value". Every $ of mortgage u pay off adds to those savings, stored in the intrinsic value of that house. A store of value ( savings does not have to be in the form of Fiat money, or associated financial derivative assets

Using sectoral balances as an argument does not get us very far.
Apply it to the "Wealth of a Nation"... Does ur sectoral balances concept increase the wealth of Our nation ( which includes Govt/private sector ).
ie.. Will running large deficits make NZ a wealthier country..?

Building more houses does.
Producing more products does
Innovation and productivity does.... etc... etc.

And where should the money that we need to save up for a deposit come from and the money that we need to pay in interest to the banks for the mortgage? The banks also need reserves to operate which only the government can create. Current account deficits also need to be financed by additional currency or we all become poorer.

Ive been talking about mmts idea about savings.
Im not arguing that there should be no money.
In the current system, it is our private banking system that creates credit , based on the demand from the private sector. This is an endogenous money system.

Also.. the reality is that running chronic current acct deficits actually does make us poorer. To pay for it we need foreign direct investment, immigration and debt.

Warren buffett said its akin to selling off bits of the family farm ,over time, to maintain a certain lifestyle.

You would argue that money printing will give us a free lunch , .... Which i would disgree with.

This was on graphic display recently as the government printed and handed out billions of dollars. At the same time deposits have grown proportionally...

Inflation becomes an issue when there are unused real resources, until then fiscal policy (government deficit spending) is okay. As real resources get closer to all being used the magnitude of automatic stabilisers like social security reduce, reducing deficit levels anyway.

Read the article again. It addresses every issue you raise above. Yes, a country's real wealth is indeed in its natural resources and productive capacity. MMT completely endorses that. What MMT debunks is the fundamentally wrong notions that a currency-issuing government is funded by taxes and that such a government's spending is inflationary when it is directed towards unused or underused resources and productive capacity. I don't really understand your last point, but MMT's core idea is what I've spelt out in the sentence above, and that is anything but an economic fallacy.

In in a previous post someone said that Money was a claim on future output.. (maybe a claim on saved output, current output and future output ). ( A claim on productive wealth.? )
From that context a Govt ability to print money and "claim productive wealth " simply a hidden form of taxation..

I find that the MMT concept relies alot on the , " which comes first ...the chicken or the egg"... kinda argument.

I'm not a fan of MMT , which is just a rehashed form of Money printing in the name of full employment.

Also...keep in mind the whole interest rate/Monetary policy system we have now is NOT a free market system... It is a command style system...which is what MMT would be.?? ( Keynes showed that when it comes to the impact of monetary inflation, taxation and price controls ( regulation) don't really work and have unintended consequences, without addressing the Monetary inflation itself )

In fact, in the hands of politicians MMT might be dangerous..... because they intend to use taxes to repress the economy when the inflationary impact of Monetary inflation ( a tax ) "over heats the economy"..... This would basically a double dose of taxation....

Its easy to say that "Govt is not like a creates the money it spends"...AND... its convenient to forget that Govt in a democratic country, is basically a parasite , that requires the productive endeavours of the private sector for it to live. ( Govt basically , thru taxation, appropriates and redistributes productive wealth, that the privates sector creates ).....

I'm pro-Govt... but I think it needs to know its place... eg... How big should it be ? ... (50% of GDP it maybe 25% of GDP)....... How much regulation should there be.? etc

Basically... I dont think MMT would be the blessing that it promises to be...

just my view

I agree with a lot of what you have said Roelof, especially the bit about politicians being dangerous with it. We have never had an economic system that has been 'free' in the terms that economic theorists sold it. It has always been manipulated by someone or another. I disagree with you definition of the purpose of Government. It is a traditional view that many agree with, and MMT refutes it and also demonstrates why it is not valid. Your sentnece about being pro Govt - I fully agree, but again the politicians are the threat here. But keep in mind the MMT is not a 'new theory' but rather a new way to explain what is happening and how to view it and perhaps change the rationale for why we do a few things.

Does the private sector not rely on the free services that the government provides, i.e, education, healthcare, police, welfare, military, infrastructure, ect. That doesn't sound like a parasite to me. It is the private sector that is the more parasitic I would say, banking as an example.

If a squirrel was given "free" services would he collect save any more nuts ?, (which is a function of his work ethic and intelligence and the bounty of the productive wealth of Natures resources.) Call it productivity... And yes... I'm sure a squirrel would pay a few nuts for healthcare and law and order.

... Govt uses the productive wealth of the Private sector to provide services back to the private sector. ( Back in the day Govt might have taxed our harvest now they take money..?

Like I said... I'm pro Govt. i'm Happy to pay taxes for, education , law and order, infrastructure... and maybe one or 2 other things.. Maybe alot of other things might be done on the community/tribal family level..??

I use the word parasite because I think its the best word to describe the dangers of the symbiotic relationship between private sector and State, that gets out of whack... so to speak.
(A parasitic relationship is one in which one organism, the parasite, lives off of another organism, the host, harming it and possibly causing death. The parasite lives on or in the body of the host.)
I see too much Govt as a dangerous thing. Govt is NOT some kind of super intelligent entity that can allocate resources in wise and best ways.

I view any kind of Monetary inflation as a "parasitic" kinda thing.. only to be used carefully in special circumstances..... not as a way of life like MMT advocates, and as our current Monetary system is... ( current Monetary/ banking system has lead to the financialization of almost everything , and to the increasing division of wealth... ( wealth inequality).
I see Monetary Inflation as a hidden tax and a wealth transfer mechanism.

just my view

Taxation doesn't finance anything though, the government pays for all of its services to us itself. The Levy Economics Institute has this to say.
Working Paper No. 244 | July 1998
Can Taxes and Bonds Finance Government Spending?
This paper investigates the commonly held belief that government spending is normally financed through a combination of taxes and bond sales. The argument is a technical one and requires a detailed analysis of reserve accounting at the central bank. After carefully considering the complexities of reserve accounting, it is argued that the proceeds from taxation and bond sales are technically incapable of financing government spending and that modern governments actually finance all of their spending through the direct creation of high-powered money. The analysis carries significant implications for fiscal as well as monetary policy.

Ive just read that working paper....
For me , is does not prove the assertion that taxation doesn't finance anything and that Govt pays for everything itself.
In fact... I think the assertion is a nonsense .

Using common sense.... If there is a mismatch between income and spending , then an entity has to finance the difference between the cashflows.

If a Farmer has an overdraft chq acct , to tide him over , in regards his seasonal cashflow income.... can one argue that his spending is unrelated to his income..??
Analyzing his chq acct balance sheet.... it seems that he spends before he earns. It looks like his spending is unrelated to his income..?? ..The bank creates credit for him, at seems.

I realize that with an inside money/ outside money, monetary system the balance sheet accting trail is far more complex.... but same principles apply... in my view.

The trouble with accounting balance sheet stuff is that it is an abstract derivative of underlying realities. In my view , if one does not try to understand the fundamental, commonsense, realities , then it is easy to end up down rabbit holes by only using abstract balance sheet accting stuff.

I might be showing my ignorance here.... but thats my view.... The idea that taxation doesn't pay for anything is a nonsense to me.
( sure... if govt printed all the money it spent it becomes true....BUT... thats not the system we have... Private banking system creates most of our new money as credit/debt )

Roelof, appreciate your measured account. But, it fundamentally misunderstands the difference between a currency issuer and a currency user. I completely accept that it is incredibly intuitive to analogise a government fiscal's capacity with mine or yours: it should not be able to spend more than it earns or borrows. And we are inundated every day with politicians extolling the virtues of 'being fiscally responsible' or 'balancing the books' or 'striving for surpluses', which just perpetuates this analogy. But is false. Have another read of the article, and if you're not convinced, read Kelton's book. Please. Kelton was just as sceptical as you, as was I, once.

my comments are in regards to the assertion that " taxation doesn't finance anything and that Govt pays for everything itself."
I'm saying that this assertion is a nonsense.

I understand that Govt can print money....and they do , via central banks , in extraordinary circumstance.
In our current Monetary system, most new money is created by the private banking system, as credit(debt).

eg.. in 2001 monetary base was $3 billion, in 2009 is was $13billion and today it is almost 30 billion.
Broad money ( private banking sector ) in 2001 was $83 billion 2019 $320 billion and today $356 billion.

But. It. Isn't. Tax and taxpayers do not fund any expenditure of a currency-issuing government. Tax takes money out of the real economy. Don't take it from me, Steven Hail, or Kelton - take it from the Bank of England:

As for private banks, they are still currency users (not issuers), so they can only issue credit within their prudential lending limits set by the government. The government itself is not so constrained.

I've heard the definition of money being a promissory note of future energy expenditure. Seems the best explanation to me. Also, agree with your comment about turning money creation over to politicians. Can they be trusted not to turn the whole thing into a giant barrel of pork?

Thank you all above so much for having a fascinating discussion on the topic of the article. I gladly take my comment above back where I asked "are we no longer able to have an intelligent conversation".

I completely get that NZ Govt. can print as much NZD as they like.
I don't get the statement above that "Taxes ... , contrary to the popular myth, ... don’t finance government spending."
In what sense is this a myth?
The govt's own financial accounts for the YE Jun3 2020, (, clearly show a revenue and expenditure statement (not a creation and expenditure statement) and that by far the most of that govt. revenue is derived from taxes.
What am I missing?

MMT proponents continue to ignore that actions *are* reality.

If everyone behaves precisely as if something is true and it drives their behaviour, then it doesn't actually matter if it is true or not. Their actions make it true.

Huh? MMT is totally alive to the fact that currency-issuing governments have firmly embraced household myths and chosen to damage their economies as result (look at austerity in the UK in the wake of the GFC, not to mention the state of public infrastructure in most Western countries). What MMT offers is an alternative, which reflects the actual capability and capacity of such governments. I agree that if I lock myself in my room and put on handcuffs, then I'm in a prison of sorts. But I don't have to be: I could throw off the handcuffs and walk out the door to a better reality.

The Emperor's new clothes comes to mind

That statement simply reflects flows. It tells you nothing about stock - the NZ Government's fiscal capacity as the currency issuer. The NZ Government doesn't count its taxes or check its financial account before it spends. It just spends by the Treasury (at the behest of the elected Government) instructing the Reserve Bank to type numbers into a payee's account.

There's nothing monetary about it either, it's a fiscal approach.

Any system not accounting for resource stocks, falls over when the underwrite depletes.

MMT is therefore in the same boat as the free-marketeers, the economists and the interest-chargers.

In a resource-constrained world, we are bidding against each other for the remaining stocks - and in our case (actually, in most cases) the bidding is being done with debt. Which is no bidding at all. It's Growth which is in trouble and until we fit a system to the real (Bounded System) planet, we're flying blind.

Indeed...the bidding for declining resources has spurred a printing frenzy. when the currency war stops working, the hot wars will begin.

Adrian Brr.
Read the Price of Tomorrow by Jeff Booth.

Our currency is dying , what happens next ?

Hedge against it, buy property, that's what is essentially happening now (preferable then shares). It's a run out of banks into houses. Mr Orr even encourages it, saying "People need to find alternatives to bank deposits" ....and this is the result.

Article is a real crock. As is MMT. The authors are fooling themselves.

goes for just about any emanation from an economist.....

Hello? One of the authors isn't a practising economist...

Is it not as simple as realising that fundamentally fiat currency has to be relatively stable enough to trust in its ability that as time passes one can trade it for same/similar quantity of goods/services as one can trade for it today!

By whatever mechanism you chose to erode this trust, the moment you do, you will find people will no longer be willing to hold said currency..

Key fact is we don’t want money, we want the ability to store purchasing power. How can we do this if quantity of money is increased then its purchasing power has to decrease... I.e. inflation. The MMT money-go-round theory is ludicrous in that it ignores the fact that people want to increase purchasing power and the only way to do this is by increasing actual output (productivity) more than the increase of currency...

Please educate me where I’m wrong..

MMT is a description of how our monetary system is working here and now, it is not something that we need to introduce. There is always spare capacity within any economy that can be put to work, unemployment is an example of this fact, a job guarantee would be one way to put these resources to productive work. MMT does not say that the government can spend without limit but that the availability of resources are the limiting factor and not money.
Banks also create money every time that they issue a loan hence the ever increasing price of our houses but this is only credit money and not currency, it carries a debt liability that must be repaid with interest.
The Bank of England explains here how banks create money.

Thanks. I understand credit multiplier from banks loaning out on reserves. My point is, also highlighted by you, that ‘money/credit creation’ has to be instep with real productivity else all we get is inflation.
Someone above mentioned savings... here the premise is one would receive more money ‘value’ in the future by saving/investing... if this is not the case then we are better off now to consume and buy real assets with someone else’s savings (loan).

Treadlightly & ML Smith IMO you both make great points, thank you and I am humbly acknowledging that I am still confused about the merits of MMT

It's all good in theory. The problem lies with who decides how much to print based on whatever measure of productivity. And how far into the future they're willing to trade against. That's all smoke and mirrors.

Japan. Japan. Japan. Japan shreds every unfounded mainstream mantra about government deficits, who controls interest rates, and what preserves the ‘purchasing power’ of a currency. It is not the amount of dollars but the nature of spending that can be inflationary. And it’s not just government spending that can trigger this. As you say, it is far more about the productive capacity and scope for increasing that capacity in a particular market.

I've been in working groups where this sort of stuff gets talked up and agreed upon. Lots of nodding and in depth proselytizing and everyone congratulates each other on how many meetings they're having, and their high salaries, and the big words they're using.

But the bottom line is, the MMT credit experiment of the last 40 years is close to failing. Resources are finite and many are increasingly scarce. The common man on the street is finding it more difficult to make ends meet which were seeing in mortgage deferrals transferred to interest only 5 year terms. And larger and larger companies are taking more and more of the resource pie with fewer compensated as a result. MMT has brought us the GFC (which QE has just stalled). You can spin and talk up the levers and mechanisms all you want, but this article is right about just one thing:

[governments are limited by] real spending limits: a country’s people and its resources

And in that regard they're EXACTLY like a household, just on a larger scale.

MMT didn't invent our monetary system it only describes its operation. If you want to point the finger at our troubles then blame neo-liberalism. MMT didn't create the GFC, that was irresponsible bank lending, issuing mortgages to people that had no way of repaying them and then packaging them up and on selling them. It was governments that had to come to the rescue and bail out the banks to prevent them from failing. Perhaps it might have been better in the long run to have let them fail as austerity was the end result where governments reduced their spending to try and reduce their debt. It was the poor that ended up paying while the bankers got of scot free.

Austerity is the only way out of this to be sure. Looking for the smoking gun is economic chicken and egg stuff. The hard principals of work force productivity still stand as a foundation.

The Modern Monetary Theory is ...Print and Pray. The Exports, Trade, Housing, etc will take care of themselves. Sorted.