Frank Ashe — A Kindergarten Guide To Modern Monetary Theory

This is a paper presented to the Institute of Actuaries of Australia in May, 2010. It is s simplified introduction to MMT by someone that understands accounting and its institutional foundations.

Now that MMT is going mainstream it is a good place for many who are curious about it to start.

Pass it on.

My particular interest in this particular theory is due to the very simple nature of its assumptions and the clarity of its logic – essentially looking at the consequences of a stock/flow consistent analysis of money and credit.

One important point that flows from this analysis is a recognition that most of the current discussion on the topic of money, credit, and the government sector finances has a language that comes from the gold standard era of money. Most economies have been in a fiat money system since the mid 1970s – it’s time to move the discussion onto the proper footing.

As part of this, I’ve noticed it is easy to become confused between the boundary line demarcating (i) and (ii) and the boundary line demarcating (ii) and (iii) where:

(i) what is easily accomplished using the current economic institutions, widely interpreted as: laws on budgetary outcomes; notional independence of central banks; presentation and discussion of government finances; imagined reactions of bond markets etc i.e. the self-imposed constraints under which a government manages the economy;
(ii) what is actually happening under a fiat money system;
(iii) what is not allowed under a fiat money system.

In discussion with various people I have found this confusion to be very difficult to overcome. The self-imposed constraints have so muddied the stream of discourse that it is difficult to see what is happening beneath the surface.

The following classroom discussion looks at the basic flows of a fiat money system....

Institute of Actuaries of Australia
A Kindergarten Guide to Modern Monetary Theory (PDF)
Frank Ashe