Modern Monetary Theory or: How I Learned to Stop Worrying and Love the National Debt

There’s a wonderful scene in Stanley Kubrick’s 1964 masterpiece, Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb, where the assorted generals and politicians in the War Room are wrestling with the reality their policies have created – mutually assured destruction gone awry, where now everyone will be assuredly destroyed.

Dr. Strangelove pipes up to describe a theory of survival in the face of such a depressing reality, where the most genetically fit humans (along with their political and military leaders, of course) go underground into a giant mine shaft to wait out the apocalypse and then repopulate the Earth.

General “Buck” Turgidson: Doctor, you mentioned the ratio of ten women to each man. Now, wouldn’t that necessitate the abandonment of the so-called monogamous sexual relationship, I mean, as far as men were concerned?

Dr. Strangelove: Regrettably, yes. But it is, you know, a sacrifice required for the future of the human race. I hasten to add that since each man will be required to do prodigious… service along these lines, the women will have to be selected for their sexual characteristics which will have to be of a highly stimulating nature.

Ambassador de Sadesky: I must confess, you have an astonishingly good idea there, Doctor.

Nothing like a good porn fantasy to change the reality of nuclear annihilation from fear and loathing to “actually, doomsday machines can be fun and rewarding”. Yes, mistakes were made, but when all is said and done the world will be a better place for our having blown it up. Don’t you feel better already?

This is the power of theory in the service of political expediency, the power of post hoc rationalizations gussied up as “theory”.

“Theory” makes us feel better about all the bad stuff we’ve done.

Want more examples? I’ve got hundreds. For every politically expedient or power-expanding action that any government has ever done in the history of the world, there was a post hoc “theory” that supported it. Laffer Curves, anyone?

Modern Monetary Theory – which is neither modern nor a theory – is a post hoc rationalization of political expediency and power-expanding action.

It makes us feel better about all the bad stuff we’ve done with money and debt for the political efficacy of Team Elite.

And all the bad stuff we’re going to do.

At its core, Modern Monetary Theory is an argument that would be wonderfully familiar to every sovereign since the invention of debt. It is essentially the argument that significant sovereign debt is a good thing, not a bad thing, and that budget balancing efforts on a national scale do much more harm than good. Why? Because there’s so much to do and so little time for the right-minded sovereign. Because it is fundamentally unjust for the demands of private lenders to thwart the necessary ends of the sovereign, and it is politically difficult to finance those ends through tax levies on a fickle citizenry.

MMT is the sovereign-friendly justification for deficit spending without end.

Historically, this argument has been used by sovereigns to support wars without end.

Here, for example, is Edward III (1312 – 1377), shown below on the left in effigy at Westminster and on the right counting the dead at the battle of Crecy, the first major English victory in the Hundred Years War. And you thought Afghanistan was dragging on and on.

Edward III borrowed vast sums from Italian banks to finance his campaign. When he defaulted on those loans, the Italian banks were ruined. But Edward was fine, thank you very much. And within a hundred years or so, Edward’s successors were getting loans from other Italian banks. That’s the core logic of MMT. A sovereign’s gotta do what a sovereign’s gotta do, and private capital just has to deal with it.

What’s modern about MMT is this: the modern sovereign’s balance sheet cannot be understood solely from a fiscal perspective. The sovereign’s balance sheet includes not only the assets and liabilities of the sovereign’s treasury from tax-and-spend-and-borrow fiscal policy, but also the assets and liabilities of the sovereign’s central bank from money-printing-and-pricing monetary policy. As a result, MMT holds that not only are austerity and budget-balancing policies a bad move, but so are balance sheet-reducing and liquidity-draining policies. MMT is the theoretical justification for QE without end.

You may not have heard about MMT yet. It’s still a nascent narrative. But it’s growing, and it’s growing fast. Here’s a map of all non-paywalled US media articles on MMT over the past year, colored by recency (blue older and red more recent). Only 272 unique articles over this span (although 3x from the prior year), but you can see where this is going. Twelve months ago this was a fringe issue, negatively portrayed in the press. Today it’s part of the AOC media machine, with Bernie there to cheer it on.

Source: NLP analytics courtesy of Quid

Like I said, you may not have heard about MMT yet. But you will. You won’t be able to avoid it.

Why? Because MMT is the post hoc justification of both easy fiscal policy and easy monetary policy. As such, it is the new intellectual darling of every political and market Missionary of the Left AND the Right.

MMT is the theoretical justification for the economic policies of Trump and his Wall Street fellow travelers alike, who want nothing more than to keep the market punchbowl in place and well-spiked with pure grain ZIRP alcohol forever and ever, amen.

MMT is the theoretical justification for the economic policies of every potential Democratic presidential candidate in 2020. Because with MMT, you CAN have it all. You can pay for wars without end. You can pay for universal single-payer healthcare. You can pay for everyone to go to college. You can pay for a universal basic income. I mean … why not? A caring sovereign’s gotta do what a caring sovereign’s gotta do.

So yeah, you’re going to hear a lot more about Modern Monetary Theory. And you’re almost certainly going to get it.

Modern Monetary Theory is to the 21st-century United States what Lysenko Genetics Theory was to the 20th-century Soviet Union.

Everyone in a position of political power wanted to believe Lysenko’s “theories” of acquired inheritance and seed plantings SO MUCH, because it would make all of these horrible collectivist farming policies work out okay.

And then the famines began.

Look, I’m not a gold standard wacko or a balanced budget loon. I fully understand that the debt of all of us is a completely different animal than the debt of any of us. I’ve got a social science Ph.D. from the Team Elitist of Team Elite institutions. I was an ordained priest a tenured professor in this Church scientific field.

I get the joke.

So don’t tell me that the crowding-out effect of sovereign debt on the real economy isn’t a bad thing. Because it is. This is how entire economies are turned into zombies.

Don’t tell me that the monetization of sovereign debt, explicitly or implicitly, isn’t a bad thing. Because it is. This is how a middle class is destroyed.


I can see this narrative storm system forming off the coast of Africa. I can see it heading west across the Atlantic. I know the warm waters of the election cycle Gulf are going to feed it until it becomes a monster. I know it’s going to make landfall.

I can’t stop it and you can’t stop it. But forewarned is forearmed.

We can prepare for the storm.

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  1. Avatar for jz1 jz1 says:

    Back in 2013, people were in two camps regarding QE, “eventually deflation, default, great depression”, or “eventually 10 thousand dollar gold”. You guys were saying either outcome could be true but most likely we will be “muddling through” under the policies of Omnipotence Central Banks.
    Now, 5 years later, the “zeitgeist” has changed. Are you guys calling 10 thousand dollar gold now?
    The thing is. I AM the middle class raising families and this MMT is designed to kill me. I am losing sleeps now.

  2. “This point of agreement sets both Austrians and MMTers outside of mainstream economics in precisely the same way. They appreciate that the modern monetary system is very, very different from older, commodity based monetary systems—in a way that many mainstream economists do not.”

    MMT’S AND AUSTRIANS (Libertarians) are both a combative crowd…I see the good in both compared to the status quo. BL don’t drink the “Coo-Laid.” No difference than blaming the “Fed” for all of our problems…the problem is looking back at you in the mirror! LMFAO, I am still amazed at how many citizens think you can run a government like a business…Pure Comedy…you don’t have your own sovereign currency! The common denominator is people’s anger with the economic models that leave them scrambling to make do, all the while seeing their lives being taken away from them bit by bit while whoever’s in power keeps bankers and the elite contented.

    The Long Night is coming and its not off the coast of Africa its off Europe and heading our way! No one has a silver bullet, but maybe we can pull this off, but getting more skeptical by the day! Between the Fed/Government, not sure who gets the most blame…too funny, its all about accountability and responsibility and no one in this modern age understands that concept, especially our current DC leadership! What a shit show!

    All have a great MLK weekend! Thanks Ben…Please just do not drink anyone’s Coo-laid!

    “But what is government itself, but the greatest of all reflections on human nature?” –James Madison, Federalist 51

  3. War & Conflict and the Political Conversations

    The fact that we have not had another WW in over 3/4 of a century is unprecedented in human history. The big political economy conversation are not just the debate over socialism and libertarianism, that problem is too normative…people are talking more about “what things should be,” we should be having the conversation on “What good states are possible” then “What good states are sustainable” …this way of thinking is very poorly understood!

    —Conversation between Tyler Cohen and John Nye Podcast

  4. Great article Ben, thank you. I’ve been struggling with positioning for inflation vs deflation for 20+ years now. I’ve come to believe that its a timing issue rather than a “who’s right” issue. The timing looks to me like a small to medium sized deflation event happens, and that triggers a massively inflationary reaction. Ultimately we all know that policy ends in tears, but these politicians don’t care about what happens down the road they only have a “need to do something now!” I’ve been trying to play this game with a strategy of increasingly “hedging my hedges” ad infinitum. That yields mixed results obviously. Its a strategy of minimizing maximum regret. It’s worked well to a point, but it sure as hell doesn’t feed the dopamine receptors.

  5. Avatar for Kpaz Kpaz says:

    I know it didn’t get a lot of traffic, but the debate around MMT did heat up quite a bit in 2010, some time just after QE1 got started. The post-hoc theory is “modern” only in the sense of a post Bretton Woods world. And more than a theory, I think of it as a description of how our fiat money system works. And it’s enlightening really. At that time, there were so many voices adding to the narrative with screams of money-printing = inflationary spiral. But it didn’t work that way did it?

    The real fly in the ointment for MMT proponents is the government jobs guarantee component. It’s in the Mosler writings, but it hasn’t been tried yet in “modern” times. I don’t know if you can still find them, but there were some excellent blog spats during that year between Mosler and Roche (Monetary Realism proponent) If you want to dig in:

  6. I appreciate MMT’s understanding of the Fed and Gov Inputs/Outputs/Debt and not because of Bernie/Ocasio but simply because it describes how things really are…too bad Ben does not. They have a lot to offer so do Libertarians but neither have all of the answers…the same peeps that choose not to understand,how many of them have had a conversation with Warren Mosler, Stephany Kelton, Bill Mitchell or Steve Keen…none of them but they know everything. Every person is the smartest person in the room. Still screaming inflation too…Pure comedy!

    So many things are poorly understood because people believe everything they see/hear versus having a conversation with people. That was a short-form hit piece without putting very much into overall context and application. But what do I know…about two cents worth!

    Reminds me of tale once…The story of the Fukawi Indian Tribe

    Our tribe has rich and long-standing history. Long time ago, our tribe wander the wilderness. For many years, we wander looking for land to call our own. Our chief led our people through mountains, valleys, seashores and plains.

    People were born wandering. People died wandering. After an entire generation of wanderers were born and died, our chief, then very old, led us to top of great mountain. He stood atop mountain summit and faced his people. He looked around. He looked far and wide. He then shouted to the gods,

    “We’re the Fukawi! We’re the Fukawi! WHERE THE FUCK ARE WE?!”

  7. Avatar for jz1 jz1 says:

    I am all for conversations/debates on all social issues and science problems. Conversation about THEORY OF MONEY? I think it is waste of time and energy. Money is Caesar’s, it is NOT up to anybody else to debate. Caesar can choose to have sound money. Sound money is sound because nobody can do anything to it. Because there is nothing anybody can do to it, there is NO theory about it.
    Caesar can also choose to have unsound money and create all kinds of theories. We can all have our conversations/debates, and in the end, Caesar is going to put out his sword and tell you which theory is right.
    No matter which way Caesar chose, there is nothing the team-sheeple can do.
    I am 100% sure there are aspects of MMT that will help somebody at some time frame and be considered good. But the point is that the power of money, like all power, corrupts human. You can say, “without power, there is nothing I can do!”. Also true. Power corrupts and power helps. It is up to Caesar to decide whether the power of manipulating money should exist. We all know what Caesar does. It is NOT modern and it is NOT a theory.
    To me, the power of money should be left to God and no human should be able to come up with any theory to use that power. What do I know?

    Leave the money and money theory to Caesar, we, the sheeple, can still have conversations about what the theory of money will do to us. Although there is NOTHING we can do to stop it, we can figure out how to minimize the damage.

    There will be a day when the last round of QE or Bailout will trigger yellow vest occupying central banks. Old Caesar gone, new Caesar rises with the new theory of money.

  8. Some simple data. As of Q2 2018 combined Federal, State and Local decficits were in excess of $1.2 trillion. The deficit as a % of Nominal GDP (this is what the population experiences is north of 6% during a boom. This does not include Social Security where contributions are treated as general revenue and the liabilities are unrecognized. Quite simply the United States cannot afford a recession.

    In every tightening cycle in the post Volker period a hiking cycle that coincides with a collapsing ISM Manufacturing has spooked the Fed into pausing then easing. Fed Fund effective rate is 2.4%, Fed Fund Futures for September 2.44% and the 2 year has been falling. In my view the Fed is in the process of blinking.

    Fun to see references to the Plantagenets. They were suburb in helping bad money chase out good. Thankfully we no longer have to bite our coins to test for base metals.

    Gold bugs should take a look at the UK booms and busts in the 19th century. Post Napoleanic wars a run on the Bank of England’s gold reserves; busted the central bank.

  9. Thanks to Mike S for the link (in we’re all ETists now), I downloaded and read Warren Mosler’s ‘Soft Currency Economics II’. I will have to reread it. From my first reading, I think I learned that fiat currency issuers with central banks cannot go bankrupt and that deficit spending is necessary to increase the money supply in the US. After that, there seems to be paradoxical relationships between savings, investment, taxes, wages and so forth, and so the need to reread. I wish the author had been more explicit. MMT is certainly very seductive as DrB has indicated. I wonder if it will be like Special Relativity was in physics.

  10. Missionaries think they know MMT, but they choose to see something else because it goes against what they were taught or because of some other dogma in there head. MMT is not about endless debt or you can print money forever…but those make nice bulletized soundbites!

    It simply states what money is and how it works in our current system and gives another path. Great thread below on all things money ran by William Hummel who in my opinion knows more about what money is and all things Fed then anyone in the country. (!searchin/understandingmoney/What$20is$20MMT|sort:date/understandingmoney/sOjSCZL7dy8/G5UkXLfJAgAJ

    ***Until we somehow we end the corrupt system of buying legislation in Congress, I don’t see how any set of rules can solve the problems that nearly sank the US financial system in 2008. Wealth begets political power and more wealth as things stand, and the Supreme Court seems oblivious to the economic implications!

  11. Avatar for jz1 jz1 says:

    The value Caesar sees in Nuclear “power” is a bomb, NOT electricity. Same way Caesar sees value in MMT. I learnt about banking and money from the Coursera’s online class provided by a Columbia professor. The point is all monetary systems have two opposing parameters. “Discipline” and “Elasticity”.
    You need elasticity in banking and money system to deal with growth and shocks like war and natural disaster. You need to discipline to restrict corruption.
    Caesar sees and smells the corruption out of MMT while selling the MMT to the public under the name of “elasticity”. Should we really wonder why there is a “corrupt” system of money buying congress?
    How to balance discipline and elasticity is up to Casesar’s personality. Country dies like humans. Nothing last for ever and God has ensured everything has a “corruption” mechanism. You want to live long and healthy, drink water. You want to get high, take pills and corrupt your health and die fast.

  12. Avatar for bobk71 bobk71 says:

    The core nature of the world system is that an alliance of top politicians and bankers use state power to prop up the values of money, debt, and other financial assets they issue. While the bubbles hold, the elites benefit most, by issuing the assets. When the bubbles must collapse, the public at large foot the bill by suffering lost jobs, business, and lost savings.

    We in the West have really been running a socialist system to benefit the Party, it’s just that the central planning occurs in money and finance, rather than the real economy. Thus we can tell people we have a market economy and the associated freedoms. In truth, supply and demand can’t possibly be free when the supply and demand for money and financial assets are ‘managed’ by the state-bank elites.

    MMT is just a brutally honest way to admit to such a system. My suspicion is that it won’t hold anything close to total sway. The top Western elites have always been smart enough to maintain the fiat (but not real) freedoms enjoyed by their citizenry, and use that as a powerful weapon against other aspirants (ahem, to Beijing and Moscow) to imperial power. Historically, funding fiscal expenditures directly by money printing (such as the French Revolutionary paper money, the assignot) has been a quick way to loss of confidence and collapse, by amplifying the destructive traits of this system: perverse incentives for the elites, distorted investments and economic activities, etc.

  13. Wasn’t his great-great GF named Moses?

  14. Avatar for bobk71 bobk71 says:

    In the modern system, there are more tickets sold than seats in the house (more money/debt printed than products and services, at current prices.) The elites are good at playing for time, but eventually ticket holders will want to go in.

    So you’re down to a choice among: denying entry to some tickets (default/deflation,) putting 4 people in every 3 seats (inflation/devaluation,) announcing everyone must wait indefinitely (financial repression,) and building more seats (economic growth.) If you’re the global empire, you can also make the neighboring theater honor some of your tickets, or make war to make that happen. There are no other ways out, and even if miracles come out of the labs, people may not spend money on them, so growth is really outside Team Elite’s control.

    Historically, the Western elites have been pretty good at effecting a combination of the scenarios, to spread around the stress and keep their system alive.

  15. Avatar for bobk71 bobk71 says:

    It think it’s extremely tempting to say, the money system really reflects human nature (and not the best parts either,) and there’s nothing we can do about it. I feel that anyone who claims to have an understanding of money has to have this inkling.

    Before we come come to that conclusion though, why don’t we think really hard, and make absolutely sure we’re not saying that because we benefit from the system (and let’s face it, every citizen of the West ‘benefits’ from debt and money issuance – whether some get eventually destroyed by various addictions and alienation is another story.)

    Even if there’s no cure for the way the system works fundamentally, there are many ways to make the patient comfortable. A recent insight I have is that, for every bit of extra understanding of reality by the public, the elites will be forced to give up some of their machinations and make life marginally better, due to the way the Western system works (by having to rely on soft as well as hard power.)

    Money is fungible, and so is insight!

  16. Avatar for bobk71 bobk71 says:

    Buying legislation is only an outgrowth of the state-bank-alliance system. When the US can print and borrow cheaply, ‘free’ money rains on politicians, more so than any other country. Political candidates don’t really compete on competent management; they compete on ability to build political capital by distributing the free money. You can see what types of people run and get elected, over the decades.

  17. Avatar for bobk71 bobk71 says:

    There was a famous quote (I don’t remember the details,) that says, you’re seeing this all wrong. It’s not an economic story; it’s a crime story.

    My eyes have been opened after the Financial Crisis. Yes, read the mainstream economics – it’s the most reliable, as far as raw information is concerned. But keep in mind it’s ultimately a crime and its cover-up. So read it with the mindset of a libertarian. If you can collect one insight in a mainstream book that points more or less directly at the crime, be thankful.

  18. Avatar for bobk71 bobk71 says:

    The Long Night is coming, yes, very possibly.

    The history of the modern system is that the elites will have to apply great deflation from time to time to keep their system stable. You simply can’t have financial-asset inflation forever. (First of all, it’s fragile, and secondly, such an increasingly centrally planned economy would take the West out of its winning terrain, i.e. the perception that it alone is the true friend of free markets and property rights.)

    The elites will work to achieve this deflation especially if there are ready-made targets for blame. And yes, that’s you, Trump and Pelosi!

  19. Avatar for bobk71 bobk71 says:

    What if the powers that be are not interested in ‘possible’ and ‘sustainable’ good states? But only in keeping their powers and keeping important (monetary) issues ‘very poorly understood?’

    The modern system of money is unsustainable by nature, due to the perverse incentives faced by the elites.

    Over the centuries, while material wealth has grown, happiness and the environment have suffered. Happiness is down especially for the ‘winners,’ who face a variety of personal addictions and social alienation, again, due to the incentives inherent in this system.

    So, what is possible? Progress. Progress by public understanding that the power of money can’t be anything but abusive, and progress by taking that power from the elites. We need to add monetary and financial manipulation to the Enlightenment list of prohibitions against the state.

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