Modern Monetary Theory explains that monetarily sovereign governments (like the US, UK, and Japan) can issue money without first raising it via tax. That’s what puts the “fiat” in fiat currency. At first glance, that appears to be counterintuitive. How can that be?
Once you stop to think about it for a moment, most of us come into contact with this concept every day.
It’s called a credit card.
If you imagine that a government does all its spending on its credit card, then you’ll have the structure about right.
There are differences. A monetarily sovereign government can get the best credit card deal in the world. It is a super-platinum credit card with the following benefits:
It has no spending limit
Some individuals can get “no pre-set spending limit” cards, so it’s hardly surprising that a sovereign government with its own currency and full tax-raising powers has one.
It can repay itself
The government issues its own credit card, which means it can settle the credit card bill and any interest charges with the same credit card. If you could settle your credit card bill with a credit card, you’d never require a balance in your bank account either.
It has the best cashback deal in existence
The cashback deal is truly spectacular. You might get a measly percentage when you spend money at the shop. When the government spends at the shop, it gets a percentage of the spending and another percentage when the shop pays its staff. After that, when the staff buy beer at the pub, the government takes another chunk. And so on, until the initial government spending turns entirely into cashback.
Nothing can beat this amazing cashback deal.
For the government, when it spends £100, it will always get £100 back in cashback1.
For everybody else, this is called taxation, and, besides death, it is the only certainty in life.
With this deal in place, the only time there will be a balance on the credit card is if people haven’t spent everything they’ve earned. In other words, a balance on the credit card is caused by people’s savings.
What we know as “the national debt” is just the balance on the credit card, and the change in the balance is “the deficit.” The cause, on the other hand, has not changed: people are saving.
If only I had one of those…
Now just think what you could do if you had one of these cards:
- you can spend as much as you want anywhere that accepts the card.
- you’d never have to fund your spending.
- you’d never worry about the balance because you wouldn’t have to pay it off, it doesn’t affect your credit limit, and you know you’ll get cashback to cover it anyway when people get around to spending their savings.
So what’s the catch?
With great power comes great responsibility.
Although you can never run out of money on your super-platinum credit card, you can run out of real things to buy. You must make sure you use the money wisely in a manner that encourages the production of real stuff. That way, there will be more for you to buy in the future.
If nobody is tending your garden, hire somebody without a job to tend it for you. It doesn’t cost you anything - you have a super-platinum card - but it gives someone the means to support their family.
You might want to trim back the cashback percentage a little. It doesn’t cost you anything. As long as the rate is positive, you’ll get all your money back eventually, but it does put money in people’s pockets and allows them to keep paying the mortgage or rent and, perhaps, buy more real stuff for their families.
You might pay for the upkeep of universities and training colleges. It doesn’t cost you anything - the colleges already exist - and keeping them up gives people without work jobs. You might also fund students to go there. It doesn’t cost you anything, and those students will be able to use their greater skills in the future to generate more real output for you to buy.
You might decide to create a high-speed rail link across the country. Again, it doesn’t cost you anything - you have a super-platinum card - and engineers short of work like nothing better than a big project to get their teeth into. The infrastructure would last a century or more, providing great benefits to all (as well as not insignificant accolades to those who built it).
You could encourage the use of more machines to produce real things more cheaply with less labour. That might sound a bit like Star Trek, but without progress along those lines, we’ll end up over-consuming the planet.
And you might be bold and provide a job offer to everybody so they can always contribute to society and live free from poverty. Ending unemployment and poverty once and for all is surely a worthy goal, particularly when you can do it with the mere wave of a credit card.
But I haven’t got one of these cards
No, you don’t, but your government does2. You might like to ask them “what’s in their wallet” and why they’re not using their plastic more effectively.
First published 1 Jan 2011. Updated Jan 2022