Fallacies of Modern Monetary Theory (MMT)

Fallacies of Modern Monetary Theory (MMT)

Taxation does not fund government spending

It does! Governments can fund public spending in just three ways: 

  1. Through taxation;
  2. By borrowing from the private sector;
  3. 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. 

Conclusion

The “magic money tree” does not exist!

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3 comments

  1. “Taxation alone determines a currencies value”

    Literally no MMT academic has said that. What has been said is that taxes are sufficient to drive the currency. There are all sorts of reasons to add on to give value.

  2. Load of nonsense. MMT is obviously too subtle for you.

    Re funding government spending, obviously the bulk of government spending is balanced by tax. However, the point MMTers are making here is that it can perfectly well be argued that the purpose of tax is to control inflation, rather than fund government spending. Those are just two different ways of looking at something.

    Money is a liability of government. Yes we all know that the bulk of money in circulation is issued by private banks. However some is issued by central banks. It’s the latter than MMTers are referring to here. And as to whether that money is a liability of the state, that’s a bit of a complicated argument: way above the heads of simple folk.

    Government spending precedes tax. Unfortunately privately issued money is not acceptable in payment of taxes (though you can of course pay tax with a check drawn on a private bank). However, FINAL SETTLEMENT is always made using base money (central bank issued money).

    Tax alone determines…. This section contradicts the previous one. The statement that “governments require taxes to be paid in the national currency” contradicts the previous section.

    • No, the purpose of tax is to fund public services.
      No, taxation precedes government spending. Monarchs were taxing their subjects (to fund wars) long before they injected money into the economy.
      Recording base money as a liability of the state is a legacy from pre-fiat money times. Although base money is recorded as a liability in a central bank’s balance sheet, it is not really a liability – it is an accounting relic


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