Modern Monetary Theory (MMT): How Fiat Money Works

[Dovahkiin]

This is a great read by Chris Mayer.
Modern Monetary Theory (MMT): How Fiat Money Works

Warren Mosler tells a good story that shows how our economy works at its most basic level.

Imagine parents create coupons they use to pay their kids for doing chores around the house. They “tax” the kids 10 coupons per week. If the kids don’t have 10 coupons, the parents punish them. “This closely replicates taxation in the real economy, where we have to pay our taxes or face penalties,” Mosler writes.

So now our household has its own currency. This is much like the U.S. government, which issues dollars, a fiat currency. (Meaning Uncle Sam doesn’t have to give you something else for it. Say, like a certain weight in gold.) If you think through this simple analogy, all kinds of interesting insights emerge.

For example, do the parents have to get coupons from their kids before they can pay them to do any chores? Obviously not. In fact, the parents have to spend their couponsfirst by paying their children to do chores before they can collect the tax. “How else can the children get the coupons they owe to the parents?” Mosler writes.

“Likewise,” he continues, “in the real economy, the federal government, just like this household with its own coupons, doesn’t have to get the dollars it spends from taxing or borrowing or anywhere else to be able to spend them.”

The government creates dollars. It doesn’t even have to print them. The vast majority of spending is simply done by adding electronic dollars to bank accounts. Therefore, the U.S. government can’t go bankrupt. It pays all its bills in U.S. dollars, of which it is the sole issuer.

the state is… at best, bumbling and incompetent and wasteful. At worst, it is an evil force on society.

This sounds really obvious, but it is amazing how many people — even very smart people — forget this simple fact. They get hysterical about the fiscal deficit or the national debt. (This is not to say there aren’t bad consequences from issuing too many coupons, or from government spending in general.) The only way the U.S. government can default is if it chooses to do so.

Going back to Mosler’s example, let’s ask another question: How can the kids “save” coupons in excess of the weekly tax? Well, they can only do that if the parents spend more than they tax. There is no other way to hoard coupons. In the real economy, the same is true. The private sector can save dollars only if the government spends more than it taxes. Spending pours fiat money into an economy; tax payments drain it away.

You don’t have to like this. (I don’t.) It’s merely a description of how a fiat currency system works. That’s the world we live in. Too many people tackle economic questions ideologically. I can be as guilty of this as anyone. My own view of the state is that it is, at best, bumbling and incompetent and wasteful. At worst, it is an evil force on society. (My sympathies lie with those old American radicals, such as Lysander Spooner [1808–87]. If you don’t know who he is, look him up. He was a great American. I have his six-volume collected works here on my bookshelf.)

Nonetheless, after much reading and thought, I agree with Mosler: The state’s ability to enforce tax liabilities, fines and fees drives the demand for money. Or as Mosler says, “Taxes drive money.” This is a view of money called “chartalism” and it is one I subscribe to. It has been around a long time. And it forms one of the building blocks of a school of thought Mosler helped to found, called Modern Monetary Theory (MMT).

 

[Centinel]

The constitution mentions years, Monday, December, and dollars. Did each of these terms have meanings at the time of the ratification?

 

[Dovahkiin]

The constitution mentions years, Monday, December, and dollars. Did each of these terms have meanings at the time of the ratification?

What does this have to do with the OP?

 

[Centinel]

The constitution mentions years, Monday, December, and dollars. Did each of these terms have meanings at the time of the ratification?

What does this have to do with the OP?

Dollars are the money in the US, no? If you are talking about a theory of money, I assumed that you meant dollars, or are you from another country?

 

[Dovahkiin]

The constitution mentions years, Monday, December, and dollars. Did each of these terms have meanings at the time of the ratification?

What does this have to do with the OP?

Dollars are the money in the US, no?

The united states dollar is the currency, yes.

 

[Centinel]

The constitution mentions years, Monday, December, and dollars. Did each of these terms have meanings at the time of the ratification?

What does this have to do with the OP?

Dollars are the money in the US, no?

The united states dollar is the currency, yes.

And what is a dollar? When the constitution uses the word dollar, to what thing was it referring?

 

[Dovahkiin]

The constitution mentions years, Monday, December, and dollars. Did each of these terms have meanings at the time of the ratification?

What does this have to do with the OP?

Dollars are the money in the US, no?

The united states dollar is the currency, yes.

And what is a dollar? When the constitution uses the word dollar, to what thing was it referring?

The currency of the united states. I'm pretty sure the constitution refers to this.

 

[Centinel]

The constitution mentions years, Monday, December, and dollars. Did each of these terms have meanings at the time of the ratification?

What does this have to do with the OP?

Dollars are the money in the US, no?

The united states dollar is the currency, yes.

And what is a dollar? When the constitution uses the word dollar, to what thing was it referring?

The currency of the united states. I'm pretty sure the constitution refers to this.

There was no currency of the united states when the delegates of the several states wrote the constitution. In fact, there was no United States. So what did they mean when they used the word "dollar"?

 

[Norman]

Why do you keep advertising MMT here?

Can you not read, this is politics, not economics forum.

It's OK, MMTers can't read either, or otherwise they would have addressed the critique of their incorrect theory by now.

 

[Dovahkiin]

What does this have to do with the OP?

Dollars are the money in the US, no?

The united states dollar is the currency, yes.

And what is a dollar? When the constitution uses the word dollar, to what thing was it referring?

The currency of the united states. I'm pretty sure the constitution refers to this.

There was no currency of the united states when the delegates of the several states wrote the constitution. In fact, there was no United States. So what did they mean when they used the word "dollar"?

You tell me.

 

[Dovahkiin]

Why do you keep advertising MMT here?

Can you not read, this is politics, not economics forum.

It's OK, MMTers can't read either, or otherwise they would have addressed the critique of their incorrect theory by now.

Which critique?

 

[Centinel]

Dollars are the money in the US, no?

The united states dollar is the currency, yes.

And what is a dollar? When the constitution uses the word dollar, to what thing was it referring?

The currency of the united states. I'm pretty sure the constitution refers to this.

There was no currency of the united states when the delegates of the several states wrote the constitution. In fact, there was no United States. So what did they mean when they used the word "dollar"?

You tell me.

Seems weird to have a dollar theory when one doesn't even know what a dollar is.

 

[Norman]

Why do you keep advertising MMT here?

Can you not read, this is politics, not economics forum.

It's OK, MMTers can't read either, or otherwise they would have addressed the critique of their incorrect theory by now.

Which critique?

I have written many posts, specifically to you.

Other than that, there are dozens of critiques floating online. The theory is complete garbage, however you make it way more garbage by trying to make it seem like the theory claims something it DOES NOT. Ie. deficits don't matter.

Please, stop the spam already. If you legitimately want to talk about the theory, that is fine, but this is just spam. Besides, this is not the economics forum.

What are your motives for these shameless plugs anyway? Are you paid or trained by MMTers?

 

[Dovahkiin]

The united states dollar is the currency, yes.

And what is a dollar? When the constitution uses the word dollar, to what thing was it referring?

The currency of the united states. I'm pretty sure the constitution refers to this.

There was no currency of the united states when the delegates of the several states wrote the constitution. In fact, there was no United States. So what did they mean when they used the word "dollar"?

You tell me.

Seems weird to have a theory of money when one doesn't even know what money is.

What are you rambling about? Money is a way governments can obtain resources to do its duty. A tax obligation gives money value.

 

[Dovahkiin]

Why do you keep advertising MMT here?

Can you not read, this is politics, not economics forum.

It's OK, MMTers can't read either, or otherwise they would have addressed the critique of their incorrect theory by now.

Which critique?

I have written many posts, specifically to you.

Other than that, there are dozens of critiques floating online. The theory is complete garbage, however you make it way more garbage by trying to make it seem like the theory claims something it DOES NOT. Ie. deficits don't matter.

Please, stop the spam already. If you legitimately want to talk about the theory, that is fine, but this is just spam. Besides, this is not the economics forum.

What are your motives for these shameless plugs anyway? Are you paid or trained by MMTers?

Post the critiques, in your own words, instead of pointless rambling. Yeah, I don't remember these posts, maybe because I don't respond to people who don't understand the theory. For example, where do I claim deficits don't matter? Oh right, I don't nor does any MMTER.

 

[Dovahkiin]

The constitution mentions years, Monday, December, and dollars. Did each of these terms have meanings at the time of the ratification?

And this is about how fiat money works, not the interpretation of what the constitution meant when it said dollar.

 

[Centinel]

And what is a dollar? When the constitution uses the word dollar, to what thing was it referring?

The currency of the united states. I'm pretty sure the constitution refers to this.

There was no currency of the united states when the delegates of the several states wrote the constitution. In fact, there was no United States. So what did they mean when they used the word "dollar"?

You tell me.

Seems weird to have a theory of money when one doesn't even know what money is.

What are you rambling about? Money is a way governments can obtain resources to do its duty. A tax obligation gives money value.

So in the constitution, dollars aren't money?

 

[Dovahkiin]

The currency of the united states. I'm pretty sure the constitution refers to this.

There was no currency of the united states when the delegates of the several states wrote the constitution. In fact, there was no United States. So what did they mean when they used the word "dollar"?

You tell me.

Seems weird to have a theory of money when one doesn't even know what money is.

What are you rambling about? Money is a way governments can obtain resources to do its duty. A tax obligation gives money value.

So in the constitution, dollars aren't money?

You need to tell me what the constitution is referring to, because it seems to be open to interpretation. You're the expert on the old document after all.

 

[Centinel]

There was no currency of the united states when the delegates of the several states wrote the constitution. In fact, there was no United States. So what did they mean when they used the word "dollar"?

You tell me.

Seems weird to have a theory of money when one doesn't even know what money is.

What are you rambling about? Money is a way governments can obtain resources to do its duty. A tax obligation gives money value.

So in the constitution, dollars aren't money?

You need to tell me what the constitution is referring to, because it seems to be open to interpretation. You're the expert on the old document after all.

I'm no expert on the constitution, any more than any of the members of the ratification conventions were experts, nor have I claimed to be an expert. I simply have the ability to read.

I am not the one who started a thread about dollars. I would have expected that you knew what it was you were talking about.

 

[Dovahkiin]

You tell me.

Seems weird to have a theory of money when one doesn't even know what money is.

What are you rambling about? Money is a way governments can obtain resources to do its duty. A tax obligation gives money value.

So in the constitution, dollars aren't money?

You need to tell me what the constitution is referring to, because it seems to be open to interpretation. You're the expert on the old document after all.

I'm no expert, any more than any of the members of the ratification conventions were experts. I simply have the ability to read.

I am not the one who started a thread about dollars. I would have expected that you knew what you were talking about.

I started a thread about fiat money in general.