Home > Videos | 👨‍🏫📉💵 Warren Mosler

🇦🇹💰🆚 Modern Monetary Theory Showdown

🤖 AI Summary

• 💵 Deficits do matter, but not how they are conventionally represented.
• 🇺🇸 The United States is a currency issuer with a floating exchange rate and no explicit promise to convert its currency into a physical asset or foreign currency.
• 🛠️ Domestic resources can be productively mobilized by spending, which is the key constraint.
• 🛡️ The private sector financial position is crucial; government spending during the pandemic significantly increased household financial net worth and security.
• 📉 The largest increase in government liabilities came after the 2008 financial crisis due to automatic stabilizers, not necessarily the COVID-19 relief spending.
• 🏦 Monetary policy’s core function is the Federal Reserve setting interest rates over the yield curve, which is the primary determinant, rather than a simple quantity of money printing.
• 💸 The primary issue is excessive government spending, which diverts resources from the private sector into politically motivated, less productive channels.
• 🗓️ Deficits are a problem of deferred pain because the government receives the benefits up front from spending.
• ⚙️ Government spending is financed by three mechanisms: explicit taxation, borrowing (deferred taxation), or printing money (hidden taxation or inflation).
• 📊 The latest Congressional Budget Office CBO projections show the debt held by the public at about 99% of GDP in 2024, which is an optimistic forecast.
• 💣 Printing money is not costless; it harms holders of dollar-denominated assets through inflation.

🤔 Evaluation

• ⚔️ The Austrian view shares a fundamental opposition to MMT with many mainstream economists, arguing that MMT’s policy prescriptions are dangerous and that deficit spending is constrained in the long run by a government’s ability to satisfy creditors, according to the Richmond Fed in MMT and Government Finance: You Can’t Always Get What You Want.

• 🤝 MMT and mainstream macroeconomics actually agree on the goal of macroeconomic policy: achieving a zero output gap, where unemployment is low and inflation is stable, as noted by the Institute for New Economic Thinking INET Economics in Mainstream Macroeconomics and Modern Monetary Theory: What Really Divides Them?.

• 🛑 A core point of contention is whether the government can simply print money without inflationary consequences; the Austrian and mainstream consensus is that it ignores the risk of inflation and loss of government credibility, according to the Bipartisan Policy Center in Does the National Debt Matter? A Look at Modern Monetary Theory.

• 💰 MMT’s focus on sectoral balances is acknowledged by some mainstream economists as a simple accounting identity, although they disagree on the policy implications.

• 🧮 The CBO projections cited by the Austrian view are corroborated by external analysis, showing that federal debt held by the public is projected to rise to 156 percent of GDP by 2055, which is unsustainable and poses risks like slower economic growth and increased interest costs, according to the Committee for a Responsible Federal Budget in Analysis of CBO’s March 2025 Long-Term Budget Outlook.

• ⚙️ The transmission mechanism of MMT’s proposed job guarantee ELR and how it establishes a nominal price anchor requires further exploration.

• 🌍 The open economy implications of MMT, specifically how large, permanent deficits and currency monetization would affect exchange rates and international trade flows, which MMT is often criticized for neglecting, is a topic to explore.

• 🏦 The technical interest rate setting role of the Federal Reserve (MMT’s argument) versus the quantity theory of money that underlies the Austrian critique is another area for deeper understanding.

❓ Frequently Asked Questions (FAQ)

❓ Q: What is the primary difference between Austrian Economics and Modern Monetary Theory MMT regarding government spending?

✅ A: Austrian economics views government spending as a diversion of scarce resources from the productive private sector to politically motivated, less efficient channels. MMT views government spending as the necessary mechanism for injecting the sovereign currency into the economy to mobilize unused domestic resources, constrained only by the risk of inflation.

❓ Q: Why does MMT claim that a sovereign currency issuer like the US does not face a solvency constraint?

✅ A: MMT states that a government that issues its own currency, has a floating exchange rate, and does not promise to convert its currency into a physical asset can never run out of dollars to pay obligations. The constraint is not financial, but rather the availability of real economic resources to be mobilized without causing demand-pull inflation.

❓ Q: According to Austrian economics, what are the three ways government spending is financed, and why do deficits matter?

✅ A: Government spending must be financed through explicit taxation, borrowing (which is viewed as deferred taxation), or printing money (which is viewed as a hidden tax via inflation). Deficits matter because they defer the pain of paying for current spending, creating a resource misallocation problem and future costs.

📚 Book Recommendations

↔️ Similar

• 💰📉➡️📈🗳️ The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy by Stephanie Kelton
  • 📝 This book is foundational to understanding the core MMT position, explaining the sectoral balance approach and arguing that the only constraint on government spending is inflation, not solvency.
• 📙 What Has Government Done to Our Money? by Murray N. Rothbard
  • 💰 This classic Austrian text provides a deep dive into the historical progression of monetary systems, strongly critiquing fiat money and the government’s monopoly over money creation, aligning with the video’s Austrian perspective.

🆚 Contrasting

• 📘 Economics in One Lesson by Henry Hazlitt
  • 💡 This book provides a clear, microeconomic-focused critique of government interventions and spending, arguing for the importance of considering unseen consequences, which directly contrasts with MMT’s macro-focused functional finance approach.
• 🧑‍💼🏦💸 The General Theory of Employment, Interest, and Money by John Maynard Keynes
  • 🌍 This is the seminal work that provides the theoretical basis for modern macroeconomics and countercyclical fiscal policy, which MMT expands upon but fundamentally differs from in its understanding of the monetary operations of a sovereign government.

🎨 Creatively Related

• 🏛️💰 Debt: The First 5,000 Years by David Graeber
  • 🤯 This anthropological study offers a compelling history of debt, challenging conventional economic narratives about money and barter, and providing a historical context that supports MMT’s focus on money as a social and legal creation rather than just a medium of exchange.
• 🤔🐇🐢 Thinking, Fast and Slow by Daniel Kahneman
  • 🧠 This book on behavioral economics is relevant because it explores the cognitive biases that influence financial decision-making, which can help explain why economic policies, like fear of the deficit, often rely on emotionally resonant but economically flawed arguments from the public and policymakers.