Central Banks Never Run Out Of Their Own Money
Interview with Prof. Dirk Ehnts on behalf of Rosa Luxemburg Foundation
- Privat
Read the full interview here [1]
The last few years have witnessed a surge of public debate around Modern Monetary Theory (MMT), spurred by prominent heterodox economists such as Yanis Varoufakis but also a number of thinkers from the Global South, who see it as a tool for developing states to emancipate their economies from international financial institutions and pursue development on their own terms.
MMT is not without its opponents, however, with critics on both the Left and Right. Fabio De Masi, a former MP for Die Linke known for his investigation into the Wirecard scandal and the author of the recent study When Finance Meets Big Data[2] for the Rosa Luxemburg Foundation, spoke with Dirk Ehnts, one of the most well-known academic proponents of MMT in the German-speaking world, about what MMT has to say about economic policy, inflation, and orienting the economy towards the public good.
Modern Monetary Theory (MMT) claims that sovereign states are different from private households and can never run out of their own currency. Could you explain this notion?
A household, a firm, and a local government all need to have money before they spend it. They are users of currency. Since they cannot create currency and run a money-printing machine in the basement, they need to “finance” their spending (i.e. via wages, profits, or credit). Income has to precede spending.
A federal government, however, is the issuer of currency. It creates new money when it spends. For example: when the federal government pays a construction firm to build a road, the account of treasury A at the central bank will be debited and the account of the bank of the construction company B credited. When bank B credits the account of the construction firm and workers receive the wages into their accounts, money has been injected into the economy by government spending.
Links:
- https://www.rosalux.de/en/news/id/50220/central-banks-never-run-out-of-their-own-money
- https://www.rosalux.de/en/publication/id/50039/when-finance-meets-big-data