MMT’s 7 Inconvenient Truths · Rebel Economist (Free)

MMT’s 7 Inconvenient Truths

There are a few people I greatly respect for their wisdom in economics and the monetary system who are fans of MMT, and they have tried to explain to me what MMT is and how it works. The major MMT premise from what I can gather is something like this:

"The Government issues money to spend first, and receives tax revenue and bond sales revenue later, so tax and bond sales revenue do not fund government spending and deficits don’t matter because the Gov can always issue new money to pay off the bonds."

MMT as a whole can be summarized from what I have read primarily by some version of the 11 arguments below:

1. Gov tax receipts and bond sales revenue do not fund Gov spending.

2. The Gov issues new money to pay Gov bills.

3. The Fed issues new money for the Gov to spend by crediting the account of the Gov at the Fed.

4. The Bank of England issues new money for the Gov to spend by crediting the reserve accounts of the banks of Gov payees, paying Gov bills on the Government’s behalf.

5. Gov deficit spending causes negative Gov equity and positive public equity by the Gov printing more money to cover deficit spending.

6. The Gov sells bonds to reduce the supply of reserves and influence interest rates.

7. The Gov cannot go bankrupt and Gov deficits and debt aren’t a problem because the Gov can always print more money to pay off Gov debt.

8. What matters when the Gov runs a deficit is whether there is excess capacity in the real economy to put the money to use, and we should increase Gov deficit spending until inflation starts, which only happens when there is not any more capacity absorb new money, so new money at that point just starts to increase prices.

9. Interest rates should be 2% (or lower) to maximize output in the real economy, and deliver economic opportunity to the most amount of people, ideally everyone.

10. Gov deficits should not be feared and should be run to achieve full employment, otherwise we are wasting the opportunity to deliver full production, and build the largest economic pie for the everyone to share.

11. When inflation arises the Gov should lower it by removing excess capital through higher taxes, otherwise we force the Fed to raise rates and wreck the economy, which reduces GDP and real productivity and creates unemployment, and causes businesses to fail and people to lose their homes.

Are there any major MMT arguments that need to be added to this list?

Jim Byrne, author of the MT101 Substack, is very well organized and thoughtful, and asked his readers “what are the most important parts of MMT to you?” To me personally, #’s 8, 9, 10 & 11 are the most important ideas at the heart of MMT, and would be a major change and improvement in our current monetary policy by the Fed and coordinated fiscal policy by Congress. In short, this approach focuses on aggressively using deficit spending to ensure full employment and maximum possible GDP for the country, while removing excess capital in a strong economy that is about to cause inflation through increased taxes. This mirrors Freidman’s ideas on automatic stabilizers, which is the best way from an apolitical purely economics perspective to optimize and coordinate fiscal and monetary policy. Running deficits when the economy is strong is forcing the Fed to raise interest rates, making them unnecessarily high and choking off real growth in the real economy, while also making the debt more expensive to service. MMT shows we need to end this approach.

The problem is, MMT’s #’s 1-7 get all the airtime, not #’s 8-11, and unfortunately, #’s 1-7 are based on unsound thinking and a confused understanding of how our monetary system actually works. If we follow the forensic accounting, #’s 1-7 all appear to me to be provably false, which I will show and explain below. I am laying all the arguments out together so we can answer the question, “Does MMT have a problem, or not?” If anyone who is reading this supports MMT and believes I am somehow mistaken, please help me see what you see, I’d love to hear why!

MMT Inconvenient Truth #1:

Absolutely zero spending can occur from the Treasury General Account TGA by law unless the funds are already on deposit in the Government’s account at the Central Bank to complete the payment.

The only way funds can get into the TGA is through tax receipts or bond sales. Therefore, as we follow the money, if there is no revenue in the Gov’s account, the Gov simply cannot make any purchases or payments. If the Gov does not have enough tax revenue to complete payments, they must ‘borrow’ money by selling bonds to replenish the TGA and be able to cover Gov payments.

If by law the Gov cannot borrow by issuing new bonds, such as under the debt ceiling, and the Gov does not have enough tax revenue in the TGA to cover its payments, the Gov cannot complete any payments and it is forced to default on its obligations.

That’s terribly inconvenient for MMT, because that essentially not only disproves MMT’s fallacy that taxes and bond sales do not fund government spending, it proves without a doubt, the ONLY funds the Government can spend are EITHER tax receipts OR revenue from bond sales!

MMT Inconvenient Truth #2:

The U.S. Government does not issue money, full stop. Private banks issue 97% of our money supply, and in 2024 the U.S. Government issued a grand total of $0.

What more is there to say? If someone believes the Gov issues new money, please explain exactly how the Gov issues new money and how the Gov distributes that new money.

We can see that the U.S. Gov BORROWS money, and currently has over $36T in debt to repay, which is a commitment to repay money the U.S. Gov borrowed. A currency issuer has new liabilities 1:1 for every dollar they issue, and the U.S. Government liability for new U.S. dollars issued in 2024 is $0. The Gov does not issues money to pay Gov bills, it taxes or borrows.

MMT Inconvenient Truth #3:

The Central Bank CB NEVER issues money to pay Gov or CB bills, the CB ONLY issues new reserves to BUY assets or LEND against assets, because if the CB issued new money to spend, they would be spending the CB’s equity and would be quickly bankrupt.

If we assume as MMT suggests that the Fed is not issuing new reserves to buy or lend against assets, then this means the Fed’s Assets will remain the same. If the Fed issues new reserves to spend and pay either the Fed’s or the Gov’s bills (instead of being used to acquire assets), this will increase the Fed’s liabilities with no corresponding increase in Fed assets. In this scenario, mathematically the Fed’s equity must decrease 1:1 equal to the increase in Fed liabilities. In the example below, if the Fed issues $40 in new reserves to pay bills, this increases Fed liabilities by $40 without securing $40 in new Fed assets, and the result is a $40 decrease in Fed equity.

Fed Equity = Fed Assets - Fed Liabilities

$40 = $540 – $500

$40 = $540 – ($500 +$40)

$0 = $540 - $540

Any increase in Fed liabilities that does not also increase Fed assets 1:1 results in negative equity 1:1 for the Fed, and thus NEVER happens. It’s simply not true that the Fed or Gov issues money to spend and pay Fed or Gov bills.

MMT Inconvenient Truth #4:

The Bank of England BoE only issues new money to the U.K. Gov as a LOAN, secured against a financial asset like a Gov bond or Credit Line CL, which we know are funds the Gov is borrowing and a Gov debt because the Gov must repay these borrowed funds. The BoE NEVER issues money for the U.K. Gov to spend to pay their bills that the U.K. Gov does not have to pay the BoE back, any Gov bills the BoE pays on behalf of the Gov is a LOAN the Gov has to repay.

The BoE is required by law to pay the Government’s authorized liabilities when presented for payment, but when the Government does not have enough tax revenue or bond sales revenue to cover incoming bills, by law the BoE credits the reserve account at the BoE of the payee’s bank, completing payment on behalf of the Gov by creating new CB money. While forensically the BoE does credit the payee bank’s reserve account, which is creating new reserves to pay the Gov’s unfunded liabilities or bills, the amounts the CB creates are put on a Gov Credit Line at the BoE, and that CL is a loan, a CB financial asset. The CB LOANED new money to the Gov to pay their bills. The Gov BORROWED those funds against the promise to REPAY the CL, and the Gov must REPAY the amounts it borrowed from the CB. By law in England, if the short term Credit Line cannot be repaid quickly, the Gov must sell bonds to payoff the credit line, swapping short term liabilities (CL) for long term liabilities (Bond).

BoE

+Assets (new loan on Credit Line CL)

+Liabilities (new reserves)

U.K. Gov

+Assets (reserves)

+Liabilities (loan on Credit Line CL)

The BoE and the U.K. Gov both expand their balance sheet when the Gov borrows to spend, or the BoE loans the Gov by paying Gov bills. This does not create any new equity for either entity. It’s simply not true the BoE/CB issues money to pay Gov bills that the Gov does not have to repay.

Instead, MMT should state the Gov can BORROW as much as they wish to deficit spend and pay Gov bills, not PRINT or ISSUE as much as they wish.

MMT Inconvenient Truth #5:

Deficit spending creates negative Gov equity after the Gov spends the bond sale receipts, and the public receives positive public equity through the new deposits they receive from the Gov spending those bond sale receipts, not by receiving the bond itself, which the public swaps deposits for (-deposits +bond) or banks swap reserves for (-reserves +bond). However, it is the banks that are creating those new deposits, not the Gov. The Gov is creating the positive private equity not by borrowing, as that only expands the Gov balance sheet (+assets/reserves +liabilities/bonds), but by spending the reserves or assets from the bond sales, which the banks receive on behalf of Gov payees, and which the banks use to create the new deposits and expand the money supply. But the assets the Gov provides are assets borrowed from the non-bank public, and transferred back to the public when spent, or borrowed from banks and returned to banks when spent, but are not newly created assets or new money created by the Gov or the Fed unless the CB buys the bond.

To understand this clearly we need to track the money supply from before the bonds are sold until after the Gov spends those bond sale receipts. There are three potential buyers of those new Gov bonds being sold at auction, the non-bank public, banks or the CB via a Primary Broker Dealer, and unfortunately we can’t tell the effect on the monetary system until we know who bought the bond.

Non-bank Public Buys The Gov Bonds.

The non-bank public buys most bonds, and when they do their deposit account is debited to pay for the bond, reducing the total supply of deposits and the money supply. The buyer is completing an asset swap, deposits for bonds, which does not increase the buyers balance sheet so there is no new public equity. The buyer’s bank has their reserve account debited, and the Treasury General Account or TGA credited. When the TGA spends those reserves they have the TGA debited and the reserve account of the payee’s bank credited, returning those borrowed reserves back to the baking sector, and the receiving bank then credits the deposit account of the payee which increases deposits, increasing the money supply. The net effect on the money supply from before the bond sale until after the funds are spent is no change in the supply of reserves or deposits, no change in the money supply:

-D(buyer) -R(buyer’s bank) +R(TGA) -Bond. -R(TGA) +R(payee’s bank) +D(payee)

-D -R +R -Bond -R +R +D = -Bond.

The result is negative Gov equity but no change in the money supply. The Public who receives the deficit spending has new deposits they would not have otherwise had, which increase their assets and equity, so the new public equity is not the bond, but the new deposits received from banks by the Gov deficit spending.

Bank Buys The Gov Bonds

If a bank buys new Gov bonds at auction, there is no initial decrease in deposits, the bank is completing an asset swap, swapping reserves for bonds (-reserves +bonds), which provides no new bank assets or equity. The net result to the monetary system from before the bond sale until after the gov spends the proceeds of the bond sale is no change in total reserves. However, the bank of the Gov payee receives new assets/reserves transferred to them from the Gov, which were borrowed from the banking sector by selling bonds to banks, so no new net reserves, but an increase in reserves to the receiving bank, which increases assets. When the Gov spends those borrowed reserves, the bank’s then receive the reserves back, which does not increase net reserves but does increases bank assets (-reserves +bond +reserves). The receiving bank then credits the deposit accounts of the Gov payees, which increase bank liabilities, which expands the receiving bank’s balance sheet with no change to the receiving bank’s net equity. The Gov payee receives an increase in deposits from their bank that increases total deposits and the money supply, increasing the public’s equity.

-R +R -Bond -R +R +D = -Bond + Deposits.

The Fed/CB Buys The Gov Bonds

If the Fed buys new Gov bonds via a Primary Broker Dealer PBD in the U.S. the transaction looks like this:

+R -Bond -R +R +D = -Bond +Reserves +Deposits

The CB is creating new reserves to buy assets, expanding their balance sheet but not creating or increasing Fed equity. This increases the total supply of reserves at banks. However, the bank that originally buys that new bond at auction originally completed an asset swap (-reserves +bonds), no new bank equity, and when that bank sells the bond to the Fed the bank completes another asset swap, swapping the bond with the CB for reserves (-bond +reserves), which provides no new equity for the selling bank. The new reserves flow to the Gov account to spend, and the Gov increases their balance sheet (+A/reserves +L/bond). When the Gov spends those new reserves, they have the TGA debited and the Gov reserve account of the Gov payee’s bank credited. The bank of the payee receives a new asset, and then uses those new reserves to create new deposits for the Gov payees, which increases the bank’s liabilities, and expands the receiving bank’s balance sheet with no new bank equity. The bank then credits the payee’s deposit account, which increases total deposits, increasing the money supply and increases the Gov payee’s equity.

The Gov must receive tax revenue or bond sales revenue to complete interest and principal payments to the Fed, which takes reserves out of circulation and reduces Fed liabilities, reducing the supply of reserves systemwide.

If and only if the Fed Holds To Maturity HTM, so keeps the bonds until they mature, then the CB will receive interest payments and principal repayment from the Gov, and the profits are returned to the Gov, so AFTER the Gov BORROWS and REPAYS the CB, the Gov repayment drains these new reserves back out of the financial economy and returns them to the Fed, and the Fed returns profits to the Gov, which reduces the Gov negative equity. The Gov is borrowing and repaying, but after the Gov repays, the end result as long as the Fed HTM is the Gov has their negative equity returned and reversed. Of the $37T of U.S. debt, the Fed holds roughly $4.5T in bonds and $1.7T in Mortgage Backed Securities so $6.2T in Gov debt or just less than 17% of the total U.S. Gov debt. Much of this debt was purchased during covid to prevent financial collapse, and if the Fed HTM this amount will be returned to the Gov and reduce the Gov negative equity. The Fed does not normally purchase privately owned assets like Gov bonds from banks, so this is the exception and not the rule.

1. When the PUBLIC buys new Gov bonds at auction, they loan the Gov their deposits, which when the Gov spends the deposits are replenished, and the total deposits return to where they were prior to the bond sale, with no new money, no increase in deposits, no increase in the money supply and no increase in reserves. The Gov payees receive new deposits, which increases their assets and public equity.

2. When BANKS buy new Gov bonds at auction, they loan the Gov their reserves, which the Gov spending replenishes the reserves to where they were prior to the bond sale, with no new reserves, but the receiving banks credit their customers’ deposit accounts, which increases deposits and increases the money supply. The Gov payees receive new deposits, which increases their assets and increase public equity.

3. When the FED buys new Gov bonds at auction via a Primary Broker Dealer PBD, the Fed expands the supply of reserves, and the receiving banks credit their customers’ deposit accounts, which increases deposits and increases the money supply. The Gov payees receive new deposits, which increases their assets and increase public equity.

4. In all cases, Gov deficit spending creates the negative Gov equity, and when the banks receives the reserves the Gov borrows through bond sales and then spends, the banks credit their customers’ deposit accounts, delivering deposits the receiver’s would not have otherwise received, which is how deficit spending creates positive public equity and negative Gov equity.

5. Under no circumstances is the Gov issuing new money to spend, the Gov is always borrowing and creating negative Gov equity when they spend the reserves they receive from bond sales. The banks are issuing new deposits to Gov payees against the reserves they receive when the Gov borrows reserves and deficit spends, and this sometimes (but not always) results in the banks increasing the money supply from what it was prior to the sale. The bond is purchased as an asset swap for either the public or the banks, but when the CB buys the bond it issues new reserves and expands their balance sheet with the new asset (+bond) and new liability (+reserves). The banks that receive the new reserves from Gov spending expand their balance sheets, (+A/reserves +L/deposits). The Gov payees or public receives new deposits and increase their assets, which increases public equity.

MMT Inconvenient Truth #6:

The government does not sell bonds to decrease the supply of reserves or change interest rates, as the Gov does not set interest rates, the Gov sells bonds so it can borrow assets in the form of reserves and then spend them. It’s the Fed that sets short term interest rates using the Structured Overnight Financing Rate SOFR, and the Fed will supply banks reserves at the SOFR in exchange for pledged High Quality Liquid Assets as collateral, but the Fed does not sell new Gov bonds or Fed bonds.

Selling bonds withdraws reserves from the banking sector, and moves them to the TGA, but the TGA quickly spends those reserves and returns them to the banking sector. There is no change and no reduction of the ‘supply’ of reserves on the Fed’s ledger, total liabilities do not change, and the reserves that leave the banking sector and are deposited into the TGA are spent and returned to banks quickly, so the supply of reserves (Fed liabilities) does not change, and the supply of reserves in the banking sector does not change for long.

The faulty idea that the Gov sells bonds to reduce reserves is a direct result of mistakenly believing the Gov issues reserves to spend and pay the Gov’s bills, because if the Gov did, then reserves would be a Gov liability like they are with the Fed, not a Gov asset as they are today. If reserves were a Gov Liability, like they are for the CB, the reserves received from selling bonds would not be an increase in Gov assets, which is what bond sales are today when they replenish the TGA to enable Gov spending, but instead those reserves received would be a reduction in Gov liabilities, like they are for the Fed, taking reserves out of circulation. We have already established that the Gov does not issue any reserves or money whatsoever, and the CB only issues reserves to buy assets or lend against assets, the CB does not issue money to spend or it would go bankrupt. It’s simply not true the Gov sells bonds to reduce the supply of reserves or effect interest rates, because in today’s financial system this conflates the Gov and CB. The Gov does sell bonds but it does not set interest rates. The CB does issues reserves as a new Liability to buy assets, and sets interest rates, but it does not sell new bonds, and does not issue reserves to spend. Logically the idea that the Gov is selling bonds to reduce reserves and effect interest rates doesn’t really even make sense.

MMT Inconvenient Truth #7:

True, the Gov cannot go bankrupt unless it chooses to, but that’s because the Gov can BORROW however much it wants, not because the Gov can issue new currency however much it wants to payoff Gov debt.

The Gov COULD decide to change the current dual circuit monetary system and add a new third circuit, the U.S. Treasury, and issue digital USD as a Gov liability on the U.S. Treasury’s ledger. I tried to model that on medium here:

https://medium.com/@wunderwood11/trumps-rare-and-short-lived-opportunity-for-a-5t-grand-bargain-69921b8fc7c6

So MMT proponents out there, I am always trying to learn, so please share anything important you believe I have missed, or explain how any of the above is wrong or incorrect.

Thank you!

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