Modern Monetary Theory

Modern Monetary Theory is an account of how a government that issues its own free-floating currency actually finances itself. It descends from chartalism, Abba Lerner's functional finance and sectoral-balance accounting, and took its present form from the 1990s onward. The label is a poor one — neither especially modern nor a theory in the predictive sense — and the Naming has cost it readers.

The core claims are these. A currency issuer borrowing only in its own currency cannot be forced into involuntary default, since it can always create the unit it owes. Spending is operationally prior to taxation: the state must issue the currency before it can collect it. Taxation therefore works as a demand drain, and as the reason the currency is wanted at all, rather than as a pot outlays are drawn from. Bond sales are an interest-rate operation, not a funding one. The binding constraint is real — labour, materials, capacity — and announces itself as inflation, so budgets should be judged against available resources rather than against a deficit figure that Goodhart's Law has already spoiled as a target.

The strongest objections do not dispute the accounting. They hold that the operational claims are largely identities, true but not predictive, which is a real Falsifiability problem for the framework's broader statements; that the power to issue currency is not the power to avoid inflation or exchange-rate collapse; that the proposed brake, discretionary tightening by a legislature, is slower and less credible than a central bank; and that the account weakens sharply for states with foreign-currency debt, heavy import dependence or thin currency markets.

Both camps read the 2021-23 inflation episode as confirmation, which suggests the disagreement is over which constraint binds first rather than over arithmetic. Reporting on it also invites the Percentage Point confusion.