MMT Tools for Sceptics: How to Convince Your Friend You’re Not A Conspiracy Theorist
Easy Ways to Explain Modern Monetary Theory with Quotes, a Key Graph, Deficit Spending, and Government ‘Borrowing’
What you will learn
How to convince your friend of the merits of MMT; by use quotes as social proof; by understanding currency issuers vs currency users; by showing deficits as normal; and by explaining why taxes don’t fund spending and borrowing’ doesn’t raise government spending money
Technical Terms/Jargon Used in This Article
You will find definitions of all of the technical terms/jargon used in this article in my series of MMT Economic Jargon Buster articles. Paid subscribers can also download my MMT Dictionary.
Tools and strategies to explain core MMT concepts to your sceptical friend
In this week’s post I aim to provide you with a set of tools you can use to convince your friends that Modern Monetary Theory (MMT) does indeed have the potential to be the answer to many of the world’s financial ills. With any luck it will stop them from thinking that you are part of some strange cult - one that they feel they have a duty to save you from.
These ‘tools’ are not designed to convince orthodox economists who have been beavering away in their university departments for three decades constructing their latest ‘Structural Vector Autoregressions (SVAR)’ models - they are too far gone: they can’t be converted. No, these are for the person you meet in a cafe, at a bar, and most importantly, your friend who becomes interested in economics for a few minutes each year when the government releases their latest policy goals (i.e. their, ‘kill the economy with austerity’ idiocy).
There are two types of government - currency issuers and currency users
Ok, let’s get started. I would suggest that our first goal is to find a way to introduce a core MMT idea: i.e. that there are two types of government: currency issuing governments and currency using governments.
It is easy for us to forget that most people have never heard of this idea - as MMTers we have internalised it to the point where it feels obvious - but in reality it’s not. For most people, it never crosses their mind that the government issues the nation’s currency: as far as they’re concerned money comes from their employer or, more generally, it is generated by economic activity in the private sector.
So this is your first task: to introduce the idea of the currency issuing government to your friend. How do you do that? Well, I believe that quotes are a powerful tool: they can be used to demonstrate that some very smart people have accepted this to be true for a very long time.
This is called ‘social proof’, and it’s why wealthy right-wing ‘research institutes’ spend their fortunes at the troll farm. The more people see others confirming an argument, the more they are likely to believe it themselves. It’s why every new book or course comes with testimonials from the great and the good - it’s the art of persuasion. ‘Hey look, it’s not just me saying it’s great, listen to these smart people!’
If you have any questions or if you disagree with anything I write, I want to hear from you. Please add your comments in the discussion area. Contrary views are welcome.
Quotes confirming the existence of currency issuing governments
So, here are a lot of credible individuals confirming a core MMT idea that some governments do indeed issue their own currency and it’s not possible to run out of something you issue yourself.
“I’m afraid that the ordinary citizen will not like to be told that the Bank of England can create and destroy money.” Reginald McKenna, Ex-Chancellor of the Exchequer 1928
“Taxes for Revenue Are Obsolete” Beardsley Ruml, Chairman of the Federal Reserve Bank of New York 1946
“When the Fed wants to pay money to a bank it’s not tax money, we simply use the computer to mark up the account” Ben Bernanke, Former chair of the US federal reserve
“The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.” Ben Bernanke, Former chair of the US federal reserve
“I have not been worried about the state deficit for sometime, ever since Mr Brown found out that the UK state can literally print money to pay its bills. John Redwood, Conservative MP for Wokingham, UK
“…Rishi Sunak is entirely right to borrow mind-blowing amounts of money because the essential task is to keep the economy going. Fiscal hawks will say that this is all our money and it has to be paid back. Well no, it is not actually all our money. A lot of it is the Government’s money, which they generate from the printing presses of the Bank of England.” Lord Horam (originally a Labour MP, defected to SDP, now a Tory)
“In the UK, the Bank of England – a public institution – has been issuing money to the public for over 300 years. Its banknotes, carrying the famous “I promise to pay the bearer” pledge are carried in millions of wallets and purses and used millions of times every day by the public to make transactions.” Sir Jon Cunliffe - Deputy Governor, Bank of England
“The money government spends doesn’t come from anywhere, and it doesn’t cost anything to produce.” Economist James K. Galbraith
“A Government, which has control of the banking and currency system, can always find the cash to pay for its purchases of home-produced goods.” John Maynard Keynes - How to pay for the war, p. 61.
“Shhhh, can you keep a secret? The necessity of balancing the budget is that ‘old time religion” we use to scare politicians and the population to behave themselves” Paul Samuelson Economist - the first American to win the Nobel Memorial Prize in Economic
“Assuredly we can afford this and much more. Anything we can actually do, we can afford. Once done, it is there. Nothing can take it from us.” John Maynard Keynes, BBC lecture on postwar reconstruction in 1942
“The central lesson of the COVID-19 fiscal response is that money is not scarce. Without delay, governments around the world appropriated budgets that dwarfed any other post-war crisis policy.” – Pavlina R. Tcherneva, Modern Monetary Theory: Key Insights, Leading Thinkers
“Taxes are not the primary source of revenue for currency-issuing governments. They have the ability to spend by creating money ex nihilo.” Gail Tverberg - Author of Our Finite World
“This whole notion that you run government like you run a household and you actually have to earn tax revenue to even be able to spend and otherwise you have to, you know, do austerity is a complete myth. Governments create money all the time.” Prof Mariana Mazzucato - Professor in the Economics of Innovation and Public Value at University College London - on BBC Newsnight.
“Governments that issue their own currency are not financially constrained in the same way as households or businesses. They can always afford to buy anything for sale in their own currency, including paying people to do useful work… We’ve been conditioned to think of the government’s budget like a household budget, but it’s not the same.” Stephanie Kelton - Author of The Deficit Myth
“Money, then, is credit and nothing but credit. A’s money is B’s debt to him, and when B pays his debt, A’s money disappears. This is the whole theory of money.” Alfred Mitchell-Innes – The Credit Theory of Money
“A government that issues its own currency can always pay its bills. It doesn’t need to collect taxes or borrow to spend.” Warren Mosler – The ‘father’ of MMT
“Private balance sheets can become insolvent when they have negative net worth. Central banks cannot run out of their own currency, and cannot therefore be insolvent. There is no need for central banks to retain positive ‘net worth’, although this is not widely understood.” MMT Economist Steven Hail
“Sovereign currency-issuing governments like the United States are not like households or businesses. They can never run out of their own currency, and they can afford anything for sale in their own currency.” Pavlina R. Tcherneva - Associate professor of economics at Bard College
If after reading those quotes - collected for you so you don’t have to look for them yourself - it is possible that your friend is still not convinced that the national currency comes from the government, because of course, you just made up those quotes yourself. So, it’s time for strategy number 2. ‘Look it up on the internet’, or should I say, ‘look it up on Wikipedia’.
The fact that some governments issue their own currency and can’t run out, isn’t a secret
Your friend has never heard of the idea that some governments issue their own currency, even thought it’s not a secret - it’s public knowledge; or at least it’s knowledge available to be found.
Pull out your phone and type the following phrase into Wikipedia’s search form, “Monetary Sovereignty”. Read out the first paragraph that contains the phrase
“The concept encompasses not simply the technical ability to issue currency, but the broader capacity to manage macroeconomic conditions through monetary instruments.” Wikipedia
Scroll down the page a little bit and point out the following,
“Issuance and retirement: the exclusive authority to control legal tender issuance and retirement.” Wikipedia
Issuance, is self-explanatory, governments that have currency sovereignty like the UK, US, Canada, China and so on have the power to issue their own currency. What does retirement means? Well that means the have the power to take some of that currency back out of the economy (i.e.retire it) via taxation (at that point their ears will prick up because they know that it is taxes that fund government - and they will feel they’ve got a handle on that).
Lets keep going, politicians and local TV newsreaders may be unaware of this simple truth, but right now you have planted some seeds of doubt in your friend’s mind. There’s a slightly quizzical look on their face - they are a bit destabilised: but they still don’t know whether to believe you or not.
So, they ask, ‘why is the government saying there is a black hole in the finances, when you are telling me that they issue the UK pound and can never run out?’
Well, you say, it is because politicians mistakenly think that the government operates just like a household. Households do indeed have to ensure that they earn or acquire the money they need to spend - or they could end up bankrupt - but a government that issues its own currency is obviously in a different situation. You can’t run out of something that you create yourself.
As long as there are things to buy in the government’s currency they can buy them, theough not without constraint. That constraint is that if the things the government wants to buy are scarce - if (along with those in the private sector) they continue to try to buy those things - they will push up prices. The constraint is the possibility of inflation.
But, by this time, your friend (who now has some mild cognitive dissonance) has regained their composure and is still thinking that you are wrong - because they know for sure that it is tax revenues that pay for government spending.
Surely it is tax revenues that fund government spending?
So, we need to address the ‘tax revenues are used to fund government spending’ myth: we need to find a way to undermine that belief. We can address that by first establishing that governments regularly spend more than they bring in in taxes (i.e., a deficit): that additional money must be coming from somewhere.
This takes us neatly to our next tool - or strategy if you prefer - which is to show a graph. A graph that shows that for the last 300 years the UK government has consistently spent more than the tax revenue they bring in.
Deficits are the norm for all countries - and in the UK we have records stretching back 300 years - showing that deficits are the default.
To my mind, the following graph is one of the most important graphs in economics: it shows 300 years of UK Government deficits. It tells us that governments routinely spend more than they bring in in taxes - which in turn - tells us that it’s simply not possible for all government spending to come from tax revenues.
So, the question must be, ‘where did that money come from?’. And the answer is that it came from the government. For currency issuing governments like the UK, the simple truth is that all spending is new money. It comes into existence when BoE marks up the account of the bank the money is being paid into.
Deficit spending is not some special category - in fact the government only knows that it has a deficit - and its size - retrospectively. Deficit spending comes from the same place as all other government spending. You will be feeling smug when you pull out this graph.
But what about government borrowing?
You may well be feeling smug, but that won’t last long. ‘Out of the blue’ your friend will surprise you by saying the reason the government is able to spend beyond their tax income is because they borrow. That is, they are selling bonds in order to get that additional spending money. Goodness me, how did they hear about? Well because the mainstream media has been painting a picture - in words - of how government spending works for decades: and those words have become part on an unspoken but common understanding.
Ok, don’t panic, this is an opportunity not a problem. You can combine an explanation of the ‘borrowing’ process with some clear quotes - explaining that what they think is government borrowing - is actually just a way to control the overnight interest rate (the rate at which banks lend to each other).
I suggest you address this in the following way: First describe, in simplified terms, how commercial banks purchase government bonds (see my description below) and secondly, provide the logic that demonstrates the impossibility of the idea that borrowing gives the government extra money to spend.
What is the process commercial banks use to purchase government bonds?
I’ll start with some facts relating to commercial bank reserve accounts at the Bank of Engladn (BoE) - and go on - with a description of how commercial banks - with reserve accounts at the BoE - purchase government bonds:
All of the money in central banks’ reserve accounts came from the government in the first place. It got there as a result of government spending.
All government spending flows through banks that have accounts with the central bank.
Within those central bank accounts there are two containers. One contains the banks ‘reserves’, i.e., money which got there via government spending. The other contains the government bonds they have ‘purchased’ using those reserves.
The essential thing to remember - in relation to point 3 - is that both of these containers are part of the commercial bank’s account at the central bank.
So, when the commercial bank ‘buys government bonds (gilts as they are called in the UK) all they are doing is taking some of the money the government spent out of their reserve accounts and putting the resulting bonds into their securities account (container 1 to container 2 - or as Hillary Sillitto suggests - from a current account to a deposit account). This is what is called an asset swap: swapping reserves for the same value in bonds. And that means the value of those assets remains the same.
And here’s something worth telling your friend: ‘all of the money in central banks reserve accounts came from the government in the first place’ - it was spent into existence by the government itself. That money was then used to buy its own bonds. It is clear that no extra spending money comes into existence as part of this ‘borrowing’ process.
If all of the money in central banks’ reserve accounts came from the government in the first place - and it is those reserves that are used to purchase government bones - it’s just not possible to say that the government uses borrowing to make up a spending deficit. And - in case you are about to ask - No, no-one can come and chap the door of the Treasury or Bank of England and hand over cash to buy a bond.
MMT Tools for Sceptics - In Conclusion:
You have given your friend quotes, a nice graph showing 300 years of deficits and provided a watertight, logically sound, case, demonstrating that, so-called borrowing is nothing more than shuffling assets between those bank accounts: as reserves are swapped for government securities.
Your friend is not daft. If they have any patience left, they will ask why - if it’s not for raising funds - why does the government sell bonds to the private sector? Goodness me, some people are very persistent.
The answer is that this process is used to manage the overnight interest rate.
“The blunt truth is that a national government which issues its own free-floating, inconvertible sovereign currency does not need to issue treasury bonds whatsoever. Bonds serve absolutely no financing purpose…In the modern era, a treasury bond is an obsolete debt instrument that is issued by the national government for the singular purpose of declaring a particular interest rate and seeing that rate prevail. Nothing else.” The Bond Market Doesn’t Control Anything; the Currency-Issuing National Government Does - Ellis Winningham - 2019
“The central bank would be buying securities from the treasury and selling them to the public. No monetisation would occur. So Government debt functions as interest rate support and not as a source of funds.” Towards a Spatial Keynesian macroeconomics - 2005
Unfortunately, that is slightly more complex to explain. So, given that your friend’s head is probably spinning with all this new information, just say, ‘we’ll leave it at that for now – and complete the story another time, i.e., when you have had time to digest all of this new information’.
And that’s also where I will leave this post/article. Though I had many, many other ideas that I was going to include - I’ve already written too many words. It’s time to stop. I’ll continue this story another time.
Get in touch with your own ideas
As an aside, I’d like your help with this task. If you have any simple, but great ideas that would make good additions to this post - please send them to me and I will add them. Or if you prefer, just add them at the foot of as a comment.
That’s all for now. Don’t forget to subscribe for more MMT insights and if you have some change to spare please become a paid subscriber because that helps me to continue to write and promote Modern Monetary Theory.
If you have any questions or if you disagree with anything I write, I want to hear from you. Please add your comments in the discussion area. Contrary views are welcome.
Resources
The Bond Market Doesn’t Control Anything; the Currency-Issuing National Government Does - The Gower Initiative for Modern Money Studies - Ellis Winningham
About Monetary Sovereignty - Wikipedia
Anything we can actually do, we can afford - MMT economist Bill Mitchell
The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton
Jon Cunliffe: Do we need “public money”? - Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England
BBC Radio Address Keynes gave on April 2, 1942, subsequently published by The Listener and in his collected Works XXVII page 264.
Keynes, J.M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan.
Keynes, J.M. (1940). How to Pay for the War. London: Macmillan.
Keynes, J.M. (1971–1989). The Collected Writings of John Maynard Keynes. London: Macmillan/Cambridge University Press.
Links to some of my most popular newsletters
Become a paid subscribers for access to additional content:
A Permanent Home for MMT101 Paid Subscriber Resources – Factsheets, book recommendations, academic papers, MMT podcasts and more.
MMT Factsheet 3: If Taxes Are Not For Spending What Are They For?
This is great! I've actually been writing some short posts on a personal blog to help me understand mmt better myself but also to give me better clarity when trying to discuss it with others.
I'm finding it quite hard to decide how in depth to get, for example the full funding rule in the UK seems highly relevant but I can imagine eyes glazing over if I start to discuss fiscal conventions that were introduced in the 1980s!
Great stuff.
For me, and in my conversation with others, the fact that a government deficit is actually a private sector surplus is a significant point to take in.