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The Basics of Modern Money
An intro to Modern Money Theory
Money is a wonderful human invention—perhaps one of our greatest. Unfortunately, we've forgotten how to properly use it. Modern Money Theory (MMT) helps explain many things that have become common misconceptions over the years. Set the record straight and learn how governments, like the U.S., that issue their own sovereign currency, can better use modern monetary systems to improve the economy and serve the general welfare of the nation.
"Anyone can create money. The problem lies in getting it accepted."
The big things you need to know
First, here's what we're NOT saying: We're NOT saying currency-issuing governments can't spend too much, or on the wrong things. We are NOT saying that our current monetary system is perfect, nor are we ignoring the very real problems related to rising inequality and concentration of economic and political power. We're NOT saying these governments should pay for everything just because they can't become insolvent in their own currency.
MMT is firstly a simple description of how the current system works, and it can help advise us on ways to use it better. We ARE saying these currency-issuing governments aren't actually constrained by the artificial limits you may think they are. They have the power—and indeed, the responsibility—to improve the lives of their citizens with their sovereign currency.
This makes a big difference! The sovereign issuer of a nation's currency can and should behave very differently from users of its currency, like households, businesses, or state and local governments.
Have you ever wondered if the budget rules that apply to a household or business probably shouldn't be imposed in the same way on the government that creates your nation's money?
Despite what we might hear politicians say on the campaign trail, when a country issues its own sovereign currency it can never run out. Japan can never run out of Yen, nor can England run out of Pounds.
Money is created effortlessly every day on computers in large numbers. It's our access to real resources that is limited. Could we use our ability to create money to do more with the resources we have?
Governments spend by crediting bank accounts, creating currency in the process. Governments tax by debiting bank accounts. Taxes remove or delete some of the currency they previously created. So taxes cannot "give" the government "money" to spend; rather government spending actually gives us its currency so we can later pay our taxes. We have it backward!
How are you able to pay your federal taxes with the government's currency if the government hadn't first spent its currency into the economy?
No amount of prior government deficits or future government promises to retirees or medical patients can prevent the U.S. government from being able to make every single payment that comes due in U.S. dollars. This is equally true for other nations like Japan or New Zealand.
What kind of financial challenges might face countries like Greece that stopped issuing a sovereign currency?
China saves dollars because it sells more to the U.S. than the U.S. buys from China. Countries save the currencies of nations that buy their goods. "Made in China" is not something you'll ever see on a U.S. dollar! Currency-issuing nations can't "borrow" the currency they, alone, create. What we call the "National Debt" is not a debt in any normal sense; government bonds are there for savers, not as a form of government borrowing.
If Argentina borrows U.S. dollars, it has a real debt since it doesn't issue U.S. dollars. But if China saves dollars gained from trade in U.S. Treasury bonds, what does the U.S. really owe China that it can't "pay" using a computer?