Modern Money Theory (MMT) is an economic perspective that emphasizes the flexibility in the government’s ability to spend, tax, and issue debt. The key insight is that the government can do something that no private agent can do: issue its own sovereign currency. The MMT perspective explains how, in practice, the government spends by writing a check on its account on the Federal Reserve and the Fed simply creates the monetary reserves necessary to cover the check with “keystrokes.” The Treasury does not need to tax anyone or borrow from anyone (by issuing bonds) prior to spending.
As a practical matter, the Treasury can choose to impose taxes or issue bonds at some point. These operations drain reserves created by government spending. And the Fed will engage in open market operations to maintain its target interest rate that may fall due to the injection of reserves created by government spending. But it is misleading to think of the government of a country with its own sovereign currency as facing a budget constraint in the same way that a household must come up with funds before it can spend.
The MMT perspective provides a nuanced and very practical analysis of the way that a sovereign government and its central bank interact with the economy. We have not yet integrated the details of this analysis into our pages, but we encourage interested readers to explore the extensive content on the “Modern Money Primer” blog.