Tag Archives: Modern Money Theory

Where the Government’s money comes from, and who it goes to, makes a big difference

[Published 3 May at Independent Australia]

Stephanie Kelton, Modern Money Theorist

Why would the Government buy bonds as it sells bonds? Why would it borrow money when it has its own money?

Various explanations have been appearing lately that purport to explain how the Government is raising the money it is suddenly splashing around to support (some) people through the Covid-19 shutdown. There are also explanations of how the Reserve Bank of Australia is engaging in ‘quantitative easing’ (QE) to support the economy through the shutdown and beyond.

It seems there may be at least three things happening: the RBA is buying bonds in order to inject extra money (‘liquidity’) into the financial sector and keep interest rates low; the RBA is funding some spending by the Government; the Government is borrowing money from the private sector by selling bonds.

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Trying to Clarify Modern Money Theory

coinsmedievalModern Money Theory is about how our monetary system works in the complicated real world – with a central bank, government spending of new money, private bank lending leveraged off the government “base” money, and the central bank and government kept separate by complicated rules allegedly to ensure “sound” money.  It is such a convoluted subject that there are about as many accounts of how it works as there are “experts”.  MMT cuts through a lot of that to a story that makes good sense and is quite contrary to a lot of things said by politicians and mainstream economists.  So MMT seems to be a very good thing.

Yet the most accessible book on the subject, Modern Money Theory by L. Randall Wray, concludes with the Chapter What is Money? that I find to be convoluted and confusing.  Much of it is built on the assertion that “goods cannot buy goods”, which I find mystifying.

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