MMT Economics Jargon Buster - Part 4 (I thru V)
If you’re new to MMT, you’ll need a reference. This is article four, in which I define the most commonly used MMT terms from I thru V.
In this series of articles, I aim to cover the basic MMT terms. 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 4: I thru V.
The Phillips Curve
The Phillips Curve is an economic theory suggesting that there is a relationship between the level of employment and the level of inflation. Specifically, it posits that, as the economy approaches full employment, the rate of inflation accelerates. The name, ‘The Phillips Curve’, comes from a study carried out by A.W. Phillip in 1958 showing wage and unemployment changes in the period between 1861 and 1957.
The Primary Market
The primary market refers to the market for new government securities. In the UK, this occurs through auctions conducted by the Debt Management Office (DMO), where authorised institutions, such as commercial banks, bid for and buy securities on behalf of the UK Treasury. The Bank of England facilitates the settlement process.
‘Securities’ is an umbrella term for financial instruments, including government bonds, corporate bonds, and shares. In the UK government bonds are called gilts and in the US, treasuries. From an MMT perspective, these bonds aren’t issued to “raise funds”. In practice, they provide a safe savings vehicle for investors and manage short-term interest rates, specifically the overnight interbank interest rate.
Quantitative Easing
Quantitative easing involves the Bank of England buying government bonds from private investors and crediting their reserve accounts in exchange. This process swaps one type of financial asset (bonds) for another (reserves).
What is a government bond? There was a time when government bonds and money were both physical pieces of paper. You can think of a bond as being the same as paper money, but the holder of the bond gets interest paid on and the holder of the money doesn’t. Stephanie Kelton points out that government bonds are just different forms of government-created money.
What are Central Bank Reserves? Central Bank Reserves are the deposits commercial banks hold at the central bank. In the UK, that’s the Bank of England. These deposits are held exclusively in digital form.
Quantitative Tightening
Quantitative tightening involves the Bank of England selling government bonds or letting them mature. This reduces reserves (base money) in the banking system.
Secondary Market
The secondary market is where existing securities are bought and sold between investors after their initial issuance. In this market, government bonds are traded among private institutions, banks, and individual investors, without direct involvement from the original issuer.
The Bank of England participates in the secondary market by buying or selling government bonds during operations like quantitative easing (QE) or quantitative tightening (QT).
Sectoral Balances
MMT brings attention to the fundamental truth that the financial positions of the private sector, public sector, and foreign sector, when added together, must always balance to zero. Put simply, a deficit in one sector must always be matched by a surplus in another. If the government sector is running a deficit, this will result in a surplus somewhere else — either in the private sector, the foreign sector, or both.
The point of all this? Government deficits plays an essential role in the economy. When the government runs a deficit, it adds money into the economy, which ends up as a surplus in either the private or foreign sector.
This is a direct challenge to the mainstream economic view, which sees government deficits as a problem. MMT argues that deficits are crucial for economic growth; allowing the private sector to save. In fact the private sector can only save if the government is running a deficit.
This argument pushes against austerity thinking and suggests that deficits can and should be used strategically to maintain full employment, support growth, and create stability. It’s a shift in the conversation, away from deficit phobia, towards an understanding of the essential role government spending plays in the broader economy.
Securities
An umbrella term for financial instruments, including government bonds, corporate bonds, and shares. In the UK government bonds are called gilts and in the US, treasuries. From an MMT perspective, these bonds aren’t issued to “raise funds”. In practice, they provide a safe savings vehicle for investors and manage short-term interest rates, specifically the overnight interbank interest rate.
Stock-Flow Consistent (SFC) Modelling
Stock flow consistent modelling is an approach in macroeconomic analysis that ensures all financial transactions and their effects on stocks and flows are consistently and accurately accounted for across all sectors of the economy.
Definition of the words 'stocks' and 'flows' in the context of economics
'Stocks' refer to the amount of assets or liabilities held at a particular point in time, while 'flows' represent the changes in these quantities over a specific period. An example of stocks would be the amount of money in your bank account at the end of a particular year. The 'flows' would be the deposits and withdrawals you made during that year.
Supply side
Supply-side refers to the availability of resources, labour, technology, and access to imports, as inputs into the production of goods and services. In countries reliant on imports, geopolitical events like wars can disrupt global supply chains, driving up the prices of critical imports such as energy and food. This raises production costs, fuels inflation and puts pressure on foreign currency reserves, especially for countries that rely on imports to meet basic needs and lack control over their own currency supply.
Vertical Money
Vertical Money is money created by the government through its fiscal operations. When a government spends more than it taxes, it injects new net financial assets into the economy. Unlike horizontal money, this government-created money (often via currency issuance or deficit spending) does not need to be repaid by the private sector. Vertical money adds to the overall net financial wealth of the non-government sector (which includes the private sector and foreign sector).
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That’s Enough MMT Jargon For Now
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All The Jargon I’ve Missed From I Thru V
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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If you’re finding value in these articles, become a paid subscriber. Your support allows me to continue to write, teach and to build a community of like-minded individuals—individuals, like you, who understand that MMT offers an opportunity to change the world for the better. Become a paid subscriber now.