Money is not *physical* (and only *spending* can cause inflation) – an alternative introduction to MMT

In developed nations such as the US, U.K., and Australia, the term “printing money” is misleading, primarily because at its heart, money is not a physical thing. In addition, (the reality of) inflation always has to do with spending – not the mere existence of money, nor its creation by the government. (Inflation also has to do with the prices paid by the issuer.)

This post can also serve as a unique introduction to Modern Money Theory, or MMT.


These resources were created by Activist #MMT, the podcast (Twitter, Facebook, web; please consider becoming a monthly patron). This post was last updated January 11, 2021.

Disclaimer: I have studied MMT since February of 2018. I’m not an economist or academic, and I don’t speak for the MMT project. The information in this post is my best understanding, but I don’t assert it to be perfectly accurate. In order to ensure accuracy, you should rely on the expert sources linked throughout. If you have feedback to improve this post, please get in touch.

Link to tweet

The federal government doesn’t “print money.” It issues currency. (To be less precisely accurate but still reasonable, it creates money.) It does this by making numbers in accounting entries bigger, and when it collects revenue via taxation or bond sales, it reduces those same numbers. It “expands and contracts balance sheets.”

This is how all federal revenue and spending works, and has always worked – ever since the first dollar was issued, long ago. This is the case regarding funding federal programs, selling and repurchasing government bonds, quantitative easing (QE), etc. There are no exceptions. Here’s former Federal Reserve chairman Ben Bernanke, at the height of the Great Financial Crisis, speaking at around the eight-minute mark in this video:

It’s not tax money. We simply use the computer to mark up the size of the account they have at the Fed[eral Reserve].

(“Mark up” = “make a number bigger.”)

Here is the full abstract from a 1998 paper by Stephanie Kelton, the author of the 2020 book The Deficit Myth:

This paper investigates the commonly held belief that government spending is normally financed through a combination of taxes and bond sales. The argument is a technical one and requires a detailed analysis of reserve accounting at the central bank. After carefully considering the complexities of reserve accounting, it is argued that the proceeds from taxation and bond sales are technically incapable of financing government spending and that modern governments actually finance all of their spending through the direct creation of high-powered money. The analysis carries significant implications for fiscal as well as monetary policy.

Physical money is only created (actually printed or minted) in response to citizens explicitly requesting it from a bank teller or ATM. When that happens, some of those accounting entries are exchanged for bills or coins. Before that point, all government spending is purely electronic entries on accounting ledgers – essentially, tally marks. Physical money can even be thought of as a bank statement printed on metal or a green piece of paper.

Projecting a physicality onto federal money is plainly incorrect and highly mIsleading. It is misleading especially because it implies scarcity. It also evokes historic hyperinflationary episodes that have little-to-no relevance to modern developed economies (except, perhaps, to serve as vaguely scary boogeymen).

Money is not scarce. Real resources are scarce, but not money. Banks and the government create and destroy money (expand and contract their balance sheets) every second of every day. (You may think that’s a bad thing, which is fine, but it is the reality.) Money is scarce to us as currency users, of course, but not to the issuer. We – obviously – primarily use their money. There’s no money to use until they give it to us. If the United States government were overthrown and stopped existing (unless the new government chose to honor them) all US dollars would instantaneously become worthless.

[Here’s how banks create money (audio), and how governments create money (audio).]

Inflationary pressures are caused by spending outpacing productive capacity – spending, not money. Imagine the government (actually) printed $100 trillion in physical bills, put the bills into a suitcase, put the suitcase into a rocket, and then shot the rocket to the moon. It would obviously not cause inflation. The same is true with money invested or otherwise not spent. Only spending money can cause inflation. Therefore, the idea that “creating money causes inflation” is simply not true. If production can be ramped up to meet that new spending, or money can be taxed away (or invested or otherwise not spent) to reduce it, then it won’t be inflationary. Most believe inflation the Boogeyman to be reality. Inflation in reality is very different.

[As a brief aside, while the dollar being the world’s reserve currency does indeed provide benefits to the United States, it doesn’t change much about what’s written in this post. Everything in it is equally true for the United States (the current reserve currency); the United Kingdom (the former reserve currency); and Canada, Australia, Japan, New Zealand, and etc. (which have never been the reserve currency).]

MMT describes how our monetary system actually, currently, already, and has always worked – both on and off the gold standard. To say “MMT people want even more [printing to outpace production]” (as in the above tweet-screenshot) is something made up by someone who doesn’t understand, or has been misled by someone who doesn’t understand.

MMT absolutely does demonstrate that many things are possible to do safely, as laid out in these four resource and inflationary impact studies: Medicare For All, a truly bold Green New Deal, canceling all student debt, and the MMT-designed federal jobs guarantee. These things are not just “safe” and highly beneficial to the economy – but also desperately needed by millions. That said, the MMT project itself recommends three things , and three things only.

Unfortunately, too many people say – with supreme confidence – various terrible things they believe MMT to be, do, or say. Quite often, they’re just making stuff up (or believing someone else who’s making stuff up). MMT is defined by exactly one thing: the economists who have developed MMT over the past quarter century, primarily as documented in the hundreds of academic papers in these repositories. What people say online, whether in comments, posts, documentaries, or even papers by mainstream economists, is of no consequence – unless they can confirm it with a citation from one of the MMT papers above (or statements, posts, and etc. from the authors).

Here is my collection of MMT resources which is a gateway to that body of work, geared towards the layperson.

✌️, ❤️, and #MMT 🦉

An early version of this post can be found in this twitter thread and was inspired by this tweet and tag by Franco of Franc Analysis.

Top image: From Foto-Rabe on Pixabay (license)