This is a great clarifying piece from the thought leaders of MMT responding to their critics. They make the point to differentiate between a generalized description of money mechanics vs. specific implementation like the U.S. model. As has pointed out in the past, they clearly understand how the U.S. system clearly works under today’s self selected fiscal and legal constraints, such as the TGA must be funded prior to spending, no Treasury overdraft at the Fed, and the Fed cannot buy bonds directly from the Treasury. Supporters of MMT often conflate the need for the Fed/CB to create new Reserves by spending or lending, with the Treasury creating new reserves by Gov spending, but which the authors do not. Anything here anybody would like to point out or discuss? Anything anybody would like to add?

This might seem well off-topic, but I think there is a strong underlying connection with economics. Two slightly-rebellious physicists make a case for the treatment of information as being fundamentally missing in current physics. During my career as a signal-processing engineer, I’d often thought the same. But in my part of that discipline, information always had the context of a human source and sink - so subjectivity was giving the raw, bit-based Shannon-measure its meaning, via an interpretation of human significance and purpose. See the Aeon article ‘Is information a fundamental force in the universe’ with 10-minute video at https://aeon.co/videos/a-radical-reimagining-of-physics-puts-information-at-its-centre and the Quanta article ‘Why Everything in the Universe Turns More Complex’ at https://www.quantamagazine.org/why-everything-in-the-universe-turns-more-complex-20250402/ Both Lee Smolin and Ilya Prigogine have argued for a reinterpretation of the role of time in physics, but not from an informational standpoint. For sure, the 2nd law of thermodynamics in a closed system demands a decrease in order with time. Yet the history of both the universe and of the life in it deals with open systems, and rather obviously is characterised by the exact opposite process - an increase of order over time. That’s what these two physicists suggest should extend physics, through finding another route to reach significance without requiring subjectivity, via what they describe as a functional sub-set of information in its Shannon-measure. I’d say the link with economics comes through the processes that the various schools of orthodox economics (Physiocrats likely excepted) have devised to move from observation of an individual trade or exchange to an overall, aggregated description of a whole sector or an entire economy. I’m thinking of things (at the macro level) such as:

A forensic accounting lens when applied to the analysis of a sovereign monetary system is inherently narrow and misleading. While valuable for tracking legal compliance and reconciling transactions within well-defined boundaries, forensic accounting is a static, fragmentary tool. It examines the ledger entries between institutions as if each were a self-contained entity operating in isolation. In the context of sovereign finance, this approach ignores the real-world process of how money is created, both over time and through its underlying structure. By freezing the analytical frame at the point of a single transaction—Treasury spending, bond issuance, or tax collection—this approach obscures the broader monetary sequence that makes these flows possible in the first place. It treats the U.S. Treasury, the Fed, and commercial banks as if they were unrelated entities interacting at arm’s length, rather than components of an integrated state–private financial architecture. This framing is especially problematic because, in operational terms, the state—through the combined and coordinated actions of its fiscal arm (the Treasury) and its monetary arm (the Fed)—is the sole issuer of the national currency. It is not merely a participant in the monetary system; it is its foundation. When this consolidation is ignored, a central fallacy emerges: the belief that the Treasury must “secure” funds before it can spend. This inversion of causality distorts the actual sequence of events. In reality, the private sector’s holdings of dollars and bank reserves—the very assets used to purchase government bonds—exist only because they were first injected into the system by state spending or lending. Without prior currency issuance by the state, there would be no stock of dollars available to purchase anything. Forensic accounting, by focusing on the legal order of transactions rather than their economic genesis, mistakes the rules of the game for the nature of the game itself. The consequences of this methodological myopia are far from innocent. First, it justifies the neoclassical but incorrect narrative that “taxes and bonds fund spending.” This is not a harmless misunderstanding; it frames public spending as dependent on prior revenue collection, precisely as it is for a household or firm. Such an analogy is false, but its repetition shapes public discourse, constrains fiscal policy, and fuels austerity arguments. Second, it misrepresents the nature of government securities. In operational terms, bond issuance in a sovereign, fiat currency system functions as a reserve-management tool: it drains excess reserves from the banking system and swaps one form of state liability (reserves) for another (bonds). This is an asset swap for the private sector, not a borrowing operation that “funds” the government in the same way a bank loan funds a household or business.

For those that don't want to read this entire post, let's not bury the lead: MMT is wrong: - The U.S. does not have a spend and then tax system, we have a tax then spend system - The U.S. Treasury does not issue the U.S Dollar - The Fed does not issue reserves for the Treasury to spend - The Fed does not issue new reserves to pay the Gov's bills directly - The Gov cannot spend before receiving tax receipts or revenue from bond sales Below I explain in detail exactly why. Please let me know if you think I made any mistakes. After many, many hours of discussions with friends here and elsewhere, I think it’s finally becoming clear, I have finally gotten to the bottom of the MMT debate, so please let me know if you agree. We can have a tax and spend system, which many people believe we have today, and under a tax and spend system in 2024, the USG would have taxed roughly $5T and spent roughly $7T, showing a roughly $2T deficit, and the Gov would have had to borrow roughly $2T to cover the deficit spending. Or we can have a spend then tax system, which MMT believes we have today, and in 2024 the USG would have issued and spent $7T and taxed back $5T, showing a $2T deficit, as the USG spent $2T more than they received back in tax revenue. Two different systems that in practice don’t matter much until you have a deficit. Under a tax and spend model, to cover deficit spending the Gov has to borrow, because desired spending exceeds tax receipts. Under a spend first then tax back model, the Gov already spent the $, so the deficit is covered by issuing money, no borrowing or debt, the deficit is created because tax receipts are lower than currency issued and already spent, so all the money issued is not all taxed back. Which model we have is the heart of the MMT debate. A currency issuer always has a liability for the currency they issue, which means when they issue their currency they increase their Liabilities on their Balance Sheet, and when they receive their currency back as payment, they reduce their Liabilities. If they receive 100% of the currency they issued back as payment, their Liabilities go to zero and all currency is removed form circulation.

At the end of the quarter June 30th, banks went to the Fed and swapped assets for $11b, increasing Fed liabilities and increasing the supply of reserves. There are other signs of tightening liquidity, but this was a shock as nothing like this has happened in the last 5 years. There was one day I think in 2022 where banks borrowed maybe $2.9b from the Fed? (It’s in the video). Most days in the last 5 years banks borrow nothing from the Fed, they only borrow from each other using overnight repurchase agreements, pledging bonds overnight to borrow enough reserves to complete payments or meet regulatory requirements overnight. Swapping assets for reserves provides banks liquidity. Banks settle roughly $3T in reserve transactions a day, so $11b from the Fed is not a huge number, but it means that banks could not find enough reserves in the market to borrow from each other, so they had to pay more and go to the Fed. Banks can borrow what they need from the Fed, supply is unlimited at the Fed funds rate, but banks charge each other less (SOFR), and no bank wants to go to the Fed to swap assets and borrow to increase bank liquidity, there is a stigma for the borrowing bank.. People wonder what is the minimum number of reserves needed to run the financial system. The Fed has expanded their Balance Sheet using Quantitative Easing and during Covid it reached $9T. The Fed has been trying to reduce their BS since through Quantitative Tightening, and after selling more than $2T in assets and allowing maturing securities to roll off their BS, it appears the Fed may have hit their lower limit. On June 30th, banks expanded the Fed’s BS by swapping $11b in assets for new reserves, and this may signal to the Fed that they need to stop QT, and start easing. This may put pressure on the Fed to cut rates quicker than they had anticipated. I am posting a link to a great video that explains more, but the market is wondering what this means, and how the Fed will respond. Anybody here tracking this?