Modern Monetary Theory Explained | Steve Keen and Lex Fridman 

I'm sure this is a common saying, but I can still remember sitting in a lecture hall in one of my undergrad economics classes and hearing the prof say "if you took all of the economists in the world and laid them end to end, they wouldn't reach a conclusion."

Modern monetary theory: You are Lex Fridman and still renting home.

"...so money is fundamentally a 3some, and everybody gets fucked" I'll teach my children exactly that

Money Printer go BRRRR ... Make new theory for to keep money printer going...

I think the confusion that MMT advocates have is they call things 'money' that are actually only 'fiat money'. As long as you can confuse those two different things you can spin an endless tale of how debts don't matter and you can print 'money' without worrying about deficits or bankruptcy. But this is magical thinking.

Lex needs to have Richard Werner on to talk banking and money creation!

Somehow he took a topic I knew well and made it totally confusing

Damn it, I'm dumber now.

This is very closely tied to keynesian economics in general when you think that you can make an equation to simply make anything work . Money is a commodity. FIAT money exists because it is ENFORCED, not because it is REQUIRED. Many, many people choose to opt out of their countriy's fiat money because THEY PRINT TOO MUCH MONEY. Printing money impacts prices in general. It has been proven time and time again. Theres current day examples. And people gravitate to different currencies (can be "better" fiat currencies too). I hate that you can ignore all of that simple because "oh no but if we take it as liabilities vs assets it sums 0"

As a person with 10+ years of banking/accounting experience thought that Steve explains that well. Not sure if others would agree. Think that what MMT is missing is that the Treasury uses Third party investors when selling their debt obligations. Only a fraction of the borrowing is done through the Fed. So deficits do add liability to the aggregated economy. It isn't a zero sum.

House of Cards*

6:56 The issue with Steve Keen's explanation is that , while he dismisses barter he doesn't bring several parts of the argument to its furthest conclusion. Questions such as ... if each transaction is between Party A, Party B and the bank that issues money, what stops the bank from issuing ∞ money, and using Cantellon effects to be on the pillager's side of inflationary effects?? Another Australian economist, Steve Kates, keeps banging on about Say's Law, and that money lubricates barter but does not replace it: ultimately people don't want to trade money, they want to trade goods.

Great explanations! At 6:24, Steve should have said Lex's rent is his liability and the landlord's asset (like a mortgage).

it does create money for the private sector, but it does so to the benefit of certain parties, at the expense of others: usually, it helps the rich and the politically connected, and it hurts anyone on fixed income, and anyone who earns a wage. That's the cantillon effect. Gold is money btw. Why else would the fed (and every central bank on the planet) hoard the stuff? I'm hoarding it too... because I want to own a monetary asset that is quite literally not anyone else's liability. If an asset I hold is someone else's liability, and that someone is the govt, they have every reason and ability to deprive me of that asset or to minimize their liability by minimizing the value of my asset. They can't do it with gold.

This is the most unnecessarily convoluted explanations of mmt ever and will certainly leave people more confused than they already were

_”Modern Monetary Theory_ is accounting.” Thanks Steve.

Having learned business accounting prior to consumer access to computers I am often startled by widespread ignorance of that wonderful invention of double-entry accounting.

Actually this is how the system works and why we are in a deep trouble: Fiat money is not directly convertible into a physical commodity at a specified amount. It is a type of credit money through which a central bank issues notes in exchange for interest-paying bonds by the government. The interest on these bonds is paid by the government primarily through the process of taxation. That is to say, by you and me. Since the interest plus the principle always exceeds the initial amount borrowed, the government must continually borrow more money, at additional interest, in order to repay the central bank, thus beginning an ever-increasing spiral of debt.

Someone told me longtime ago that asset is anything that puts money into your pockets, whereas a liability is something which takes money out of your pockets.

The short of it all is that the individual gets a slice of the pie (chart) that's left over after the banks make money on debt. The individual mostly plays by different rules than the establishment. Those in power from government or wealth. Huge teams against the individual.

The most significant question is not about commodity (thing) vs currency (IOU) but who controls its value. That’s why gold is no solution as long as someone can manipulate its market value.

With his logic any governmental deficit is good for the private sector? At what point does a deficit/ printing become a liability for the private sector?

Government debt is a claim on all future earning through production, growth and or higher taxes. If robot add to GSP this effect should be lessend but the new problem of human productivity might become a burden.

I want that time back

Lex get Stephanie Kelton on your show she's a 100x better at explaining things so lay people can understand. Steve Keen uses big words quickly and makes people's heads spin.

So what i understand is that money is some sort of social relations, and it's like accounting divided on two things assets and liabilities, and the total sum of this accounting thing that is based on social relations is zero, that's why gold or other commodities aren't money because anyone can have more by mining in the gold example, and money creation happen through loaning by the banking sector and a deficit by the government, so he first said that the total sum of money which is the social relations and the accounting thing is zero, and then said that the total sum of money isn't zero, the total sum of the accounting thing is zero, which makes us ask what is money (according to his definition) ? then he said that money is the positive thing in the equation not the negative, and at the end said that money is an exchange of promise of a third party which is the banking sector which is basically the government it is the one who control it (interest rates, loans conditions, reserve requirements...), so if money is the positive side of the equation, and you first said that it is the social relation and the accounting thing which its total sum is zero, and the government and the banking sector are the one who can create money (deficit, loan), so it should be there a negative side of the equation to end by zero, which is the people!! by inflation (decreasing the purchasing power), so first he refuses gold as money because anyone can have more of it by mining, but fiat currency is money because he change the definition making money the positive side after it was according to him a zero sum, what a contradiction!!!

Why should money be a commodity? It seems to me like you want to restrict government spending which is okay, but conflicting with your point of view that money creation is a good thing?

Keen has an unparalleled ability to make simple things difficult. Money (national currency) is a fiscal credit. The national currency is a monopoly of the Government and it has value because you can pay taxes with it. The national currency not reclaimed yet by the Government to pay taxes is what we call financial equity. If you want to know what modern monetary theory is you shouldn't ask Keen, but Bill Mitchell, Randall Wray or Warren Mosler.

Money creation is "good" if you're the one creating it, or the one getting it first...

When you deposit to a bank, their liabilities go up, not assets.

It helps if you consider that another way to look at money is as a promissory note from the government to the holder of that note. For the holder of that paper, the US treasury owes assets equivalent to it.

On the old italian lira notes it was written something like "payable on sight to the bearer", which meant that anyone who went to the central bank could in theory exchange a note for its corresponding value in gold. In this sense I can agree that money can be seen as a government's liability. But why would it be that either in a fiat currency system, in which the state can print money "for free"?

It was Luca Pacioli, the Italian monk, mathematician and friend of da Vinci who created double-entry bookkeeping. They never taught us that at Kingston University.

Money is a medium of exchange based on an accepted and saleable commodity. Money is a creation of the market, not government (law).

What if your house price goes down to 600k and your loan was 800k how do they balance out?

Keen explains liabilities and assets in the private sector but ignores that conceptual understanding in the government sector and falls into a belief that is what "government" does is somehow not subject to the same rationally derived concepts as what everyone else is forced by by law to act upon to maintain a workable economy.

also government deficits had to money supply only if other second order effects take place, such as central bank financing it via QE. If it is financed by the private sector through bond issuance then it is just currency trading hands.

Yes the banks have been involved in double entry book keeping for quite sometime. They've been doing it to us for so long it hurts.

The classic theory is clear... Imagine a cartesian plan with y axis as the index of general prices of economy and the x axis as the quantity of money. The demand for money will increase as the index of general prices increase, simply because people will need more money to buy thing. So, it is a line with a positive slope. The money supply is defined buy the FED, so it do not depends on the genreal price, so it's a vertical line. The intersection between these two lines gives us the prices in a economy and the quantity of money. It will work because the economy will trend to the balance in the long run. If I increase the money supply I will shift the vertical supply line to the right side (increase quantity of money), so the new intersection will be in a point with more quantity of money and higher prices! It's pretty simple to explain how the increase of money supply creates inflation in the long term. (sorry for my english, I'm a english student yet).

I went from thinking I knew a bit about money and the economy to realising I know nothing.

Steve should not use the word 'asset' in terms of a call on someone else's liabilities, as you can own an asset free of debt, and thus, it will show in your personal balance sheet, but with no double entry. Terms for this conversation about money should be 'money owed to me', and 'money owed from others'. If I sell an asset for $500,000, and it is unencumbered of debt, and it arrives to me in cash, then it will not show as a double entry transaction in 'the system' that he describes, yet it exists in cash.

$6 gas and skyrocketing prices across the board are a good thing. Back to academia sport. Guys like this caused this, they should pay for this

The phrase "money creation is a good thing, because it's what allows commerce to happen" is an oversimplification that exemplifies the problem people have with MMT practitioners. What you want is the right amount of money. If you make too little money youre preventing commerce, if you make too much youre causing inflation. There's nothing wrong with MMT, but MMT practitioners tend to forget that second part. Now that we have high inflation all the MMT people should be calling for higher taxes to decrease the total money supply.

Curious, but have extensive surveys, data mining and simulation on the viability of certain UBI programs been done in recent years? Ie, if UBI payed extra to people who could find a job, with higher taxation on the rich, minus companies that would leave (unless we tax foreign owners).. would we all be richer, overall? If this study hasn't been conducted, I'd like to see it.

Actually, double entry goes back to babylon, if you know how to look for it.

Excellent! I am reminded of the movie They Live where in the unemployment office the story talks of how a town died by the banks closing.

Creating more claims on existing goods is good. Interesting theory.

Under MMT, why can't we just print more money instead of making people pay taxes?

It’s easier to start with the idea that cash is a central bank’s liability. It’s an IOU.

Very educational . Although the concepts are simple for anyone who had economics 101 class at the college, it’s admirable how humble Lex is to ask basic questions so that average Joe can related to it. Well done

Pity the discussion did not explain the relationship between state reserve (treasury) and commercial/'private' banks. Simply put money is debit, as all money comes into being by agreement between the state treasury and banks to extend credit (debit). Therefore all money savings, private assets, are on fact debit on the states books. As the state provides authority to banks to create credit (loans). Which are in theory settled with interest added. The interest charged by central banks and in turn private banks is a form of monetary growth. Taxes are only used by the state to reduce the sum of money in circulation - to reduce monetary inflation. The state does not use or need taxes in order for it to spend. MMT provides that all money is in fact liability between parties. For example a company loans money from a bank in lieu of future income it will generate. The company pays its employees and the wages are a liability to the company and the bank that issued the loan but the interest on the loan is an asset on the banks balance sheet. The company converts its liabilities into profit by selling the goods/services it creates for more than the cost of creating these. Therefore the banks asset is the interest payment it receives and the companies asset is the profit it generates. The employees savings is their asset and their expenditure are liabilities. Therefore the only asset generated by central bank, commercial bank and the private individual is directly proportional to economic growth - which is how much additional cost a economy can allow without creating excessive inflation. The central bank sets a 'safe' inflation target - usually around 3% of GDP. Any growth in excess of this target is potentially inflationary - rising costs beyond what is affordable. Exchange rates have an impact on cost of imports and gains on exports - get this balance wrong and the rest is hyperinflation or deflation.

This stuff simply cannot be explained verbally. Luckily Steve explains gov money creation in a simple Godley-table format in his book: "The new economics", p.41

So the primary principle here is that, as Prof Hudson said about MMT Provisioning concept in the context of a Civilization guarding it's resource cycles in tune with the Calendar, and as Prof Keen just said Fiscal transactions are intended to be zero sum at the end of a Management period and a Debt Jubilee ensures. The actual meaning of the word has been completely inverted to isolate the freedom from debt carry over to the Celebration of an actual Freedom from want. Excellent Teaching video, thanks.

MMT, and this guy's explanation of money, provide marvelous examples of how far you can go if you build a logical argument based on a false premise. Money consists of a commodity or a claim on a commodity used as a MEDIUM OF INDIRECT EXCHANGE. Increasing (or decreasing) the quantity of a commodity or claim USED AS MONEY distorts the pricing mechanism of the market and causes a misallocation of resources. There's a lot more, but please examine this guy's argument very carefully.

The government definitely does not put more money in my bank account than it takes out.

Lex could you please have Randall Wray, Warren Mosler, or Stephanie Kelton on to discuss MMT? Would be great to get a more full perspective on this topic.

Money is a unit of account, but it is also a store of value.

If you can get your hands on a “modern money mechanics” booklet from the Chicago Federal reserve you will understand this. He kind of sucks at explaining it but at the essence of it all money is debt, private banks control the central bank, there will always be more money owed than available in the economy leading to the money printing death spiral we are in currently…

MMT is not just accounting. They do not define banks' created money as money but as credit. But the money that the bank creates is money. It just performs differently. While the created money last as long as the debt because it is based on the promissory note, it is nevertheless laundered with interest and fees. These interest and fees amount to 1 trillion dollars a year. What Steve Keen explained is simplistic. He does not elaborate how it can hurt the economy

It’s creating new currency, not new money. It’s creating currency, not creating wealth. Big difference. And putting more currency in peoples bank accounts by creating money out of thin air is the process of inflation, which is everywhere and always a monetary phenomenon.

“If there’s any left” 😂

The real issue here is that the general public thinks that government accounts/accounting has the same rules and concepts as a households. This is where people get completely confused, as a government that issues its own currency does not have the same limitations as a household/business/state, as these entities are currency users, not currency issuers. So as Dr Keen points out deficit spending by a currency issuing government means that there is more money in circulation chasing goods and services. People need to realize that a government deficit can always be repaid by a currency issuing government and can always meet it’s interest payments. The deficit increasing size is a reflection of the growing amount of money in the economy. The real issue with deficits is inflation, which is related to the economies capacity to absorb these extra dollars. The government can never go broke as a household/business can if it spends more than it takes in. As it can always meet its financial obligations as it is the currency issuer.

So when your house is 'paid off' then it ceases to be an asset coz there's no claim on it

At the end he talks about promises being exhance by 3 parties. The only party not keeping their promise is the bank as the promise of the bank was to exchange that promise (money) for gold or another commodity. With fiat money the bank is no longer keeping its promise as instead of gold you will nothing.

Genuine question, At the end of the clip, Steve is saying that the concept of money forcibly needs a third party, trust and promises? Otherwise we would live under a barter economy system? Why and How? What benefits does that bring compared to have an token representing value which I can exchange directly with other peers for goods and services?

It's pretty hard for an average Joe to understand when you explain claims :) Make it simple. Assets are what you own (or something, that will bring you ownership in the future, your claim). For example, bananas. Do you have bananas? Or furniture? So put them on the left side of your balance sheet, it's your assets! Now, where did bananas come from? Oh! You have bought them from your bank account and paid with the card. So it was an A plus / A minus operation on the assets side. Your bank account value decreased and at the same time bananas value with the same amount of which your bank account decreased, increased. So the result is 0 :) Now, where did your bank account value come from? Yes! It was your initial investment to the company - own capital. So when you started your business, you put 10 000 USD in your bank account as a starting capital. So on liabilities, it was plus, and on assets, it was plus as well. A plus, L plus accounting operation. Your money on your bank account is your asset, and it came from your own capital (it's a liability of your company towards yourself - the initial owner). And that liability is a source, it "covers" the asset. Just read the book on basic of double-digit accounting and it will be all clear :)

Just say that a dollar bill is an IOU from the government to you. Those IOUs have perceived value so we trade our IOUs to the government for goods and services, because the other person values those IOUs and wants them.

Money is simply an IOU. It transfers the value of assets and liabilities between people - transactions.

How do you that professor doesn’t know his subject well enough after being an academic for 35 years? You know it when he starts talking about talking about double entry booking, assets & liabilities, and when questioned about government debt, he says that’s government creating money, mentions broad money, reserves, and forgets to mention assets that are left on the government’s balance sheet. Because there are none. Because the government doesn’t create money, but also borrows it into existence from private entities. And it would be interesting to hear his answer to how governments borrowing way more money than they collect in taxes is somehow beneficial for the public, because that’s exactly the reason of consumer inflation. Bonus question would be how monetary system worked on a commodity backed currency before Nixon “suspended” gold standard, because is his mind money way a pure promise way before then.

Great summary

Federal Reserve Notes are an IOU to pay your Taxes with, So an asset for the consumer of the currency but a liability for the issuer of the currency.

That's okay Lex, I don't understand it either but it makes dollars and sense. Nothing wrong with a little slang every now and then neither.

So Gov creates, money by providing goods and services, far more than what is tax? Even if those goods and services are crap?

mmt states that the creation of money beyond production creates inflation and diminishes the currency. the creation of money is not good unless it's balanced with production.

Wow - clear and concise.

The aspect that MMT economists tend to neglect is that no matter how much money is created, which they like to say has no limits, that money deflates on the asset side and requires interest expense on the liability side. At some point that is unsustainable leading to inflation.

Money is the scoreboard, the scoreboard can never run out of points, only time. The Ledger creates the Money and the Ledger can change the form of the Money into an asset or a liability.

2:01 money is a claim on someone else… whooo weee what does it mean when money printer goo brrrrr

For Keen seems everything to be accounting. Money creation may be a job of accountants, instructed by the bankers. But MMT is not accounting at all.

Yes government deficit is good because the government spent more on people than it taxed from them. However, to whom did the government spent the money? Currently, the government has $30T debt, where did the majority of the asset side of the accounting went? Could it be the top 1%? Since their wealth had gone up significantly in recent years.

Possibly the most confusing and incoherent explanation of fiat currency and double entry bookkeeping I have ever heard.

Well he didn't get around interest which is why the asset/liability exchange doesn't equal zero.

WE EXCHANGE THE "PROMISES" OF THE BANKS 😂😂😂 FANTASTIC...!!

So why are banks allowed to create their assets out of thin air, and people take a lifetime to pay them off? Once the mortgage is paid the home is your asset not the banks, but the bank has all the payments you made, that’s their asset now they didn’t work for it, why are they allowed to keep your money? It’s like the money loop is closed on your end, but open on theirs. The banks should be forced to destroy any payments they receive from loans that were created out of thin air. This makes more sense to me.

Based on Accounting but really Accounting at Scale and Scope of a Government with a Sovereign currency.

Just because you can conceive of some abstract idea of money, doesn’t mean it’s manageable, snd good for society at large

Mr. Bill Still on the banking system please.

Whats interesting is he spent more time explaining the basics of money and banks that the private sector could and had done. Which is interesting but the point of contention for a lot of us is why did the government take this over from the banks and is it over all a good thing for us that they artificially inject steroids into a system he just explained worked well enough with bank competition.

Debt based banking. The guy is saying that new money is created as a debt. In the US it is the Federal Reserve that controls this monetary policy. This isn't a policy that gets voted on by Congress. The Fed is a private corporation with very little oversight. One aspect of debt based banking is that there is never enough money to repay all the loans at interest. So you have to create more money as debt and loan it out so there is money to repay the old loans. Debt based banking requires a growth economy. More and more people and consumption of everything all the time. The problem is that we are on a finite planet and are seeing some limits to growth. These would be things like peaks in commodity supply, land shortages, etc. So debt based banking can't continue forever.

10A = 7L + 3E 100A = 97L + 3E = 90 more money in circulation David Graeber (anthropologist) has a book, "Debt" , if you close out all the promises, you have no economic interaction with your neighbors.

This is the ONLY time I’ve seen Lex openly having difficulty keeping things straight. Like listening to the Marx Brothers “Who’s on First…”

Most people believe that money is real wealth. Yet, everything we spend money on requires energy to mine, create, deliver, run, maintain, and dispose of. In this way, money is ultimately a direct claim on energy and resources. Our economic stories assert that with more money we can create more of anything. The truth is we cannot create energy. We both extract and burn it faster by using technology and printing money. Natural capital -particularly energy-is the true foundation of our monetary systems. As we create more money we don’t create more resources, we merely access them faster.

What if the bank was an indifferent machine which no one can unilaterally manipulate? That's bitcoin, it takes out the middle man.

Steve Keen missed this opportunity: when Lex said that he owned his house: that means that he has an unleveraged deed on his house, and that deed is a liability from The Government to Lex Friedman: the government owes Lex Friedman the right to live in his house, unmolested, assuming he doesn't break the law in his house, and there is freely obtainable probable cause that he does so. All actionable, enforceable notions of ownership are, themselves, debts, from the mechanism of enforcement, to the agent it is acting upon. Your ownership of a $500k house is The Government owing you the right to use that $500k house without arresting you for trespassing on what would otherwise be land that it owns, or which is owned by someone else who themselves have the same deed and deal with the government.

Debt creates money. Broken system.

This MMT generation reminds me of the social hippie movement of the 60s and 70s. "Its all so beautiful. "

Dr Keen is essentially restating and advocating one of the main planks of Keynesian economics. Although he does not say so expressly - what is important is the flow of money. Debt is never a problem - so long as money continues to flow. Et in Arcadia Ego. Paul

The title is a bit misleading..He doesnt actually talk about MMT

This should be titled, "Modern Monetary Theory Obfuscated." There are plenty of great videos on RU-vid that do a great job of explaining MMT. See anything by Stephanie Kelton.

Ok But if it is just accounting it can't be a a theory for making a monetary decision! Accounting has the purpose of self administration.