Introduction
This article analyzes Warren Mosler’s Modern Monetary Theory (MMT), which revolutionizes our understanding of fiat money. MMT challenges the belief that the state is merely a currency user, arguing that as the issuer, it is subject to different rules than a household. While gaining popularity in central banking circles, this theory faces resistance from mainstream economists because it upends traditional views on public debt and the role of deficits. You will learn how taxes drive the demand for money and why public debt is, in fact, a tool of monetary policy.
The State Budget: A False Analogy to the Household Wallet
The most common mistake among economists is a category error—describing state finances in the language of a household. In a fiat system, the state is the issuer, not a user of the currency, meaning it does not need to "earn" money before it can spend it. According to Mosler, taxes drive the currency by creating a compulsory demand for the means to settle obligations to the authorities.
The actual sequence of fiscal operations is the reverse of popular perception: spending comes first (injecting money into circulation), followed by taxes (withdrawing it). This is confirmed by Mosler’s 1992 "Italian epiphany": a sovereign state cannot go bankrupt in its own currency because it always possesses the technical capacity for settlement. Thus, a deficit is not a "hole," but a reflection of private sector savings.
IRMA: Bank Reserves Instead of Capital Borrowing
Modern central banking debunks the money multiplier myth—it is commercial bank loans that create deposits, while reserves are provided by the central bank ex post. In this context, public debt is essentially an IRMA (Interest Rate Maintenance Account). The issuance of bonds does not serve to fund spending, but rather to manage liquidity and stabilize interest rates.
Global business is already adapting to this logic, as seen in central bank repo operations that treat liquidity as essential market infrastructure. The state does not borrow its own money to finance a deficit; it sterilizes excess reserves to control the price of money. Effective functional finance therefore requires institutional reform and close coordination between the government and the central bank as the system's technical coordinator.
Real Resources: Inflation as the Only Spending Limit
For a currency issuer, the only real constraints are real resources (goods, services, labor) and inflation, not financial limits. MMT proposes a Job Guarantee as a nominal anchor to stabilize prices and eliminate unemployment. However, full employment faces political resistance because, according to Michał Kalecki, it weakens market discipline and the position of capital.
Critics from the FTPL (Fiscal Theory of the Price Level) school warn that the value of money depends on the state's political credibility. The tragedy of this situation is evident in the Eurozone, where member states have lost monetary sovereignty and become mere currency users. Consequently, these countries face a real risk of insolvency, much like ordinary corporations, forcing them to pursue austerity at the expense of the real economy.
Summary
MMT is primarily an operational description of the modern monetary system, rather than just a political platform. This theory shatters the illusion of financial barriers while simultaneously revealing the hard limits of resources and social trust. By discarding the moralizing language of debt, do we create a temptation for reckless borrowing? Or perhaps breaking free from old dogmas will pave the way for a fairer economy, where monetary sovereignty serves real prosperity rather than maintaining the illusion of a free lunch?
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