Fallacies of Modern Monetary Theory (MMT)
Taxation does not fund government spending
It does! Governments can fund public spending in just three ways:
- Through taxation;
- By borrowing from the private sector;
- By borrowing from its banker (the central bank).
The last option on this list is forbidden in most advanced economies. This leaves taxation and borrowing from the private sector as the only available funding sources.
Money is a liability of the government
No it’s not! Customer deposits held by retail banks are liabilities of those retail banks. These customer deposits are not liabilities of the government or of the central bank. As an aside, money deposited with these banks is an asset to the depositor (customer).
Government spending precedes taxation
This could be true if money was created and injected into the economy by the government. But this condition does not hold. Most money in circulation is created and injected into the economy by private banks.
Taxation alone determines a currency’s value
It is true that governments require taxes to be paid in the national currency and this creates demand for the currency. However, a nation’s international trading performance and capital flows also affect demand for a nation’s currency and its value. So tax is not the sole determinant.
The “magic money tree” does not exist!