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Modern Monetary Theory (MMT) has been a big disappointment. MMT latched on to the fact that governments can and do fund their expenditures through money creation, sometimes called money printing. And if done wisely, this need not cause inflation. Many progressives saw this as a silver bullet. We no longer had to cop the accusation that our ambitious social programmes were unaffordable. MMT had shown that we could simply print the money we needed.
The movements that really latched on to MMT – Bernie Sanders in the USA and Jeremy Corbyn in the UK – did not get into government. And I cannot think of any increase in socially useful expenditure which is attributable to the insights of MMT. On the contrary, in the MMT era governments have typically used money printing to rescue financial speculators from their follies, to massively inflate asset values and to fund wars.
But for me, the big disappointment with MMT is that it shines a spotlight on one aspect of money creation, the printing of money, and draws attention away from other aspects of the process which are potentially much more interesting, namely the impact on debt, and the role of banks.
On the question of banks, MMT asserts that governments print money. This is not correct. Money is printed by banks. Governments typically get their central banks to do it for them. MMT theorists say this is a mere quibble(1). But it isn’t. Because banks offer this same money printing service to everyone, and in order to understand the significance of money printing, we need to look at the role of banks and money creation in the whole economy.
As to debt, when money is printed and issued to a government or anyone else, the money is not given, it is loaned. And it has to be paid back, with interest. That is true for governments as much as for anyone else.
For those to whom money printing is still a bit of a mystery, here is how it works. When you go to a bank for a loan, the bank does not lend out money that it has on deposit, as is commonly believed. Banks are required to balance their books at all times, so the amount they have on deposit must be matched by the amount of their loans and other assets at all times. They are not allowed to have spare deposits to lend out. So when they advance a loan, they create the money that is lent “out of thin air”, “by a stroke of the pen (or the mouse)”. And they create a corresponding debt against the borrower at the same time. The privilege of doing this sleight of hand is allowed only to banks(2).
So the orgy of government money printing that we have seen recently is exactly matched by an orgy of government debt, and of debt interest obligations. These have reached unprecedented levels.
The Financial Times reported on 5th March that global government borrowing was set to hit a record $12.3tn. as a rise in defence and other spending by major economies and higher interest rates combine to push up debt levels.
According to the US Congressional Budget Office, interest on the USA’s mountain of debt, even at current low interest rates, gobbled up 13% of government expenditure in fiscal 2024, equivalent to nearly 40% of what was spent on health and social security combined. Taken with the fact that the money printed has largely gone to inflate the wealth of the already super rich, or to fund war and destruction, this means that money printing, in the USA at any rate, has not increased the wellbeing of the majority. It has instead squeezed out the funds available for social programmes.
Can governments sustain this level of debt, keeping up interest payments and repaying principal when it is due?
No problem, say some MMT adherents. It’s not real debt. It is just money that we owe to ourselves. It need never be paid back. But the money is in reality owed to the domestic and international holders of around 55% and 24% respectively, of $36Tn of US government debt – in the form of Treasury bonds and so on. Or to the Federal Reserve and US Government agencies who hold the remaining 20%. They all expect to be paid back, with interest. And they will dump this debt at any whiff of a likely default, causing a sovereign debt crisis, which is a very damaging occurrence.
Well, say some MMT adherents, we can simply print more money, that is, create more debt, to service and pay back existing debt. Of course, it is quite normal to roll over government debt. That is to say, to replace it with new debt when it falls due. But the current situation has become so extreme, that, for example, in the FT article referred to previously, “Billionaire investor Ray Dalio warned that the UK has risked entering a “debt death spiral” where it needs to borrow more and more in a self-fulfilling bond sell-off.”
The bottom line is that money printing is debt creation. Debt is not a new thing. The wisdom or otherwise of borrowing or lending money applies as ever. MMT does not change this.
But the really interesting insight we can get from the money creation process, is the enormous rights and privileges that it gives to banks. They are not simply financial intermediaries as many assume, lending out some people’s spare cash to other people who are short of it. They are institutions which are given the unique privilege of creating money, in other words, of creating commercial rights and obligations in the economy, deciding who should be given time and money to carry out their purposes and who should not.
Privately owned banks will make those decisions purely with an eye to their own profits. Should they not rather be made with an eye to the public good? And for that do we not need public ownership or at least public influence and power over banking?
Australia used to have its publicly owned banks at state and federal level, but no longer, except for the RBA. In the extraordinarily successful Chinese economy, political economist Michael Hudson notes that “The government owns over half the equity in its commercial banks.” With the result that “the interest and financial returns accrues [sic] to the public sector.”
More importantly: “We are dealing with two quite different ideas of what the proper role of a financial system should be. Commercial banks in the West have created most credit for speculation and asset-price inflation over the last thirty years, not to fund capital formation and industry. The guiding idea of a public-sector bank is to promote long-term investment to raise productivity, output and employment. This is what has enabled China to succeed so rapidly while Western economies have let themselves be financialized.”
Is this not a more useful insight for socialists, than what has been offered by MMT?
Jeff McCracken-Hewson, March 2025
Jeff McCracken-Hewson is Chair of the Victorian Branch of Australian Fabians. A lifelong activist in the labour and progressive movements, he also worked for a period in international banking in the City of London.
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(1) Bill Mitchell, the Australian father of MMT, acknowledged in a blog post that MMT “ignore[s] the institutional reality that governs the separation of the central bank and the treasury.”
(2) For official confirmation of this, see for example, ‘Money Creation in the Modern Economy’, Bank of England Quarterly Bulletin Vol. 54(1), bankofengland.co.uk
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I’m kinda OK with ‘non-believers’… not everyone ‘believed’ Keynes despite him being right, and many folks ‘believed’ Milton Friedman, Phillips, Greenspan, et al, despite the fact they were patently wrong (e.g. COVID payments). But being a Fabian — and the Victorian branch Chair no less — and holding onto the mantle of ‘we shan’t direct policy at the ALP because we’re above politics’ whilst promoting the notion that governments with fiat currencies must ‘choose’ between e.g. defence and social welfare ‘because; debt’ sounds like a policy prescription to me… one that has enabled a huge flow of wealth and sovereign assets from the working class to the oligarchs, and which continues apace. Re-read Kelton’s book or put in a call to Steve Keen and perhaps you can point to the specific pages with which you disagree. Or just fess-up and say you don’t believe, instead of pretending you have entertained the notion of MMT and found it lacking is some ways which seems disingenuous at best. What’s next… an article on how we achieve full employment again? I expect better. Mike Sadler (NSW)
Private authorised deposit taking institutions (banks) can also make loans which create money as a deposit in their customer’s account. As you say, this is matched by a liability on the customer’s account to an equal amount – but it does increase the money supply, until the loan is repaid in full. The bank does need to be capitalised to a certain amount (either holding deposits, bonds etc. or equity from shareholders) to a certain ratio of its loans, but that is not what you have said above. The money that the banks create through these loans is ‘real money’ i.e. it is backed by the full faith and guarantee of the government, and that money is accepted as payment of taxes etc.
The public debt issue is different, and you have misunderstood that. Government’s issue bonds and Treasury notes when they make payments greater than the revenue they collect in a specified period. Those bond issuances are then purchased by banks and other authorised dealers with exchange settlement account balances, thus draining those ‘reserves’, which (along with RBA open market operations) keeps the money supply at the RBA’s desired level. This helps it maintain its interest rate target and ensures liquidity and stability in the banking system. The debt is repaid by governments when the bonds mature, but when that happens, the RBA just credits the bond holder with the face value of the bond and the bond is cancelled – there is no change to the overall money supply, since it’s just swapping an interest bearing financial asset (bond) for a non-interest bearing financial asset (cash deposits, or exchange settlement balances). These are just a couple of corrections to what you have got mixed up in your article, so I hope that helps. There is lots of info on the RBA website about how the monetary system all works to confirm this.
As for your central argument, I’m afraid I could not really follow it – I think because there were so many misattributions of MMT and misstatements about the financial system.
I am taking a masters level program at Torrens University in MMT and would thoroughly recommend it to Fabians!
Governments spend before they tax or issue bonds. That comes afterwards. Deficits are the norm, and they are necessary. The national debt cannot be repaid in full without collapsing the private sector.
Banks lend from a relationship they have with their central bank. However each loan attracts interest, firstly from the central bank, then from the commercial bank. Each loan requires more money than the principal to complete the transaction, to cover the interest. Additionally, borrowers might expect to make a profit on their loan and acquire savings. None of these extras are created by bank loans, and the money to meet these requirements has to come from another source.
When a government runs a deficit, it leaves money in the private sector. Govt deficit = private sector surplus. It’s this private sector surplus that provides liquidity. Paying back the national debt would require all savings in the private sector to be returned to government.
You should invite Bill Mitchell to address the Fabian’s. It would be enlightening.