Understanding MMT (Modern Monetary Theory)

Looking at so many posts on social media which is discussing this concept on the public conversation, I am interested for explaining my understanding on MMT with giving some points which are crucial for obtaining the core insight inside this paradigm. In the beginning, let me introduce you with question "what MMT is?"

In general, MMT is a concept that sees the economical understanding in macroeconomics through the lens of currency issuer not currency user. In this point, currency issuer is the federal government which has the authority for issuing, controlling, subtracting money from the economy as a whole, while the currency user like a household has not. Moreover, this concept is based on the analysis inside of fiat money not credit or commodity money that could be applied only on certain countries that have sovereign currency. Now, lets discuss the first point…

Government is not same with Household

Most of families, when they have a trouble in financial condition which is their expenditure surpassing their income, in usual case, they should tighten their belt. It means they have to find other sources that can increase their income –by adding more jobs to get more income or borrowing money- or they must cut some parts in their expenditure to overcome this trouble -austerity, this is a household’s understanding as a currency user. Household can “run out of money” or going into solvency when that problem could not be solved. With using this perspective, common people or even an economists make an assimilation on the same assumption when it comes to depict the government. They think that the government has to do the same like a household, it should take money first through taxation or borrow first and then the government can spend it to the economy. But this is actually wrong! The government is never going to collapse because it is currency issuer, not currency user, even when the govt has a budget deficit, it does not matter. The govt whatever the condition happens should spending first then tax and borrow later, not vice versa. Why? Let me explain this with simple analogy.

Assume a world of a parent and several children. One day the parent announces that the children may earn business cards by completing various household chores. At this point the children won't care a bit about accumulating their parent's business cards because the cards are virtually worthless. But when the parent also announces that any child who wants to eat and live in the house must pay the parent, say, 200 business cards each month, the cards are instantly given value and chores begin to get done. Value has been given to the business cards by requiring them to be used to fulfill a tax obligation. Taxes function to create the demand for federal expenditures of fiat money, not to raise revenue per se. In fact, a tax will create a demand for at LEAST that amount of federal spending. A balanced budget is, from inception, the MINIMUM that can be spent, without a continuous deflation. The children will likely desire to earn a few more cards than they need for the immediate tax bill, so the parent can expect to run a deficit as a matter of course.

Up to this current point, we have already known that the government is different with the household. hereafter, there are several circumstances that this view could be implemented or not. It includes the requirement in which the government must have a sovereign currency. Before that, I’d like to explain from the fiat money first.

Fiat Money and Sovereign Currency

Historically, there have been three categories of money: commodity, credit, and fiat. Commodity money consists of some durable material of intrinsic value, typically gold or silver coin, which has some value other than as a medium of exchange. Gold and silver have industrial uses as well as an esthetic value as jewelry. Credit money refers to the liability of some individual or firm, usually a checkable bank deposit. Fiat money is a tax credit not backed by any tangible asset. In 1971 the Nixon administration abandoned the gold standard and adopted a fiat monetary system, substantially altering what looked like the same currency. Under a fiat monetary system, money is an accepted medium of exchange only because the government requires it for tax payments. Government fiat money necessarily means that federal spending need not be based on revenue. The federal government has no more money at its disposal when the federal budget is in surplus, than when the budget is in deficit. Total federal expense is whatever the federal government chooses it to be. There is no inherent financial limit. The amount of federal spending, taxing and borrowing influence inflation, interest rates, capital formation, and other real economic phenomena, but the amount of money available to the federal government is independent of tax revenues and independent of federal debt. Consequently, the concept of a federal trust fund under a fiat monetary system is an anachronism. The government is no more able to spend money when there is a trust fund than when no such fund exists. The only financial constraints, under a fiat monetary system, are self-imposed. After understand what the fiat money is, now let’s jump to sovereign currency, what it is?

Sovereign currency refers to take full advantage of the special powers that accrue to the currency issuer, countries need to do more than just grant themselves the exclusive right to issue the currency. It’s also important that they don’t promise to convert their currency into something they could run out of (e.g., gold or some other country’s currency). And they need to refrain from borrowing (i.e., taking on debt) in a currency that isn’t their own. When a country issues its own nonconvertible (fiat) currency and only borrows in its own currency, that country has attained monetary sovereignty. Countries with monetary sovereignty, then, don’t have to manage their budgets as a household. They can use their currency-issuing capacity to pursue policies aimed at maintaining as an example, a full employment economy. Sometimes, people ask me whether MMT applies to countries outside the United States. It does! Even though the US dollar is considered special because of its status as the global reserve currency, lots of other countries have the power to make their monetary systems work for their people. On the contrary, MMT can be used to describe and improve the policy choices available to any country with a high degree of monetary sovereignty -the US, Japan, the UK, Australia, Canada, and many more. And, as we’ll see, MMT also offers insights for countries with little or no monetary sovereignty -nations like Panama, Tunisia, Greece, Venezuela, and many more.

MMT helps us to see why countries that fix their exchange rates, like Argentina did until 2001, or that take on debt denominated in a foreign currency, like Venezuela has done, undermine their monetary sovereignty and subject themselves to the kinds of constraints faced by other currency users, such as Italy, Greece, and other eurozone countries. When countries with little or no monetary sovereignty fail to prioritize budget discipline, they can face unsustainable debts just like a household. In contrast, the United States never has to worry about running out of money. It can always pay the bills, even the big ones. The US can’t end up like Greece, which gave up its monetary sovereignty when it stopped issuing the drachma in order to use the euro. America is not dependent on China (or anyone else) for financing. Most importantly, having monetary sovereignty means that a country can prioritize the security and well-being of its people without needing to worry about how to pay for it. After this, In this below, before Indonesia as a mainland of writer will be examined with the question of “is that possible or suitable enough using this paradigm in Indonesia’s economic system?” the few stories and examples of a countries that have less or no sovereign currency and what kinds of the effects and implications will be explained first.

From Full, Less and No Monetary Sovereignty

As we have known earlier, monetary sovereignty is key to understanding MMT. Governments need a high degree of monetary sovereignty in order to exercise policy autonomy -that is, to be able to run their fiscal and monetary policies without fear of painful backlash from financial or foreign exchange markets. Many countries possess, but don’t take full advantage of, their monetary sovereignty. In addition to the United States, countries like the United Kingdom, Japan, Canada, and Australia (to name a few) enjoy a high degree of monetary sovereignty. They all issue nonconvertible fiat currencies, and they largely refrain from borrowing in currencies that aren’t their own. Generally speaking, countries that fit this set of criteria will have greater monetary sovereignty and, thus, more policy autonomy when it comes to managing their own economic destinies. They needn’t agonize over government deficits or trade deficits, and they are free to focus their domestic policy agenda on achieving macroeconomic goals like full employment and price stability. Not every government enjoys this much policy flexibility. Some nations have weakened their monetary sovereignty, either by pegging their exchange rates (e.g., Bermuda, Venezuela, Niger), abandoning their national currencies (e.g., all nineteen countries in the eurozone, Ecuador, Panama), or by borrowing heavily in US dollars or other foreign currencies (e.g., Ukraine, Argentina, Turkey, Brazil). Doing any of these things compromises a nation’s monetary sovereignty and diminishes its policy flexibility.

Most developing economies are at the weaker end of the sovereignty spectrum. Even those that can issue a nonconvertible fiat currency usually can’t afford to ignore fiscal and trade imbalances. That’s because most poorer developing nations rely on imports to meet vital social needs (e.g., food, oil, medicines, technologies). And that means they have to worry about how they’re going to get enough foreign currency (usually US dollars) to pay for imports. Many end up borrowing in US dollars and then struggling to repay those loans. For these, and other reasons, many countries around the world are stuck in a situation where they can’t rely on their own currency-issuing powers to build a good economy for all of their people. Developing countries may receive aid from the international community, or loans from institutions like the International Monetary Fund (IMF), but it never seems to be enough to help them escape the trap of needing to rely on foreign currency for their survival.

How about Indonesia?

It seems inevitable to apply MMT when looking at Indonesia because it has a central bank that does not rely on other currency for issuing, maintaining or subtracting rupiah from economy, different with members of European Union, they have restriction on its own currency because euro has the highest position rather than their currencies in which makes them as a currency user not currency issuer. However, some parts that we should have to know that Indonesia has a huge dependency on importing vital needs such as on food, medicine, manufacture and so on that makes Indonesia does not ready yet for applying MMT in all parts. This is because of when Indonesia applies MMT, it will create a significant effect on the monetary situation (i.e. weaken the exchange rate) in the reason that it has been caused by the composition and proportion of its economic heavily relies and consists on foreign currency. But, this is not closing the opportunity to use this concept, moreover, it should be brought together with requirements in which we have to reduce the dependency on imports first. Then, largering the flexibility on acomodation inside the fiscal policy. Finally, strengthen the surveillance system on how we can warn or stop to the abuse activities on economics reality.

Now we have done in first part for understanding the basic assumption of MMT. In the next part, I dig more deeply for cracking the dismal understanding regarding to economic believe that has been constructed in our consciousness through the mainstream in economic curriculum. The second part is seeking the answer when the government has a deficit, is it a bad sign of economy? and what will happen with non-government sector? The third part is exploring the truth which is what will happen with the national debt that always increase, will we end up same like Greece? Then the fourth part is widening the point of view of the question “when the number of import is more than the export, will our economy go to bankrupt?” The fifth part is explaining “is the social security will always be a burden in the economy? The last part is telling the proposal for a better economy. Thanks for reading, if you have a comments or suggestion don't hesitate to tell it to me :)