MMT Economics Jargon Buster - Part 2 (G thru M)
If you’re new to MMT, you’ll need a reference. This is article two, in which I define the most commonly used MMT terms.
In this series of articles, I aim to cover the basic MMT terms you need to know. In the future, I will continue to add to this article (and all future articles that are part of this series) and when they are all done, I’ll create a downloadable resource.
MMT economics jargon buster 2 G thru M.
Government Bonds
A government bond, is an interest-bearing financial asset issued by a government. You can visualise it as being similar to paper money (as it was in the past), except that the holder of the security receives interest, while the holder of money does not.
In orthodox/neoliberal economics story, bonds are sold to raise funds for government spending. However, MMT advocates point out that—for monetarily sovereign countries—this is not the case. When government bonds are purchased, they are simply swapped for bank reserves: i.e., non-interest-bearing base money is exchanged for an interest-bearing security.
No new funds are raised in this process; however, the interest paid on the bond flows into the non-government sector. Note that for governments that do not issue their own currency, bond sales do indeed raise money for government operations.
In the UK, all new government securities, including bonds (known as gilts) and shorter-term instruments like Treasury Bills, are sold exclusively by HM Treasury. Later, these securities are bought and sold by the Central Bank, commercial banks, private institutions, individuals, and other entities.
Securities sold directly by the government (via the Treasury) are said to have been sold in the primary market. Those same securities, when later traded by other institutions in the non-government sector, are said to be traded in the secondary market.
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The Primary Market
The primary market is where new securities, like government bonds, are initially sold by the issuer to investors. For government bonds, this is usually done through auctions where authorised institutions, i.e., commercial banks, buy them directly from the government or central bank.
The Secondary Market
The secondary market is where existing securities are bought and sold between investors after the initial issuance. In this market, government bonds are traded among private institutions, banks, and individual investors, without involving the original issuer.
“Governments are like households”
The ‘government are like households’ idea goes back to the beginning of classical economics. Today however, most people associate it with Margaret Thatcher and Ronald Reagan in the 1980s. It implies that governments, just like households, should strike a balance between their spending and their income.
With the rise of Neoliberal Economics (1980s-1990s) Margaret Thatcher in the UK and Ronald Reagan in the US popularised the idea that a government should "live within its means" – like any household. This concept framed public opinion on government budgets, and leaders used it to justify cuts to social spending and public sector reforms.
Modern Monetary Theory (MMT) challenges this idea, explaining that governments with their own currency, such as the UK or America or Japan, operate differently from households. Unlike households, these governments are the sole creators of the countries currency; they can never run out. Spending in that currency, therefore, is only limited by the availability of things to buy and the possibility of inflation.
Therefore, such governments can choose to prioritise full employment and price stability over ‘balancing the budget’. They can choose to priorities projects to mitigate global warming. They can choose to prioritise spending that enhances the wellbeing of their citizens. As long as there are resources available to purchase in the governments currency the government can purchase those resources.
MMT highlights the unique fiscal abilities of sovereign governments and advocates for policies that promote economic stability and shared prosperity.
As one of the founders of MMT, Bill Mitchell points out,
“There is a fundamental difference between the currency-issuer and the currency-user, such that the former has no intrinsic financial constraints on its spending.
Such a government can always meet any liabilities that are denominated in the currency it issues. This also means that such a government can purchase anything that is for sale in the currency it issues, including all idle labour.
Which means that the government chooses the unemployment rate. An elevated unemployment rate is always a political decision rather than anything that is forced on a nation by ‘market forces’ or the choice of individuals/households. Economist Bill Mitchell
Government Debt
The accumulation of deficits over time creates what is called the 'government debt’. This is the amount of money the government has added to the economy but has not yet taxed back.
For example, if the government spends £1 million and collects £900,000 in taxes, that leaves £100,000 in the economy. This £100,000 is the government deficit for that year. If you add up all deficits over the years, minus any surpluses run across the same period, you get the total government debt.
Government debt is of course only one side of the story. If the government is in debt that means the non-government sector must be in surplus. If I was to loan you £10, I’ve now a deficit of £10 but you’ve now got a surplus of £10.
Across any period of time (for example, one year) the size of the government deficit will always equal the size of the non-government sector surplus. This is why MMT advocate Stephanie Kelton says we should stop using the term government debt and instead call it non-government sector savings.
So, it is clear that for currency sovereign governments like the UK or the US, government debt is not the same as the debt you or I can build up. For the currency issuers, any debt can be paid off - as long that debt is in the currency issued.
In this way, government debt shows the cumulative amount of money injected into the economy through all government spending - minus taxes returned. That untaxed amount is effectively held by the private sector. That could be in the form of savings or other financial assets.
“it (government) can't run out of dollars any more than a carpenter can run out of inches.” The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy
The Government Sector
The government sector includes all levels of government and their institutions. In the US that means federal, state, and local governments, as well as public agencies and entities funded or controlled by the government. In the UK that means central UK government, the devolved administrations, local councils, and public agencies.
This sector is responsible for providing public goods, services, and infrastructure, and it typically generates revenue through taxes, fees, and, in the case of monetary sovereign countries, currency issuance.
Inflation
Inflation means a continuous increase in price levels. If prices go up faster than consumer wages and/or interest earned on savings - each pound/euro/dollar buys less and less over time.
In the UK, inflation is measured by indices like the Consumer Price Index (CPI) or Producer Price Index (PPI). The CPI measures the average change over time in the prices paid by consumers for a basket of goods and services – and is published by the Office for National Statistics (ONS). It is the CPI that the Bank of England is referring to when it publishes inflation targets.
Economists categorise the causes of inflation as either coming from ‘demand side’ or ‘supply side’ factors.
Demand-Side Inflation
The phrase ‘demand-side’ refers to the demand for goods and services from consumers, businesses, and government. When demand outstrips the supply of what’s available to buy, prices are driven up.
Supply-Side Inflation
The phrase ‘supply-side’ refers to rising costs of inputs required to produce goods and services. Input costs include, among other things, wages, raw materials, rents, advertising costs, transport costs, and interest on loans. Disruptions to supply chains and/or price gouging by large corporations are also regarded as supply-side issues.
The Non-Government Sector
The non-government sector comprises everything outside of government control, including households, private businesses, and the foreign sector (foreign governments, companies, and individuals). It represents the part of the economy that operates independently of government, engaging in private economic activity, saving, investment, and foreign trade.
MMT identifies three sectors, the government sector, the private sector and the foreign sector. The private sector and the foreign sector make up the non-government sector.
“The debt isn’t the reason we can’t have nice things. Our broken thinking is. To fix our broken thinking, we need to overcome more than just an aversion to big numbers with the word debt attached. We need to beat back every destructive myth that hobbles our thinking.” Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy
Horizontal Money
Horizontal Money refers to the money created within the private sector, primarily through bank lending. When banks issue loans, they create deposits. These deposits create new money within the banking system. This is called "horizontal" money because it represents a redistribution of purchasing power between private sector entities.
No new net financial assets are created; loans (asset) and deposits (liability) balance each other out. In other words, once a loan is paid off the money that was created to provide that loan no longer exits. At that point, zero new money has been created in the private sector by the the bank.
Only the central banks of currency issuing countries can add net new money into the economy (vertical money). The liability created after the government/central bank issues new money is a spreadsheet entry. In a Fiat currency system, government loans can exist as government ‘debt’ indefinitely.
For monetary sovereign countries, current spending does not restrict future spending. Similarly, the size of historic government debt has no impact on whether a spending decision can be made today.
The Monetary System
The monetary system is the system that governs how money operates within an economy. How it is created, circulated, and used to buy and sell goods and services. It describes the types of currency in use, i.e., digital forms or physical coins and banknotes. It outlines the rules and institutions governing their value and the exchange rates with other currencies.
Markets
At its simplest, a market is a place or system where people buy and sell goods, services, or assets. I suspect all economists would agree with this basic definition. However, different schools of economic thought disagree on the details of how to ensure markets work efficiently and operate in the interests of both buyers and sellers. Contentious issues include the appropriate level of government intervention and how attitudes and behaviours influence market dynamics.
The Neoliberal View
Neoliberal economists favour minimal government intervention. They understand markets as self-regulating systems where buyers and sellers freely exchange goods, services, or assets, and where prices are determined by supply and demand. Outcomes depend on individual effort, skills, and choices—not social or political considerations.
Minimal government intervention is seen as allowing competitive forces to allocate resources efficiently, driving innovation and promoting economic growth. Market outcomes are assumed to represent the best outcome for both sellers and buyers. Any interference, therefore, is viewed as a disruptive force in this naturally balanced system. Governments are seen as one such disruptive force, getting in the way of efficient resource allocation and optimal outcomes.
Neoliberal Economics and Human Behaviour
Neoliberal economists assume individuals are rational actors who make decisions to maximise their utility (benefits) and minimise costs. Human self-interest is considered the driver of competition, innovation, and optimal resource allocation. Price signals are viewed as key information that individuals respond to when making consumption or production choices. These assumptions underpin the belief that markets function efficiently when left to individuals to make decisions serving their own interests.
The MMT View
MMT advocates argue that, contrary to neoliberal beliefs, central governments underpin market operations—they literally set the rules. Central governments issue the national currency, license banks to issue loans (in that currency), and create the laws and financial regulations necessary for markets to function. Modern markets do not exist independently of central governments; they rely on the foundational structures governments provide.
MMT also notes that markets left to their own devices do not address collective needs such as healthcare, education, environmental protection, welfare support, and job security. Governments must therefore intervene to steer markets toward socially desirable outcomes.
Markets, when left to their own devices, have a tendency to concentrate wealth and power, exacerbate inequality, and contribute to pollution, worker exploitation, and resource depletion. These ‘externalities’ are not reflected in market prices.
Underlying the neoliberal belief in perfect competition and balanced supply and demand is the assumption of a level playing field for sellers. In reality, this is not the case. Large corporations can exert significant power over consumers and smaller producers, leading to market distortions, exploitative practices, and limited choices for consumers.
MMT therefore contests neoliberal economists underlying assumptions relating to the efficiency and efficacy of the free market approach.
MMT and Human Behaviour
Contrary to the neoliberal focus on the individual, Modern Monetary Theory (MMT) recognises that individuals are social animals; embedded within communities and affected by institutional biases and social pressures. Markets are shaped by social, institutional, and psychological factors.
MMT also emphasises the role of collective decision-making in addressing social needs that markets often fail to meet. Unlike the neoliberal focus on individual rationality, MMT acknowledges that human behaviour is influenced by structural constraints, power imbalances, and imperfect information. Therefore, the government has a role to play in addressing the weaknesses of markets that are left to their own devices.
That’s all for now. At this point I time, I don’t know how many more articles there will be before I get to the end of MMT alphabet, but I suspect there will be a few. :-)
All The Jargon I’ve Missed From G To M
I know I’m missed out many, many pieces of jargon in this list from A through to F. So please add your own list of MMT words I should have covered in the comments section below. I will add them in a future update of this article. Thanks.
And of course, if you disagree with my definitions your comments are welcomed.
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Jim Byrne - MM101.ORG
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Thanks,
Jim
If you’re finding value in these articles, become a paid subscriber. Your support helps me continue writing about MMT and helps build a community of like-minded individuals.
I really appreciate what you are doing here. I've long spoken out against much of the neoliberal approach, especially they claim of free markets when actually markets are greatly skewed by subsidies, tax structure, special interests, etc. The US especially is more a corporatocracy than a functional democracy or republic. I do have a question for you. What is your take on national debt? The interest on the mind-blowingly large US national debt is one of the biggest expenditures in the federal budget.