More on modern monetary theory

It tries to differentiate real economy fundamentals from monetary fundamentals.  But what makes it different from other theories about money is that it views fiat money creation as enabling private wealth creation:

[In a] country like the United States, which issues its own freely floating fiat currency, can always make the policy choice to issue whatever quantity of that currency it deems appropriate.  The US government can spend as many dollars into the private sector economy as it chooses, without obtaining those dollars from some other source first, and it can always pay any debts that have been incurred by borrowing dollars.  But the critics will go on to charge that MMT mistakenly concludes from these few institutional and operational facts that there are no economic limits to the wealth-generating capacities of the government.  .....

Money is a medium of exchange and exists to help the real economy work better.:

The monetary system is best seen as a public utility that is employed by its users to finance the production and exchange of goods and services.  It is a system of institutions created by human beings to help realize opportunity, and match opportunities for the creation and transfer of goods with the potential producers and recipients of these goods.  It’s our monetary system, and we can do whatever we want with it to achieve our society’s full potential.  We can create, destroy, transfer or manipulate the monetary medium of exchange as we see fit to advance the good of society and improve the condition of our people.  Thus there can be no such thing as an economic limit due solely to our society as a whole being “out of money”.  That’s like saying we can’t organize better schools, or write more and better books because we have run out of words.

Deficits do not have to be bond financed.  The government can print money without creating a hyperinflation because:

If a government wishes to increase its deficit, doesn’t it necessarily have to borrow to cover the larger gap between revenues and spending?   No, it does not.  A government that is the issuer of its own currency has the option of increasing its deficit without increasing bond sales.  It can issue new money in the very act of spending it.


 
(see link here )

In more economic terms, the basic principles are:

• The Federal Reserve and the government have a symbiotic relationship and together are issuers of the currency to the monetary system. Households, businesses and state governments are users of public sector supplied currency and also private bank issued monies (i.e. bank deposits).

• The private banking sector issues bank deposits (“inside money”) and the public sector issues coins, paper cash and banking sector reserves (“outside money”). Nowadays most market exchanges involving private agents are transacted in bank deposits and, as such, the ins and outs of “inside money” are vital to understanding how the modern monetary system functions. While the private sector component of the monetary system takes center stage in the daily business of market exchanges and economic progress, the public sector also plays an important facilitating role.

• As the issuer of the currency, there is no solvency constraint at the government level as there might be for a household, state or business.  In this regard, one must be careful comparing the federal government to a household because the federal government has no solvency constraint (i.e., there’s no such thing as the federal government “running out of money” as it can always call on the banks and the Federal Reserve to serve as agents of the government).  Households, on the other hand, have a very real solvency constraint.

• The federal government’s true constraint is never solvency, but inflation. The government must manage the money supply so as to avoid imposing undue harm on the populace via mismanagement of the money supply.

• The modern floating exchange rate system helps to maintain equilibrium and flexibility in the global economy.

• The currency denomination of debt is very important to assessing the sustainability of public finances. When a government issues debt payable in the domestic currency unit these assets are essentially default-free. (The exceptions are when policymakers “self-impose” constraints that forbid the central bank from acting as the government’s banker as per Euroland).

• The government is an entity created by the people and for the people. It exists to further the prosperity of the private sector – NOT to benefit at its expense. If this entity is allowed to exist for its own benefit or becomes corrupted by a concentration of power or abuse of its currency issuing powers it will become susceptible to dissolution via the populace’s rejection of that government.

• Governments should be actively involved in regulating and helping build the infrastructure within which the private sector can generate economic growth. The economy is a complex dynamical system with irrational participants. The market cannot be expected to regulate itself or behave rationally at all times. Therefore, some level of government intervention and involvement is not only beneficial, but also necessary. While government assists in the economic process it is ultimately the private sector that is the primary driver of innovation, productivity and economic growth. It is the private sector that propels increases in living standards with its activities the most important factor in giving value and viability to the currency.

• The unit of account or medium of exchange within a specific nation is ultimately a creature of law.  It must therefore be regulated by the state; however, ultimately the private sector must accept this legal tender as the currency unit. Therefore, the private and public sectors should best be thought of as being in partnership with one another and not opposing forces. Government by the people and for the people is not the antagonist in this story, but rather an entity that should be best utilized to maximize private sector prosperity.

• Government deficit spending and tax collection should be maintained at a rate that does not impose financial hardship on the private sector. Because the Federal government is not a business or household it should not manage its balance sheet for its own benefit. Rather, taxes and government spending should be managed in a way that most benefits the private sector and encourages private sector prosperity, productivity, innovation and growth.
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(see link here)