Beyond Modern Money Theory

Introduction

Modern Monetary Theory (MMT) has fundamentally reshaped the narrative surrounding money and government fiscal policies. Its insights and tools have provided a clearer understanding of how the modern monetary system operates. By challenging traditional assumptions, MMT has opened new avenues for economic analysis, even if its conclusions and prescriptions are not without significant flaws.

One of MMT’s greatest contributions is its use of Stock Flow Consistency (SFC) modeling. This approach offers a coherent framework for understanding the interconnections between the government, private, and foreign sectors. By emphasizing these relationships, MMT helps clarify how money moves through an economy and how fiscal and monetary policies affect overall stability. The narrative they have constructed has shifted discussions of public finance from outdated notions of household-like budgeting to a more nuanced understanding of sovereign monetary systems.

Despite these achievements, MMT’s insistence that all money must be debt-based and its overemphasis on central bank-created money limits its capacity to envision a fundamentally different monetary future. By focusing heavily on the role of government deficits and central bank policies, MMT overlooks the dominant role of commercial bank-created money in driving the economy. Furthermore, its prescriptions, while grounded in a deep understanding of the current system, fail to address the structural instability and unsustainability inherent in debt-based money.

This chapter will explore both the strengths and shortcomings of MMT, using its tools to dissect its own assumptions and conclusions. The insights provided by MMT’s framework lay the groundwork for an alternative vision: a Fiat Money School rooted in government introduced debt-free money. By building on MMT’s contributions while addressing its fundamental flaws, the Fiat Money School proposes a system designed not just for decades but for millennia. This model is rooted in sustainability, debt-free money creation, and a more balanced economic framework.

While the next section will critically examine MMT’s key elements, it is essential to acknowledge the significance of their advancements. Even though MMT is flawed, it has changed the narrative and provided powerful tools for understanding the modern monetary system as it exists today. These tools, combined with a deeper analysis, form the basis for the Fiat Money School’s vision of a better monetary future.

Unravelling MMT

Modern Monetary Theory (MMT) has reshaped the conversation around money, government spending, and economic policy. It challenges conventional wisdom by asserting that governments issuing their own currency face no financial constraints, that taxation serves primarily to drive demand for money rather than fund spending, and that trade deficits are of little concern. While MMT provides a useful framework for understanding certain aspects of modern monetary systems, it also rests on several flawed assumptions that weaken its policy prescriptions.

In this chapter, we will examine six key claims made by MMT and highlight their weaknesses. First, we will analyze Stock Flow Consistency (SFC) modeling, which MMT uses to argue that all financial flows must balance. They draw some incorrect conclusions based on that knowledge. Second, we will challenge MMT’s assertion that all money must be debt, demonstrating that money can also exist as equity rather than an IOU. Third, we will question MMT’s claim that the central bank and the treasury should be considered a single entity, exploring how their separate balance sheets and conflicting policies create practical limitations on debt-free money issuance.

We will also criticize MMT’s Job Guarantee (JG), which aims to provide full employment but introduces economic distortions, bureaucratic inefficiencies, and inflationary risks that MMT largely ignores. Additionally, we will examine the Chartalist claim that taxes drive money, arguing instead that trust, not taxation, are what truly sustain a monetary system. Finally, we will address MMT’s view that trade deficits do not matter, exposing the long-term risks of foreign asset accumulation and the loss of economic sovereignty that persistent deficits can bring. While MMT has brought valuable insights into the role of government finance, its framework overlooks critical economic realities, and in the following sections, we will explore where these flaws lie.

Introduction to Stock Flow Consistency

Stock Flow Consistency (SFC) modeling is one of the foundational tools employed by Modern Monetary Theory (MMT) to analyze and explain the modern monetary system. As a modeling framework, SFC ensures that all monetary flows and stock changes within an economic model are meticulously accounted for, creating a coherent and logical structure that underpins MMT’s theories and prescriptions. This methodological rigor makes SFC indispensable, not just for analyzing specific economic interactions, but for constructing every model that MMT produces.

The core principle of SFC is straightforward yet powerful: every financial inflow must have a corresponding outflow, and every change in a stock of financial assets or liabilities must be matched by an equivalent flow from elsewhere in the system accompanied by a corresponding change to another stock. This ensures that no transaction is left unaccounted for, and no financial “imbalances” can exist without being explicitly modeled. By enforcing this consistency, SFC provides a robust foundation for understanding the interconnections between economic agents, policies, and outcomes.

While SFC’s applications are broad, its use in sectoral analysis, particularly the examination of government, private, and foreign exchange sectors, is a prominent feature of MMT’s approach. This sectoral balance analysis, though a relatively simple application of SFC principles, forms the basis for much of the analysis in Macroeconomics by Mitchell, Wray, and Watts (MWW). The focus on sectoral balances allows MMT to highlight the relationships between government fiscal policies, private sector savings desires, and current account imbalances. It also provides a starting point for understanding MWW’s concept of fiscal space.

However, it is essential to emphasize that SFC is far more than a tool for sectoral balance analysis. Its real strength lies in its ability to support complex, dynamic models that capture the intricate relationships between monetary flows and stock changes over time. (Steve Keen has facilitated the development of an open-source modeling platform called Minsky.  Properly utilized, it makes it easy to identify any SFC errors in your model.)

MMT uses SFC as a framework to explore scenarios ranging from inflation control to employment guarantees, ensuring that their models remain logically sound and internally consistent. This systematic approach is one of MMT’s major contributions to economic thought, offering clarity and precision in areas where traditional models often falter.

Despite its strengths, SFC is ultimately a tool, and like any tool, its utility depends on the assumptions that guide its application. While SFC ensures consistency within a model, it does not, on its own, guarantee the validity of the underlying assumptions about how money is created, circulates, or is constrained. This becomes particularly relevant as we examine how MMT employs SFC to analyze fiscal space and the sectoral balances that shape its narrative.

SFC modeling’s ability to enforce internal consistency has advanced the field of economics by providing a structured way to analyze complex systems. Yet, as we will see, MMT is mired in the debt-based system to the extent that they fail to analyze the potential SFC has revealed. Assumptions, particularly the insistence that all money must be debt-based, restrict the potential of SFC to envision more expansive and sustainable monetary systems, an issue that the Fiat Money School seeks to address.

Deriving the Sectoral Balance Equation

Those not interested in the mathematical aspects of accounting can ignore this derivation.  The final equation is all you need to follow later discussions. 

The sectoral balance equation is a cornerstone of Modern Monetary Theory (MMT), providing a framework for analyzing the financial interactions between the government, private, and foreign sectors of the economy. Its derivation is presented in MWW (pp. 84-5) and begins with the standard formula for Gross Domestic Product (GDP), which measures the total economic output within a country:

GDP = C + I + G + NX

Where:

• C represents household consumption.
• I stands for investment.
• G is government spending.
• NX is net exports, calculated as exports minus imports.

This formula captures the components of domestic production. However, to analyze broader sectoral balances, we need to incorporate external monetary flows. These flows, referred to as Net Foreign Income (FNI), include payments to and from foreign entities for investments, wages, and transfers. Adding FNI to both sides of the equation converts GDP to Gross National Product (GNP):

GDP + FNI = GNP

Substituting FNI into the GDP formula, we get:

GNP = C + I + G + (NX + FNI)

The term NX + FNI represents the total current account balance (CAB), a measure of international financial flows. Rewrite the equation:

GNP = C + I + G + CAB

To isolate the private sector’s financial position, we subtract consumption (C), taxes (T), and investment (I) from both sides:

GNP – C – T – I = G – T + CAB

On the left-hand side of this equation, GNP – C – T, represents private sector savings (S):

S – I = G – T + CAB

Rearranging terms, we arrive at the sectoral balance equation:

(S − I) + (T − G) + (−CAB) = 0

This equation highlights the interdependence of the three main sectors of an economy:

• The private sector, represented by S−I (savings minus investment).
• The government sector, represented by T−G (taxes minus government spending).
• The foreign sector, represented by −CAB (negative current account balance, where a surplus (exports greater than imports) is positive and a deficit (imports greater than exports) is negative).

MMT emphasizes that this equation shows how surpluses or deficits in one sector must be offset by deficits or surpluses in the others. For instance, if the government runs a deficit (T – G) < 0, the private sector or the foreign sector or both must have a surplus.

The sectoral balance equation is a foundational tool in MMT’s analysis of fiscal policies. MWW’s presentation highlights its utility in understanding the economic interrelationships between savings, investment, government deficits, and international trade balances. This equation forms the analytical bedrock for their broader discussion of fiscal space, which we will explore further.

The Sectoral Balance

The sectoral balance equation highlights the interdependence of the government, private, and foreign sectors within an economy. MWW (p. 87), present a two-dimensional visualization of this relationship. In their depiction, the current account balance (CAB) is plotted on the x-axis, the government balance (T−G) on the y-axis, and a 45-degree line through the origin represents the private sector balance (S−I=0).

While this two-dimensional framework provides a way to conceptualize sectoral relationships, it has limitations. It does not fully emphasize the role of the private sector balance as derived from the other two balances, and the graphical representation can obscure the three degrees of freedom inherent in the sectoral balance equation.

Figure 16.1 expands the traditional sectoral balance framework into three dimensions, offering a more comprehensive and intuitive representation of how fiscal, trade, and monetary policies interact. Instead of plotting balances as points on two-dimensional axes, this model introduces three axes: one for the government balance (T − G), one for the current account balance (CAB), and one for the private sector balance (S − I). These three axes reflect the three degrees of freedom inherent in the sectoral balance equation. At the end of each evaluation period, the economy’s position in this space is captured at a single point, which we label as NS (net surplus). This point reflects the combined influence of government fiscal policy, trade policy, and private sector financial flows.

The NS arrow provides more than just a snapshot of the economy’s position. In Figure 16.2, we subdivided this arrow into its two primary components: investment (I) and savings (S). MMT often interprets the condition S = I as if it means that savings directly finance investment, but this interpretation is misleading. Investment reflects money creation through new lending, while savings reflect the amount of newly created money (and any additional money injected by government deficit spending) that is captured by the private sector rather than spent.

Figure 16.1  The arrow labeled GD represents the extent of the government’s deficit.  The arrow labeled -CAB represents the negative of the current account balance.  The arrow labeled NS is the net difference between the government deficit and the current account balance.  NS represents the final state of the economy at the end of the reporting period.

The influence of monetary policy can be understood by observing how central bank actions influence the length of the I arrow. An expansionary monetary policy stimulates more bank lending, which increases investment. If the government deficit (GD) and the current account balance (-CAB) remain unchanged, this increase in investment forces the savings arrow to lengthen to maintain the overall sectoral balance equation.

This three-dimensional depiction captures the interplay between fiscal policy, trade policy, and monetary policy. Fiscal policy moves the economy along the GD axis, trade policy moves the economy along the -CAB axis, and monetary policy influences the I arrow, which indirectly affects the S arrow. This visual format makes clear that the private sector’s net savings position (S – I) is not determined by fiscal policy alone but is also shaped by monetary policy decisions that influence lending and private money creation.

Figure 16.2  The length of the net surplus arrow (NS) is determined by the government deficit and the negative of the current account balance.  But NS is composed of investment and savings.  This depicts what happens if monetary stimulus increases the amount of investment, but it does not change the deficit or the current account balance.

In MWW, the authors define fiscal operating space as a triangular region bounded by the government deficit line, the current account deficit line, and a 45-degree line representing S = I. In this three-dimensional representation, the analogous fiscal operating space is represented by a grey rectangle in Figure 16.1 spanning between the government balance and current account balance planes.

However, government control over this space is limited. The government can directly control the length and direction of the GD arrow through fiscal policy, and it can indirectly influence the -CAB arrow through trade agreements and tariffs, though private trade and capital flows ultimately determine the final position of -CAB. The length and orientation of the NS arrow is then fully determined by the net result of government and current account balances. When the government deficit exceeds the current account deficit, the NS arrow points positively into the savings space, reflecting net private sector savings. When the current account deficit exceeds the government deficit, the arrow points negatively, indicating net private sector deficits. If either the government balance or current account balance moves into surplus, the grey operating rectangle shifts into a different quadrant entirely.

While this three-dimensional framework provides a useful visualization of the relationships between fiscal, trade, and monetary policies, it should be understood as a descriptive tool, not a policy guide. There are simply too many variables at work within the economy to allow policymakers to precisely target a desired point in this economic space. The position shown at the end of each period reflects the outcome of countless individual decisions, transactions, and policies interacting across the full breadth of the economy. This makes the framework valuable for understanding economic conditions after the fact, but far less reliable for prescribing precise policy actions to achieve a particular target position.

Analysis of the Private Sector Balance

Figure 16.2 offers a deeper understanding of the interplay between savings and investments within the private sector, challenging the simplistic view that savings directly fuel investments. When viewed in isolation, a private sector zero balance (S−I=0) implies that S=I, potentially giving the impression that investments are entirely dependent on pre-existing savings. This perspective aligns with a traditional notion: if a country saves more, it can invest more. However, this interpretation neglects the broader implications of the sectoral balance equation and the role of the money supply in reconciling these relationships.

In Figure 16.2, the NS arrow represents the private sector surplus (S – I), which equals the net of the government and current account deficits.  If NS is that difference, then:

S – I = NS or S = NS + I

This equation points out that S and I must be pointing in opposite directions as is shown in Figure 16.2.  The right pair of arrows show that if investment is increased because of monetary policy, that newly created investment money adds to savings as it circulates through the economy.  The rightmost arrow shows the longer savings arrow when compared to that before the stimulus.

In the real world, increased investment would likely change the sectoral balances as the increased savings would induce more imports or the investments may create more exports or tax rates may change.  But we cannot know that until the end of the accounting period and we are looking at a comparison as if the net surplus stayed the same.

By recognizing that investments represent changes in the money supply, we must change what we mean by investment (I).  Economists view investments as increasing capital equipment.  However, your increase in your credit card balance, taking out a loan for the purchase of an existing house, and borrowing to buy a car are all activities that count in the economic balance sheet as investments because they increase the money supply.  Even though economists view only the purchase of new houses as investment when they compile GDP numbers, this sectoral balance analysis shows that any newly created money will affect the sectoral balance so any borrowing from a bank will change the savings total. 

This viewpoint is complicated by the debt incurred.  Debt allows for an immediate increase in the money supply in exchange for a piece of paper that the reduces that money supply over a longer period of time.  Both business and household borrowers create this money supply.

The Need for Balance

One of the most significant gaps in Modern Monetary Theory is its failure to explain why the private sector cannot operate for extended periods in deficit. While MMT correctly identifies that sectoral balances must sum to zero, it uses this framework as a justification for permanent government deficits, rather than addressing why the private sector’s deficit position is unsustainable in the long run.

The core issue with private sector deficits is that they must be funded by increasing private debt. Unlike the government, which has greater flexibility to issue currency and restructure its obligations, the private sector is constrained by interest payments, creditworthiness, and the risk of insolvency. When households and businesses operate in persistent deficit, they accumulate ever-growing liabilities that must eventually be repaid, leading to financial crises, recessions, or prolonged stagnation.

MMT proposes that government deficits relieve pressure on the private sector, as public spending injects money into the economy and prevents excessive private borrowing. In a debt-based monetary system, this logic holds in the short and medium term, but over long timescales, it presents an unavoidable mathematical challenge. Even a small but permanent government deficit results in exponential debt growth over time. This is a fundamental issue with balancing sectoral flows in the long run.  Any imbalance, no matter how small, will compound exponentially over centuries or millennia.

If we attempt to model an economy over millennia, it becomes clear that a system relying on continuous government deficits is not sustainable. Every sectoral balance model, whether theoretical or applied to the real world, ultimately requires balancing sector flows to equal zero over long periods. The only viable long-term solution is to create a system where no sector must rely on permanent deficits to function.

The necessity for constant government deficits in MMT arises from the private sector’s dependence on debt-based money. Because all money in the private sector originates as bank credit, it must be repaid with interest, creating a constant need for new debt issuance. MMT’s failure to envision debt-free money limits its solutions, as it only sees two options: either the private sector continues accumulating debt, or the government absorbs that burden by running permanent deficits.

The long-term flaw in MMT’s framework is not just its preference for government deficits but its failure to recognize that the debt-based structure of money itself is the root cause of those deficits. Once debt-free money is introduced, the requirement for constant injections of new debt to sustain the economy disappears, making it possible to balance sectoral flows without resorting to endless government borrowing.

All Money Must be Debt?

Modern Monetary Theory consistently asserts that all money must be debt, a position most strongly championed by L. Randall Wray. Throughout MWW, money is repeatedly described as an IOU, reinforcing the view that its creation inherently results in a liability. This framing is not merely descriptive; it is fundamental to MMT’s understanding of monetary systems and underpins its advocacy for perpetual government deficits.

While it is true that most money creation in the modern system involves an offsetting liability, this is not an absolute necessity. The ability to record newly created money as either a liability or equity depends on who is issuing it. MMT’s insistence that all money is debt fails to account for cases where money creation does not require the issuance of a corresponding liability.

Wray goes so far as to equate Zero Interest Rate Policy (ZIRP) with debt-free money, a claim that misrepresents both the nature of ZIRP and the distinction between debt-based and equity-based money creation.

ZIRP was a policy under which the government issued debt instruments with zero interest. However, rather than allowing interest rates to fall freely to zero or negative levels, central banks offset this by paying interest on excess reserves held by commercial banks. This intervention propped up interest rates artificially, preventing the cost of borrowing from collapsing entirely.

ZIRP debt instruments still functioned like any other government debt: they had expiration dates, had to be rolled over or redeemed, and were subject to the constraints of monetary policy. They were not debt-free money but simply a form of government borrowing at a zero percent interest rate. Furthermore, ZIRP money creation was inherently reversible.  Changes in monetary policy could withdraw ZIRP created money from the economy demonstrating that it was temporary liquidity rather than a permanent financial asset.

By equating ZIRP with debt-free money, Wray obscures the fundamental difference between money that requires ongoing debt issuance to exist and money that is created outright as an asset. Debt-free money does not need to be rolled over or withdrawn through policy reversals. It is a permanent increase in net financial assets, not a temporary policy tool.

MMT’s failure to distinguish between debt-based and equity-based money creation leads to a flawed understanding of government finance. While double-entry accounting requires that money creation be offset on the balance sheet, this offsetting entry does not have to be a liability. Governments that issue their own currency could record the offsetting entry in the equity column, signifying that the money is a net financial asset rather than a debt that must be repaid.

This distinction is crucial for understanding alternative monetary frameworks, such as those proposed by the Fiat Money School. If money can be recorded as equity rather than debt, then government spending does not inherently create deficits that must be perpetually financed. Instead, it can serve as a stable mechanism for increasing economic liquidity without creating unsustainable debt obligations.

Central Bank and Treasury

Modern Monetary Theory (MMT) maintains that the central bank and the treasury are effectively part of the same entity, the government. This view is foundational to MMT’s assertion that sovereign governments, as currency issuers, are not financially constrained in the same way that households or businesses are. According to this perspective, the central bank exists merely to facilitate government spending, acting as an operational arm of the treasury.

However, even in cases where a central bank has been fully nationalized, the distinction between these two institutions remains significant. The mere fact that the central bank maintains a separate set of books is evidence that it operates independently of the treasury. While the treasury and central bank work hand-in-glove to manage government finance, their separate accounting structures demonstrate that they are distinct entities with their own decision-making processes and objectives.

The separation between the central bank and the treasury creates a fundamental problem when considering the introduction of debt-free money. If the treasury were given the authority to create debt-free money, it could do so by crediting its Treasury General Account (TGA) with an offsetting entry in the equity column of its balance sheet. This would allow the government to inject money into the economy without issuing debt.

However, this creates a problem at the central bank.  By doing this, the treasury created a liability for the central bank without the central bank receiving an asset in exchange.  Any asset created by the treasury to allow the central bank to balance its books negates the intent of creating debt-free money. 

This need to balance the books of the central bank restricts the treasury from functioning as though it were a bank of its own.  As a bank, it could create money out of nothing, but to put the money into the Treasury General Account (its banking system “reserve” account), it would need to offer the central bank an asset (like debt).   

Even if there were a way of getting around these roadblocks, the central bank might respond by counteracting this effort, increasing the amount of debt-based money it creates to maintain its control over monetary conditions. Since the treasury would be issuing money without borrowing, the central bank could view this as an inflationary threat or as an encroachment on its policy domain. As a result, it could absorb this newly created equity-based money by expanding its own balance sheet, issuing new reserves or purchasing government bonds to pull liquidity out of the system. In effect, the central bank and the treasury could end up working at cross purposes, undermining each other’s efforts.

The system’s structure points to a major flaw in MMT’s assumption that the treasury and central bank function as a single entity. If they truly were a unified government apparatus, such contradictions in policy would not arise.

Job Guarantee Program

Modern Monetary Theory (MMT) includes a Job Guarantee (JG) program as a central pillar of its policy framework, aiming to eliminate involuntary unemployment while providing a mechanism for stabilizing inflation. In contrast to conventional economic theories that treat unemployment as a natural feature of market economies, MMT argues that unemployment is fundamentally a policy choice, caused by insufficient government spending. The JG is proposed as a solution that always ensures full employment by allowing the government to act as an employer of last resort.

Under this program, anyone willing and able to work would be guaranteed a public sector job at a fixed wage, with the government stepping in to provide employment whenever private sector demand falls short. The idea is that this wage would set a floor for wages throughout the economy, anchoring both incomes and inflation expectations. MMT theorists, particularly those behind the book, Macroeconomics (MWW), present the JG as an automatic stabilizer, expanding in economic downturns when private employment contracts and shrinking when the private sector recovers.

The JG is built on the idea that unemployment is not only economically wasteful but socially harmful, leading to lost productivity, increased poverty, and negative health and social consequences. MMT economists argue that governments already engage in hidden unemployment management by allowing recessions to regulate labor demand, which disproportionately harms low-income workers. Instead of using unemployment as a policy tool, MMT proposes that the government directly employs surplus labor during downturns and releases workers back into the private sector when conditions improve.

The JG also serves an anti-inflationary role within MMT’s framework. Traditionally, central banks attempt to control inflation by raising interest rates, slowing economic activity, and increasing unemployment, a method often criticized for its bluntness and social costs. MMT suggests that a JG could replace this approach by maintaining a stable buffer stock of employed workers rather than a buffer stock of unemployed. The theory suggests that because JG wages are fixed and do not compete with private sector wages, they do not contribute to inflationary wage spirals. Instead, they provide a stable wage floor that helps regulate overall price stability.

From an MMT perspective, the government’s ability to issue its own currency makes funding a JG financially unconstrained, there is no reason, they argue, that the government should allow people to be unemployed when it has the power to provide jobs. Unlike traditional public works programs, which might be top-down infrastructure projects requiring long-term planning, the JG is envisioned as a decentralized, community-focused program, offering employment in areas such as environmental conservation, public services, and community development.

In MMT’s ideal implementation, the Job Guarantee program would offer publicly funded jobs at a set wage for all who seek employment; serve as a countercyclical tool, expanding in recessions and contracting in booms; set a stable, non-competitive wage floor, which would neither bid up private sector wages nor create inflationary pressures; be locally administered, allowing municipalities and communities to identify useful public service projects that align with JG employment; and function as a transitional employment mechanism, allowing workers to move seamlessly between government-provided jobs and private sector jobs as the economy shifts.

While this framework admirably attempts to address involuntary unemployment, it raises several practical, economic, and political concerns.

Structural and Logistical Challenges of the Job Guarantee

While MMT presents its Job Guarantee (JG) program as a simple solution to involuntary unemployment, its implementation raises serious concerns about practicality. Matching unemployed workers to productive jobs, administering a program that expands and contracts with economic cycles, and addressing regional disparities all present obstacles that MMT does not fully account for. Though the JG is intended to function as a stabilizer, it risks becoming a rigid and inefficient system that does not integrate well with the dynamic nature of labor markets and production dynamics.

One of the first major challenges lies in the issue of job matching. MMT assumes that whenever someone becomes unemployed, they can seamlessly transition into a JG job. However, unemployment does not affect all workers equally. An experienced machinist or software engineer cannot easily transition into a temporary public-sector role focused on environmental cleanup or community projects. MWW assumes these unemployed workers will decide to become voluntarily unemployed and wait for the economy to recover.  Additionally, many jobs require specialized skills and training, which means that government-created jobs may not align with the abilities of the unemployed. If workers are required to retrain for new roles every time they enter the JG system, it introduces significant delays and inefficiencies. Moreover, if the JG primarily offers low-skill, temporary employment, it may not serve as a meaningful steppingstone back into private-sector work, leaving workers stranded in government jobs that do not advance their careers.

Beyond the challenge of matching workers to appropriate jobs, the JG requires an enormous bureaucratic infrastructure to function effectively. Government employment programs are not simple to manage, particularly if they must be scaled up during recessions and scaled down when private sector hiring increases. Determining what jobs should be created, where they are needed, and how workers should be placed into them is an administrative burden far beyond what MMT acknowledges. Unlike traditional unemployment benefits, which require relatively little oversight beyond determining eligibility and issuing payments, the JG demands a highly responsive and adaptive workforce management system that must anticipate labor market conditions and respond to economic fluctuations in real time. This level of coordination would be difficult even in the most efficient government agencies, and it could lead to waste, misallocation of labor, and politically motivated job distribution.

The underlying assumption of the JG is that it will function as a countercyclical tool, expanding when private-sector employment declines and contracting when private-sector job opportunities return. However, this assumption overlooks the reality that economic downturns often cause permanent shifts in industries and skill requirements, meaning that the types of jobs eliminated in a recession may never return at all. If an industry automates a significant portion of its workforce during a downturn, for example, those jobs are not coming back, and workers who rely on the JG as a temporary stopgap may find that they no longer have a place to return to in the private sector. In such cases, the JG risks becoming a long-term government employment program, rather than a short-term stabilizer as MMT envisions.

These challenges raise serious doubts about whether the JG can function as intended. While the idea of providing employment for all may sound appealing, the reality is far more complex. The difficulty of matching workers to appropriate roles, the bureaucratic challenges of managing a fluctuating workforce, and the economic distortions caused by regional and sectoral imbalances all present significant barriers to implementation. Rather than serving as a smooth bridge between unemployment and private-sector employment, the JG could easily become a rigid and inefficient system that fails to integrate with the broader economy.

If the goal is to reduce unemployment and provide economic stability, there are likely better alternatives than a direct government employment program. Targeted investment, workforce development initiatives, and incentives for private-sector job creation could address many of the same problems without the inefficiencies and distortions of a large-scale government employment system. While MMT’s JG is built on noble intentions, its structural and logistical flaws suggest that it may not be the best tool for achieving full employment and economic stability.

Taxation Drives Money?

One of Modern Monetary Theory’s (MMT) most fundamental claims is that taxes are what give money its value. According to MMT, money is primarily accepted because the government requires its citizens to pay taxes in that currency. This argument, known as the Chartalist view of money, suggests that without taxation, people would have little reason to use government-issued currency, and the monetary system would collapse.

However, this perspective overlooks the broader role of trust, market forces, and network effects in determining what functions as money. Throughout history, money has been any commodity or instrument that people willingly accept in exchange, not necessarily because of government mandates but because they trust that others will accept it in future transactions.

The clearest refutation of MMT’s taxation theory comes from the rise of cryptocurrencies, which have gained acceptance despite not being required for tax payments. If taxation were the sole driver of monetary value, cryptocurrencies would hold little to no appeal. Yet, people around the world actively trade, store, and use cryptocurrencies in transactions, proving that money does not need government backing or tax obligations to function. The key element that makes something money is trust, the belief that someone else will accept it in exchange for goods or services.

Even within government-controlled monetary systems, taxation is only one factor influencing currency adoption. While it gives state-backed currency an advantage, it does not guarantee exclusive dominance. Historically, people have used multiple currencies simultaneously, gold and silver alongside government-issued notes, private banknotes in circulation alongside official money, and today, cryptocurrencies and foreign currencies coexist with national fiat currencies. If there is a way to exchange one form of money into another, non-sanctioned currencies can thrive.

Governments certainly benefit from requiring taxes to be paid in their chosen currency, as it reinforces demand for that currency. But that demand alone does not explain why people use money. Businesses accept money because they trust they can spend it elsewhere. Workers accept wages in a given currency because they trust it will hold its value long enough to exchange for goods and services. None of this requires taxation, it requires a functioning network of exchange and confidence in the currency’s ability to store value.

The notion that taxes alone create money’s value is an oversimplification. A monetary system is a web of trust, exchange, and mutual acceptance, not just a system of tax enforcement. If people were only using government money because of taxes, alternative currencies would struggle and die out. Instead, people use money because they believe it will be accepted by others, a belief that is strengthened by taxation but not solely dependent on it.

Trade Deficits

Modern Monetary Theory (MMT) argues that trade deficits do not matter for a country that issues its own currency. The reasoning behind this claim is that when a country runs a trade deficit, importing more than it exports, foreigners accumulate the country’s currency. MMT assumes that these foreign entities will reinvest that currency into government debt, meaning that the issuing country faces no real constraints from trade imbalances.

However, this assumption rests on a flawed premise, that foreigners will indefinitely continue to accept and hold government debt at low returns. While this may hold true in the short term, persistent trade deficits accumulate vast amounts of domestic currency in foreign hands, and over time, those foreign holders will seek more profitable ways to deploy their funds.

Initially, foreign entities may indeed be content to purchase government bonds, as these provide a relatively safe investment. However, as interest payments accumulate and trade deficits persist, these foreign reserves grow beyond what is reasonable to hold in low-yield government securities. At this point, foreign investors begin seeking higher returns by purchasing real assets within the issuing country, such as land, corporations, and other productive resources.

This shift has major economic and political implications. As foreign ownership of domestic assets increases, key sectors of the economy may fall under foreign control, reducing national economic sovereignty. When a country continually runs trade deficits, it is not simply “trading pieces of paper” for real goods, it is gradually ceding ownership of its productive assets to foreign interests.

Over time, this process can create economic instability as strategic industries, infrastructure, and even housing markets become influenced by foreign investors who may not have the same long-term interests as domestic stakeholders. This can also introduce political instability, as foreign ownership of critical industries may lead to conflicts over economic policy, national security, and resource management.

MMT dismisses trade deficits as a non-issue because it assumes that if foreigners accept domestic currency, the country faces no financial constraints. But the problem is not just that foreign entities hold a nation’s currency, it is what they do with it. Once that money flows back into the country in the form of asset purchases rather than government debt, control over domestic economic resources begins to shift, often in ways that policymakers cannot easily reverse.

Trade deficits may not pose an immediate threat, but over time, they can lead to a long-term transfer of wealth and economic influence to foreign interests. A nation that persistently imports more than it exports is not simply benefiting from cheap goods, it is gradually selling off its productive base to finance those imports. If left unchecked, this process can reshape an economy in ways that limit domestic policy choices and economic independence.

MMT’s assumption that trade deficits are harmless ignores these long-term consequences. A country that continuously runs deficits will eventually pay the price in terms of economic sovereignty, as its assets become collateral for its excessive reliance on foreign goods.

Fiat Money School (FMS)

Modern Monetary Theory (MMT) has challenged traditional economic thought by shifting the conversation away from budget constraints and debt fears toward a recognition that sovereign governments issuing their own currency can never run out of money. It has introduced valuable tools, such as Stock Flow Consistency (SFC) modeling, a re-examination of the role of government deficits, and the idea that taxation is not required to fund spending. However, MMT remains anchored to the belief that all money must be created as debt, leading to a system where financial expansion is dependent on continuous borrowing, even by the government itself. While MMT has successfully redefined fiscal and monetary discussions, it fails to offer a long-term sustainable alternative to the instability, inequality, and debt accumulation inherent in modern financial systems.

The Fiat Money School (FMS) builds upon some of MMT’s insights while offering a more comprehensive and durable approach to economic policy. Instead of treating money as a perpetual liability, FMS sees it as an equity-based tool that should be introduced into the economy without debt obligations. By shifting the foundation of money creation from borrowing to sovereign issuance as equity, FMS eliminates the structural need for government deficits, removes dependency on financial sector expansion, and enables economic stability without requiring continuous credit growth.

FMS also redefines key aspects of economic structure. It views money as fuel for economic activity. It distinguishes durable goods from consumables, recognizing that while capitalism excels at production, it also has built-in incentives to erode the durability of wealth-creating assets. Unlike MMT, which focuses on government intervention, FMS embraces capitalism’s productive potential while addressing its shortcomings, insuring that money serves the entire economy, not just the financial class.

Additionally, FMS recognizes that economic theory cannot exist in isolation. The future of economics must integrate sociology, psychology, and political science, acknowledging that monetary policy is shaped by human behavior, power structures, and social incentives. Unlimited money carries both utopian and dystopian possibilities, and FMS hopes to design a system not just to sustain an economy, but to ensure it remains compatible with a stable and just society.

As humanity moves toward space colonization, FMS should realize the long-term stakes of economic and political mismanagement. The geopolitical risks of unchecked economic power will only grow as spacefaring nations gain strategic advantages. If a nation with control over orbital assets decides that Earth’s instability is too great a risk, it may calculate that extreme measures, such as planetary resets through asteroid impacts, are in its best interest. These risks, though currently hypothetical, illustrate the urgency of establishing stable economic and political systems before power imbalances grow beyond our ability to correct them.

The Fiat Money School does not seek to reject MMT outright but to advance beyond its limitations. In the following sections, we will outline the fundamental principles of FMS, explain how it addresses MMT’s shortcomings, and present a monetary framework designed for long-term sustainability, economic equity, and global stability.

Core View

Never in history has humanity had the opportunity to create unlimited money, to move beyond a system where money itself is a scarce resource. For all recorded history, economies have been constrained by the need to accumulate money, whether in the form of gold, silver, commodity-backed notes, or even fiat currency regulated by debt-based issuance. The very structure of economic life has been built upon the struggle to acquire money for immediate survival or future security. Now, for the first time, the possibility exists to eliminate artificial scarcity in money, a shift so fundamental that it could redefine economic, political, and social structures in ways we cannot yet fully anticipate.

Control of the direction of the economic movements is controlled by a combination of UBI, transaction taxes, and balance taxes (taxes on bank balances.)  UBI would inject money into the economy, increasing to increase economic activity and being reduced to discourage economic activity.  The transaction and balance taxes would also increase or decrease to adjust economic activity.  Most of the changes should be in tax levels since reducing UBI, more than just a little, would be widely unpopular. 

Because this transformation to unlimited money has never been attempted at scale, we cannot assume that traditional economic models, built on the assumption of monetary scarcity, will adequately describe how people and societies will behave under a system where money is not the primary constraint. This uncertainty demands a new approach to economics, one that incorporates social sciences, psychology, and empirical experimentation. The Fiat Money School (FMS) recognizes that economics cannot remain isolated as a mathematical or theoretical discipline; it must evolve into an experimental science, one that integrates human behavior, governance, and adaptability into its framework.

The need for political science and experimentation is equally critical. If governments are to implement policies based on a non-scarce money system, they must do so incrementally and empirically, ensuring that unforeseen consequences do not derail progress. Policy shifts must be carefully tested, with feedback mechanisms in place to monitor real-world effects rather than relying on static economic models.

While such a transition into the unknown may seem dangerous, what is certain is that the current system is unsustainable. As economies become more prosperous, the accumulation of debt increases to such a degree that financial markets overtake and suffocate the productive economy. More and more money is absorbed into financial speculation, interest-bearing instruments, and wealth concentration, rather than circulating through the productive sectors of society. The modern economy is not merely inefficient, it is self-destructive, redirecting wealth from labor, innovation, and production into an increasingly fragile financialized structure that serves only a fraction of society.

There are many ways to unravel this debt-based system. Chapter 17 will explore these pathways in detail, but for now, FMS seeks to offer an alternative framework, one that does not rely on debt as the primary mechanism of money creation.

Implications for GDP and Sector Analysis

In the Fiat Money School framework, the familiar GDP equation and sector balance analysis both undergo important changes. In the current debt-based system, as depicted in Figure 16.2, the investment term (I) in the GDP equation reflects the introduction of new money by commercial banks through lending. Each time a bank issues a loan, the borrower spends the new money into the economy, adding to GDP. This is not necessarily investment into capital goods as is assumed by the nomenclature. 

That same newly created money circulates through the economy, where it eventually accumulates as savings in the hands of someone else. This process ties “investment” flows directly to savings flows, while at the same time increasing the overall stock of money in the system.

However, in FMS, commercial banks do not create money at all. All money is debt-free fiat money created by the nationalized central bank and injected into the economy through government spending. Since private bank lending no longer increases the money supply, the I term in the GDP equation no longer represents new money creation. As a result, the GDP equation under FMS simplifies to:

GDP = G + C + NX

This does not mean investment disappears, it just restores the meaning of investment in the GDP sense. Investment, under FMS, means spending on capital equipment.  In FMS, investment must be funded directly from existing savings or NS flows rather than from newly created money. This reflects the real transfer of resources from savers to investors, which is closer to how textbook economics describes investment, but very different from how it works in today’s debt-based system.

This change alters the sectoral balance equation as well. Traditionally, the private sector balance is expressed as S – I, meaning the private sector’s net surplus is its savings after accounting for investment (new borrowing). Under FMS, where I no longer reflects new money creation, the private sector balance reduces to simply S.  The private sector’s surplus is a flow into savings.  But some of this savings is diverted into investments into capital goods.

Figure 16.3  The net surplus (NS) under FMS differs little from that under the debt-based system.  However, the components that comprise NS change.  I* is the diversion of a portion of savings flows to capital goods leaving the rest (S*) as a flow into the stock of savings.

To make this clearer, Figure 16.3 divides the NS arrow (net surplus) into two components: one representing savings, and one representing investment. To highlight the change, we relabel investment as I* instead of I. Since S is the GDP total savings, the remainder of savings after a portion is diverted to investments is signified by S*.  I*, under FMS, represents true investment, a transfer of existing money from savers to capital stocks, rather than the creation of new money disguised as investment, as happens in the debt-based system.

This shift does not violate stock-flow consistency. Savings stocks still accumulate based on NS flows. The only difference is that the flow no longer includes additional money created by private bank lending. In this case, investment flows reduce the amount flowing to savings stocks and increase the flow to capital goods stocks.

Figure 16.4  If the government deficit (GD) is less than the current account deficit (-CAB), then the private sector is in deficit (NS). 

This also changes the interpretation of private sector deficits. As shown in Figure 16.4, if the government deficit is smaller than the current account deficit, the private sector’s net surplus becomes negative. In other words, the private sector must draw down its accumulated savings stock to fund current spending and investment. This is entirely consistent with SFC; the private sector deficit balances the difference in the government surplus and current account deficits.

Figure 16.5  With a private sector deficit, investment (I*) comes from the stock of savings from previous accounting periods.  The remainder of the deficit (S*) also comes from the stock of savings and is used to pay taxes or is spent.

Figure 16.5 shows how some of the drawdown from savings stocks goes into investments and the rest goes to spending or taxes.  The final NS position is determined by the government and current account balances. 

There is no analysis here of stimulus to the economy since those inflows come from the government sector and change the sector balances.  Stimulating the economy under FMS does not involve creating additional debt either privately or publicly.

A System That Addresses Longstanding Fears

For millennia, societies have been plagued by economic anxieties that have shaped human decision-making. The fear of poverty, food and water scarcity, catastrophic health costs, unemployment, unsustainable debt, losing financial independence, being unable to provide for loved ones, or losing housing has driven economic behaviors for generations. The current system does not solve these problems, it merely manages them, ensuring that a significant portion of society remains in a perpetual state of financial stress.

FMS offers a different vision, one where these fears are no longer structural features of economic life. By designing a monetary system where money itself is not a bottleneck, solutions to fundamental economic concerns become policy decisions, not financial limitations. Food, water, healthcare, and housing scarcity are not caused by a lack of money; they are the result of how money is introduced and allocated within the current system.

Given the inherent instability of the debt-based system, FMS proposes an alternative that shifts the focus away from financial speculation and accumulation and toward productive investment, durable wealth creation, and economic security for all.

FMS vs. MMT: Key Contrasts

The closest modern economic school to FMS is Modern Monetary Theory. Both perspectives reject the idea that money is inherently scarce and recognize that sovereign governments can create money as needed. However, there is a crucial difference:

• MMT argues that all money must be created as debt, that government deficits are a necessary and permanent feature of modern economies. It claims that private sector savings require government borrowing, leading to an economy permanently reliant on government deficit spending to function.
• FMS, in contrast, rejects the idea that money must be tied to debt. It proposes an equity-based system where money is introduced without corresponding liabilities, removing the requirement for perpetual government borrowing.

This difference is not trivial, it is the foundation of why MMT ultimately fails to offer a long-term solution. Under MMT, the economy remains trapped in a debt cycle, where public deficits accumulate indefinitely to sustain private sector liquidity. FMS eliminates this constraint, ensuring that money serves as a tool for productivity and economic expansion rather than a mechanism for managing financial liabilities.

By structuring money as a permanent asset rather than a temporary liability, FMS offers a model that is not only sustainable but also adaptable. It does not require constant government intervention to maintain stability, nor does it rely on interest-bearing financial instruments that extract wealth from the productive economy.

In the following sections, we will explore how this fundamental shift in money creation reshapes economic policy, eliminates structural economic fears, and offers a path toward a more stable and prosperous future.

Debt-Free Money Creation in the FMS Framework

Throughout this book, we have examined the process of debt-free money creation multiple times, but now we turn to the practical details of how this system could function within a modern economy. The most effective approach is to nationalize the central bank and designate it as the sole issuer of new money. Since the central bank already interacts with global financial markets and oversees the country’s monetary system, it is in the best position to monitor and manage the money supply.

Under this system, the central bank would not only issue money for domestic circulation but also, when necessary, create currency for use by foreign governments, for example, during bailouts or international lending agreements. This international role would be carefully managed, ensuring that any money issued outside the country is tracked as a distinct category. By maintaining oversight of all newly created money, both domestically and internationally, the central bank can act as a gatekeeper, ensuring that money supply remains balanced and stable.

Accounting for Debt-Free Money at the Central Bank and Treasury

The creation of new money would be accounted for as an equity transaction, not as a liability. At the central bank, the process would work as follows:

1. The central bank creates money, recording it as an asset in an account reserved for interaction with the treasury.
2. This asset is balanced against an equity account, which tracks the debt-free money introduced into the economy.
3. Typically, this money would be immediately transferred from the central bank’s “treasury” account to the government’s spending account (in the U.S., the Treasury General Account, or TGA).  This TGA account would not be held at the central bank like the current TGA. (Reserve accounts held at the central bank are unnecessary with debt-free money.) This accounting would transfer the central bank’s equity stake in the economy to the Treasury’s equity stake in the government since the central bank’s two entries will remove the money asset and remove its equity stake.
4. Once the money reaches the treasury, the government records it as an asset, with the corresponding offsetting entry on the equity column of the balance sheet.

The central bank, in this process, is effectively transferring its portion of its equity in society to the treasury, ensuring that money enters circulation without requiring government borrowing or interest payments. This structure eliminates the need for government debt issuance, allowing the treasury to fund public expenditures without creating financial liabilities.

The Role of Government Spending in the FMS System

Since governments do not produce goods or services for profit, their operations are inherently revenue negative. Under this model, government spending is the source of money inserted into the economy.  There is no other source of money injection.  It is an investment in societal well-being.

Government spending on durable goods and infrastructure is a straightforward exchange of assets for assets, for example, cash is exchanged for a warship, a highway, or a power grid. They contribute real economic value to the nation.

Conversely, money spent on consumables does not generate long-term assets and instead represents a direct transfer of equity into the economy. Over time, the depreciation of government-owned assets and the cost of consumables would be balanced against the treasury’s equity account, reflecting the redistribution of wealth from government to the broader economy. This process ensures that money continues to serve the public good without requiring a permanent deficit cycle.

Taxation as an Inflation Control Mechanism

With government spending no longer tied to revenue collection, taxation shifts from being a funding necessity to a policy tool for economic stability. The primary role of taxation in the FMS framework is to prevent inflation, rather than to finance government operations. (This is like MMT’s description of taxation’s role.)

Since the central bank already monitors national economic activity, it would be in the best position to adjust tax levels and Universal Basic Income (UBI) disbursements to keep the economy stable. This means that if inflationary pressures begin to rise due to excessive money circulation, the central bank could increase taxation rates to absorb excess money and cool the economy. If deflationary pressures emerge, tax rates could be lowered or UBI levels increased to stimulate spending and economic growth.

Because these adjustments have direct consequences for households and businesses, it is likely that legislation would impose limits on the range of adjustments that the central bank could make. For example, tax increases could be capped at a predefined percentage per year to prevent sudden shocks to the economy. Similarly, UBI levels could be set within a range that prevents excessive fluctuations in consumer demand.

Allowing the central bank to oversee taxation as an economic steering tool ensures that monetary and fiscal policy remain aligned, preventing the cycles of inflation and recession that characterize the current system.

The debt-free money creation model proposed by FMS offers a fundamental departure from the traditional reliance on government borrowing. Instead of treating money as a perpetual liability, it is introduced as equity, allowing the economy to function without accumulating unsustainable debt.

With the nationalized central bank as the gatekeeper, the treasury as the distributor, and taxation as a stabilizing mechanism, FMS creates a system where money flows efficiently through the economy without creating long-term financial burdens. By ensuring that money enters circulation in a measured, controlled manner, this system eliminates the distortions created by pro-cyclical commercial bank-created money. It provides a stable, sustainable foundation for economic prosperity.

Banks and Reserves

The Fiat Money School (FMS) fundamentally redefines the role of banks, shifting them away from money creation and back to their traditional function as financial intermediaries. In this system, banks no longer generate new money when issuing loans, nor do they rely on central bank reserves to settle transactions. Instead, banks lend out pre-existing money, and interbank transactions occur directly between institutions. This change not only stabilizes the financial system but also transforms the way interest rates function, banking competition unfolds, and economic sectors are monitored for risks.

Under the current system, banks create money through lending, with new deposits appearing on their balance sheets as liabilities. To maintain stability, central banks require them to hold reserves, which serve as liquidity buffers and allow for interbank settlements. However, reserves also function as a mechanism for central bank control, influencing lending rates and overall monetary policy. In the FMS framework, where banks cannot create money, this role of reserves becomes obsolete. Instead of settling transactions through reserve accounts at the central bank, banks transfer existing funds directly between their ledgers, making the system more transparent and efficient.  This process can be automated.

Without the ability to create new deposits, banks must attract funds from savings depositors, investors, or other financial institutions to finance their lending activities. This shifts the dynamics of interest rates. In a system where banks lend only pre-existing money, interest rates are determined by real market supply and demand. This means that interest rates will likely rise, particularly in high demand lending environments, and banks will need to compete for deposits by offering more attractive savings rates.

This shift forces banks to compete on quality of service, financial stability, and responsible risk management rather than relying on monetary expansion. When money creation is no longer a factor, banks must find new ways to attract depositors, structure loans efficiently, and assess risk without assuming that the central bank will provide liquidity during crises. Without reserve injections or emergency bailouts, banks that mismanage funds face real consequences, whether through bankruptcy, acquisition, or restructuring, ensuring that financial risk is managed at the institutional level rather than through government intervention.

One of the critical benefits of this restructuring is that speculative lending will become much more constrained. In the current system, easy access to credit often fuels financial bubbles, whether in housing, stock markets, or speculative investment vehicles. Since banks under FMS must carefully allocate limited, pre-existing capital, their ability to fund speculative excesses is naturally curtailed. This alone reduces the likelihood of boom-and-bust cycles caused by overleveraged financial activity.

To enhance stability further, FMS introduces a new analytical approach to monitoring economic bubbles, one that operates at a level between macroeconomics and microeconomics.

The Introduction of Minieconomics:

Traditional economic analysis is divided into macroeconomics, which studies the overall economy, and microeconomics, which examines individual actors and transactions. In the FMS framework, a new concept, minieconomics, is introduced to provide a more granular and targeted approach to economic monitoring. Minieconomics functions as an intermediary between macro and micro analysis, dividing the economy into sectors and establishing relationships that mirror those found in macroeconomic models.

By breaking the economy into distinct sectors, minieconomics allows for real-time monitoring of economic health, identifying imbalances before they escalate into full-scale crises. For example, instead of assessing national GDP growth as a single metric, minieconomics examines how specific sectors, such as housing, energy, consumer goods, and manufacturing, are expanding or contracting relative to each other. This kind of sector-specific data enables the identification of potential economic bubbles before they grow large enough to threaten systemic stability.

This sectoral analysis mirrors the way macroeconomic models handle interactions with governments and foreign exchange markets, treating different industries and financial categories as distinct economic entities with their own supply-and-demand and exchange dynamics. The government, central bank, or private financial institutions could monitor these sectoral trends through Standard Industrial Classification (SAIC) codes or similar economic categorization systems, allowing for precise tracking of capital flows and risk concentrations.

The information for this sector-by-sector analysis is provided through the transaction tax.  Collection of the transaction tax would have economic categorization codes embedded with the tax submission.

By utilizing minieconomics analysis, banks could access sector-specific lending risk data to determine whether industries are overleveraged, experiencing unsustainable growth, or facing systemic weaknesses. This approach offers an additional safeguard against financial bubbles by allowing lenders to make informed decisions about when to extend or restrict credit in certain sectors.

The Role of the Central Bank as a Regulator

Although central bank reserves are eliminated in this system, the central bank itself does not disappear. It remains the primary regulator of the financial system, overseeing compliance, auditing lending practices, and ensuring that banks maintain ethical and sustainable operations. The central bank no longer functions as a lender of last resort but instead plays a role in monitoring financial integrity and maintaining economic transparency.

With the introduction of minieconomics, the central bank also gains a new tool for policy guidance. While it no longer manipulates reserve levels to influence monetary policy, it can still assess sector-by-sector data to provide guidance on economic imbalances and risks. Combined with private-sector risk assessments, this information would allow banks to operate with greater awareness of potential instabilities, reducing their exposure to high-risk lending.

The transition to banking without reserves and without money creation restores financial stability in multiple ways. It ensures that banks operate within their actual capital limits, prevents speculative lending excesses, and eliminates the expectation of central bank bailouts. By introducing minieconomics sectoral analysis, FMS provides a targeted method for monitoring financial risks, ensuring that potential crises are detected early and addressed before they escalate.

This approach transforms banking into a more accountable and competitive industry, where institutions function as service providers rather than monetary engines. Instead of profiting from artificial credit expansion, banks must attract customers based on financial soundness, risk assessment capabilities, and service efficiency. The removal of reserves also eliminates a major point of government intervention, reducing the distortions caused by central bank liquidity policies.

Under the FMS model, the financial sector is fully integrated into the broader economy, serving the real productive market rather than manipulating it. Banks become true intermediaries, matching savers with borrowers, assessing lending risks based on real economic indicators, and ensuring that money circulates efficiently without unnecessary expansion.

Use of UBI and Taxation

With the transition to the Fiat Money School framework, traditional forms of taxation, income, sales, and property taxes, are eliminated. Instead, economic control is achieved through a combination of transaction taxes and balance taxes, ensuring that money remains in circulation while allowing the government to maintain fiscal stability. At the same time, Universal Basic Income introduces a continuous flow of money into the economy, reinforcing economic stability and providing a foundation for consumer demand.

Since this section assumes that the transition into a stable economic state has already been completed, the focus is now on how taxation and UBI work together to maintain economic equilibrium in a system where money is no longer a scarce resource. Taxation acts as a regulatory tool, preventing excessive inflation or deflation, while UBI ensures that money remains evenly distributed and actively circulating.

Eliminating Traditional Taxes and Freeing Up Money for Economic Growth

The removal of income, sales, and property taxes eliminates one of the largest drains on economic activity. In the current system, these taxes extract massive amounts of money from households and businesses, reducing disposable income and discouraging both spending and investment. The impact of eliminating these taxes is immediate: workers receive their full wages without automatic deductions, businesses no longer must account for sales tax when pricing goods, and property owners no longer face the burden of annual tax payments that penalize ownership. Without these financial drains, money moves through the economy more efficiently, allowing for higher levels of consumption, investment, and long-term economic planning.

At the same time, the introduction of UBI amplifies economic activity, ensuring that even those with the lowest income levels have purchasing power. Unlike selective government assistance programs that target only specific groups, UBI provides a universal financial foundation that ensures consumer demand remains strong. This has far-reaching implications, particularly for businesses that rely on broad consumer spending. Industries such as retail, food services, transportation, and housing would see immediate benefits because of increased economic participation across all income levels.

The combination of eliminating traditional taxes and adding UBI creates a system where money remains in circulation, economic bottlenecks caused by taxation are removed, and financial security is no longer a privilege of the wealthy.

Transaction and Balance Taxes

Taxation serves as a tool for controlling the money supply and maintaining a balanced economy. The two primary tax mechanisms in the FMS framework, transaction taxes and balance taxes, work together to regulate economic activity.

The transaction tax applies whenever money changes hands, making it the primary means of controlling economic activity. By adjusting the tax rate on transactions, the government can steer the economy in the desired direction, either encouraging growth by lowering the rate or slowing down overheating by raising it. However, there is a practical limit to how high a transaction tax can be set before it starts stifling economic growth. In economies with smaller financial sectors, a transaction tax alone may not be able to generate enough revenue to balance government spending without significantly discouraging economic activity.

This is where the balance tax comes into play. While it does encourage money circulation, its primary function is to supplement the transaction tax, ensuring that enough money is collected without excessively burdening economic transactions. The two taxes work in opposition to each other: a balance tax incentivizes spending by penalizing stagnant funds, while a transaction tax incentivizes saving by making spending more costly. Their interplay creates a natural economic balancing mechanism, but their effectiveness depends on behavioral responses, which will need to be empirically studied and adjusted over time.

In highly financialized economies, where a significant portion of money flows through financial markets rather than productive sectors, financial transaction tax rates must be significantly lower than taxes on economic transactions. The sheer volume of financial trades means that even a small tax rate collects significant revenue, but if financial transactions were taxed at the same rate as real economic transactions, it could severely disrupt capital markets. In contrast, in economies without large financial sectors, transaction taxes on financial trades can be set much closer to economic transaction rates without the same risk of disruption.

The introduction of balance taxes allows the government to collect the necessary revenue to stabilize money supply while preventing excessive taxation on transactions. Once an economy has enough debt-free money circulating to sustain activity, the government must ensure that it operates on a balanced budget over the long term. This does not mean that every single year must be perfectly balanced, as economic fluctuations will naturally require temporary adjustments, but in the long run, revenue collection through transaction and balance taxes must roughly match government spending to maintain stability.

Targeted Tax Adjustments Using Sectoral Analysis

With the introduction of minieconomics, economic activity can be monitored at the sector level, allowing for taxation to be adjusted with precision. By analyzing economic trends through Standard Industrial Classification (SAIC) or similar codes, governments can identify which sectors are overheated and require higher taxation to cool down, and which sectors are lagging and need tax reductions to stimulate growth.

For example, if the housing market experiences a rapid surge due to excessive speculation, tax rates on real estate transactions can be increased to slow the bubble. Similarly, if the agricultural sector faces a downturn, tax rates on transactions within that sector could be lowered to encourage investment and expansion. By applying sector-specific tax rates, economic overheating and stagnation can be managed far more effectively than using broad, blunt policy tools like nationwide interest rate adjustments.

This level of precision extends to the banking sector as well. Since banks remain responsible for lending decisions, they can use sectoral tax data to assess lending risks and avoid directing capital into overleveraged industries. This system not only prevents financial bubbles but also ensures that economic adjustments are made in real time, rather than reacting after a crisis has already occurred.

UBI as a Counterbalance to Economic Cycles

While taxation serves as a tool to remove excess money from circulation when needed, UBI provides a counterbalancing force, ensuring that demand remains stable even during economic downturns. The universal nature of UBI ensures that even during periods of contraction, individuals retain spending power, preventing recessions from spiraling out of control.

Unlike traditional welfare systems that are reactive, adjusting only after economic distress occurs, UBI is proactive, ensuring that people always have a financial buffer that allows them to participate in the economy. This does not mean that UBI necessarily replaces those welfare systems, especially if the UBI level is relatively low. UBI reduces dependency on debt as a survival mechanism, preventing the cycles of household debt accumulation and financial instability that plague the current system.

UBI ensures that economic demand remains steadier, making recessions far less likely. Government programs can further reinforce stability by spending directly into sectors that require stimulus, rather than waiting for private market corrections that may take years to materialize. This approach removes the need for central bank interventions and replaces it with a more direct, transparent, and responsive economic management system.

Replacing Central Bank Controls with Direct Economic Management

The role that central banks currently play in adjusting interest rates and injecting liquidity into the economy is entirely replaced by targeted taxation and direct fiscal adjustments. Instead of relying on broad monetary policy that takes months or even years to influence the economy, transaction and balance tax adjustments, along with targeted government spending, provide immediate economic feedback.

This shift eliminates reliance on interest rate manipulation, speculative financial interventions, and reserve requirements, ensuring that monetary stability is achieved without reliance on the banking sector. The economy becomes far more transparent, efficient, and resilient, with fewer distortions caused by financial sector dominance and government debt cycles.

Unemployment

Modern Monetary Theory (MMT) deserves credit for challenging the idea that unemployment must be used as an economic policy tool. By advocating for a Job Guarantee program, MMT seeks to ensure that everyone who wants to work can have a job, removing the use of unemployment to control inflation. However, as discussed earlier in this chapter, the practical implementation of such a program presents significant challenges, from inefficiencies in government-created jobs to the difficulty of maintaining flexibility in a rapidly changing labor market.

The Fiat Money School (FMS) takes a different approach, one that assumes that capitalism itself can create and sustain near-full employment if economic cycles are stabilized and the distortions caused by debt-based money creation are removed. In this model, the primary driver of unemployment is not technological progress but economic instability, a problem that can be largely solved by eliminating the boom-and-bust cycles caused by financial markets and credit fluctuations.

Stabilizing Employment by Breaking the Boom-and-Bust Cycle

Unemployment in the modern economy is often tied to financial instability. Credit expansions create artificial booms, during which businesses hire aggressively, only to cut jobs when credit contracts along with demand. This cycle of expansion and contraction forces workers into unemployment.

By transitioning to a debt-free monetary system, FMS removes this boom/bust cycle that expands and contracts the labor demand.  Labor demand under FMS is far more constant.

The presence of UBI further reinforces employment stability, ensuring that consumer demand remains consistent even in slower economic periods. With a reliable customer base, businesses have fewer incentives to cut jobs, preventing recessions from triggering waves of unnecessary unemployment.

Supporting Retraining and Adaptation to Technological Change

Even with a stabilized economy, technological progress will continue to displace workers as automation and artificial intelligence reshape industries. Rather than relying on a government jobs program, FMS assumes that job creation should remain in the hands of the private sector, while the government plays a supporting role in retraining and education.

Under FMS, education would be fully funded through the highest levels of learning, including vocational training, university degrees, and postgraduate studies. Workers who are displaced due to automation or industry shifts can access free retraining programs that allow them to develop new skills and transition into emerging job markets. An unemployment supplement tied to active retraining would ensure that those affected by job displacement do not suffer financial hardship while acquiring new qualifications.

By making education universally accessible, workers could proactively prepare for shifts in the labor market rather than being caught off guard by job losses. Since retraining is available to everyone, businesses also benefit, as they can hire workers with relevant, up-to-date skills rather than struggling with outdated labor pools.

AI and the Potential for a Shorter Workweek

One of the greatest long-term challenges to employment is the rise of artificial intelligence and automation, which could replace not only routine labor but also many professional and creative jobs. Unlike previous waves of technological progress, which displaced workers in one industry while creating new job categories elsewhere, AI may eliminate jobs without producing an equivalent number of new opportunities.

If AI reaches the point where mass unemployment becomes a structural issue, FMS proposes an alternative solution: reducing the length of the standard workweek. Instead of allowing technological progress to eliminate entire sections of the workforce, the available work could be divided among more people, reducing the number of hours everyone must work while maintaining overall employment levels.

Under the Talley system in medieval England, many workers labored for only 14 weeks per year, spending their remaining time on education, travel, architecture, and social activities. A debt-free economy, where production is the primary challenge rather than demand, makes this approach viable again. AI and automation could provide the productive capacity necessary to sustain the economy, while UBI ensures that demand remains high enough to justify continued production.

Rather than forcing people into irrelevant or unnecessary jobs just to maintain employment figures, FMS acknowledges that society may need to reevaluate the very concept of work, allowing individuals to contribute in more flexible and meaningful ways.

Economic Stability Now, Post-Scarcity Planning for the Future

In the short term, FMS ensures that employment remains stable by preventing financial collapses, supporting retraining programs, and maintaining consistent consumer demand. However, in the long term, if automation drastically reduces the number of jobs needed, society must be prepared to rethink work itself.

Unlike the current system, which assumes that everyone must work to justify their economic existence, FMS recognizes that technological progress may one day make full employment unnecessary. If production can be maintained with fewer workers, then prosperity should be distributed accordingly, rather than forcing people into artificial labor.

While MMT’s Job Guarantee program attempts to provide stability by guaranteeing employment, FMS assumes that a more effective long-term approach is to build a system that naturally minimizes job loss while ensuring that those who do lose jobs have clear, structured paths to new opportunities. By stabilizing capitalism, eliminating artificial financial constraints, and preparing for a future in which traditional work may not be required at all, FMS ensures that unemployment is minimized in the present and redefined in the future.

In a society where work is not required, society needs to provide environments where people live, love, laugh, dance, travel, build, and enjoy life.  There will always be the need for social interaction even in the absence of work.  Social sciences should anticipate this well in advance of the loss of work as a major portion of people’s lives.

Trade

Under the Fiat Money School (FMS) framework, trade is viewed as a natural extension of economic stability, rather than as a financial balancing act. Since FMS prioritizes production to balance the ease of increasing demand, an economy operating under this system will naturally develop a strong export capacity. If additional incentives are needed to balance trade, the government can intervene strategically, assisting industries in ways that support mutual global economic stability without distorting domestic or foreign markets.

Just as domestic economic stability requires a long-term balance between the government and private sector, international trade must also remain balanced over time. Persistent trade surpluses or deficits create economic and political instability. If a country exports too much and accumulates large reserves of foreign currency, it risks exerting disproportionate economic influence over another nation, potentially threatening that nation’s control over its land, businesses, and resources. Conversely, if a country imports too much, it may lose control over its own industries and economic sovereignty as foreign entities acquire domestic assets to reinvest their accumulated currency.

To prevent these imbalances, FMS suggests that when one country accumulates an excess of another country’s currency, its central bank could offer grants in that currency to fund productive development within the deficit country. This would help stabilize the global economy while fostering cooperation rather than competition. By investing in the productive capacity of trade partners, nations can work together to reduce economic disparities and prevent financial tensions from escalating into political conflicts.

As humanity moves into space-based economies, global cooperation will become even more critical. Throughout history, wars and conflict have often been fueled by economic and financial struggles, particularly in a world where money has been tied to debt and scarcity. By eliminating debt-based money, FMS removes one of the key drivers of international competition and hostility. However, achieving lasting peace requires more than economic reform, it demands investments in social and political sciences to develop new frameworks for conflict resolution, resource sharing, and international stability. A balanced approach to trade, one that prevents economic dominance and exploitation, will be one of the essential tools for reducing tensions and fostering cooperation in both terrestrial and extraterrestrial economies.

Prioritizing Production

The Fiat Money School (FMS) reshapes capitalism by shifting its core constraint from money scarcity to production capacity. In today’s economy, capitalism operates under a financial system that restricts demand through debt-based money creation, forcing businesses and consumers to rely on credit cycles, borrowing, and financial speculation just to maintain economic activity. Under FMS, demand is no longer artificially constrained, since money can always be created and distributed through UBI or government spending. The challenge then becomes producing enough goods and services to meet that demand without causing inflation.

This realignment of capitalism addresses a fundamental critique raised by Karl Marx. Even though Marx recognized capitalism as the most efficient system for production, he argued that its flaw lay in how wealth was distributed. His concept of M-C-M’ (Money → Commodity → More Money) describes the upward movement of money in a capitalist system, where capitalists use money to create commodities, sell them, and end up with even more money. However, this cycle disproportionately benefits those who already control capital, leaving the worker with only wages disconnected from the growing wealth they help produce.

FMS corrects this imbalance without discarding capitalism by recycling money back into the economy at the consumer level through UBI, ensuring that workers and lower-income groups retain access to money without interfering with capitalism’s ability to drive production. Additionally, the flat but scaled transaction and balance taxes naturally extract more revenue from the largest transactions and highest balances, subtly countering the relentless upward flow of wealth. Unlike today’s system, where money accumulates at the top through financial speculation, FMS ensures that capitalism remains productive while allowing money to circulate more broadly throughout society.

The Need for Competitive Capitalism Over Monopoly and Oligarchy

Capitalism thrives on competition, yet as businesses consolidate into monopolies and oligopolies, they lose the innovative edge that makes capitalism work. Monopolistic control over industries stifles efficiency, creativity, and product improvement, shifting the focus from production to financial engineering and market dominance. This only exacerbates the M-C-M’ problem, as wealth accumulates at the top through extraction rather than genuine productivity.

FMS relies on government intervention to ensure competitive markets, not through heavy regulation of business operations, but by enforcing strong antitrust policies that prevent monopolies from stifling competition. Under FMS, companies should not be allowed to rely on financial maneuvering to dominate markets. They must compete based on production, quality, and innovation, which ensures that capitalism remains a dynamic, wealth-generating system rather than a wealth-extracting one.

However, some industries, such as high-expense manufacturing, space technology, and complex infrastructure projects, naturally limit competition due to their scale, cost, and expertise requirements. While monopolies may sometimes be unavoidable in these areas, FMS recognizes that governments must still take an active role in preventing excessive consolidation. If necessary, public-sector investment in competitors could be introduced to ensure innovation and efficiency remain priorities, rather than allowing monopolistic stagnation.

The Problem of Planned Obsolescence and the Failure to Create Lasting Wealth

One of capitalism’s most self-destructive tendencies is planned obsolescence, the deliberate shortening of product lifespans to ensure repeated sales. From a purely production-based perspective, planned obsolescence drives economic activity by guaranteeing that factories remain operational, supply chains stay active, and businesses continue generating profits. However, this model is fundamentally at odds with the very purpose of a productive economy, which is to build wealth that lasts, not just to create endless cycles of consumption.

If capitalism under FMS is to succeed, it must shift from prioritizing short-term profits to emphasizing long-term economic value. Durable goods should be designed for longevity, reliability, and efficiency, rather than being manufactured for quick replacement cycles. A productive economy creates real wealth, not just temporary financial gains. The transition to FMS demands rethinking the economic incentives behind manufacturing, ensuring that the economy is producing lasting value rather than disposable goods that only fuel the M-C-M’ cycle.

The question then arises: should competition or controlled market structures drive durable goods production? Competitive industries often chase short-term profits, encouraging planned obsolescence, whereas monopolies may lack the incentive to innovate at all. Research must determine whether a highly competitive market structure, government intervention, or some hybrid approach is best suited to incentivizing durable, high-quality products. While FMS leans toward competition as the preferred model, economic data and real-world experiments should guide the ultimate decision.

A Market That Prioritizes Production While Keeping Wealth Circulating

The M-C-M’ cycle is an unavoidable characteristic of capitalism, but under FMS, its effects are counterbalanced by systemic mechanisms that prevent wealth from pooling indefinitely at the top. By injecting money directly into the consumer economy through UBI, FMS ensures that workers and consumers retain purchasing power, while the transaction and balance tax systems act as natural wealth recyclers.

This structure preserves capitalism’s ability to drive production while ensuring that money does not endlessly concentrate within the financial elite. Unlike systems that attempt to redistribute wealth through high taxation or heavy-handed government intervention, FMS allows capitalism to function freely while maintaining an economic environment where money remains in motion.

A More Productive and Balanced Capitalism

FMS does not replace capitalism but optimizes it, eliminating the artificial financial constraints that weaken its productive capacity. By ensuring that capitalism focuses on real production rather than financial speculation, it allows the economy to function at full efficiency, producing high-quality goods without artificial barriers to success.

At the same time, FMS addresses one of Marx’s primary critiques of capitalism by preventing extreme wealth concentration without suppressing market forces. With UBI ensuring money reaches consumers, and transaction and balance taxes subtly mitigating the upward pull of capital, the system allows for a free market that benefits all participants, rather than just those at the top.

By ensuring strong competition, prioritizing durable goods, and preventing monopolistic stagnation, FMS builds a capitalist system that is productive, efficient, and sustainable. In a world where money is no longer the limiting factor, but production is, capitalism on steroids is not just about maximizing profits, it’s about maximizing real, lasting wealth for society.

Long-term Effects

The Fiat Money School proposes that wealth remains dynamic and competitive rather than consolidating into multigenerational financial dynasties. While the transaction and balance taxes limit wealth accumulation at the top better than the current system of taxation, they are not sufficient on their own to prevent extreme concentrations of inherited wealth. Without a robust inheritance tax, powerful families could still amass control over industries and politics, creating distortions like those caused by monopolies.

In today’s financial system, dynastic wealth is self-reinforcing, as the wealthy use capital gains, tax loopholes, trusts, and financial influence to shield their assets from taxation. FMS proposes progressive inheritance taxation to prevent excessive accumulations of wealth.  Extreme wealth would be partially redistributed, allowing wealthy families to maintain some of its gained economic mobility. Family businesses and moderately large corporations could be passed on to heirs without excessive burden, but at a certain level, wealth would be taxed back to prevent the emergence of financial aristocracies.

Beyond taxation, the elimination of debt-based money will naturally reduce the financial sector’s influence over wealth accumulation. Today, much extreme wealth is tied to financial speculation, leveraged investments, and artificial market maneuvers. Without debt-fueled financial engineering, accumulating debt-based financial instruments as a strategy for generational dominance becomes far less effective.

Under FMS, money exists to drive productive economic activity, not to accumulate indefinitely in the hands of a few. Excess money is removed from circulation through taxation, ensuring that money remains active within the economy rather than being hoarded. As fewer people need to rely on credit, the financial sector loses its primary mechanism for extracting wealth through layers of debt being used as collateral.

FMS does not seek to eliminate wealth accumulation, but rather to keep it within a range that supports economic growth without distorting social structures. By combining progressive inheritance taxation, debt-free money, and a tax structure that continuously recycles wealth, FMS creates an environment where entrepreneurship and innovation thrive, while the extreme financial dominance of a few is naturally eroded over time.

Summary

This chapter critically examined the core pillars of Modern Monetary Theory and identified fundamental flaws in its assumptions. While MMT has contributed valuable insights, particularly in recognizing that money is no longer constrained by household budget constraints and by developing Stock-Flow Consistent (SFC) modeling, its insistence that all money must be debt-based prevents it from offering truly sustainable solutions. The Fiat Money School (FMS) builds upon the strengths of MMT while addressing its shortcomings, offering a framework that allows for debt-free money creation, balanced trade, economic stability, and long-term wealth distribution.

The first pillar of MMT uses Stock Flow Consistency to analyze sectoral balances to conclude that permanent government deficits are needed to supply the private sector with money.  This creates an imbalance that makes long-term stability impossible.

MMT’s second major claim, that money must always be a form of debt, is a faulty assumption. Governments can create money as equity rather than debt, allowing them to inject purchasing power into the economy without repayment obligations. This difference marks a fundamental departure from MMT’s insistence that government deficits are necessary to sustain private sector savings.

Another flaw in MMT’s framework is its assertion that the central bank and the treasury function as a single entity. While MMT assumes that governments can freely create and spend money through their central banks, in most nations, these institutions remain legally and operationally separate. The failure to acknowledge this reality weakens MMT’s policy prescriptions, as direct central bank financing of government expenditures is often prohibited by law or constrained by institutional independence. FMS provides a more pragmatic approach, recognizing that the treasury and central bank can be integrated into a single government function or restructured to allow for more efficient monetary management.

One of MMT’s more well-known proposals, the Job Guarantee (JG) program, also came under scrutiny. While its goal is to eliminate involuntary unemployment, the JG presents significant inefficiencies. By guaranteeing government-created jobs for anyone seeking employment, it risks distorting labor markets, misallocating resources, and extending inflationary cycles. FMS offers a better alternative by ensuring that a stable economy, supported by debt-free money and universal retraining programs, will naturally provide employment opportunities without the need for artificial government job creation. Instead of treating employment as a direct government responsibility, FMS allows the private sector to drive job creation while ensuring workers have the necessary support to transition into new roles when industries evolve.

Another pillar of MMT that we dismantled was its claim that taxes are the primary force that gives money value. While taxation reinforces the demand for the national currency, it is not the defining factor that drives money’s acceptance. Trust and utility are far more significant. The rise of cryptocurrencies and alternative mediums of exchange provides clear evidence that people accept money because they believe others will accept it in trade, not simply because a government requires it for tax payments. FMS acknowledges that money’s legitimacy is rooted in its ability to facilitate economic transactions, rather than its role in taxation.

Finally, we addressed MMT’s assumption that trade deficits do not matter. MMT dismisses concerns about persistent trade imbalances, assuming that foreign holders of a nation’s currency will always reinvest it in government debt. However, prolonged trade deficits lead to accumulations of foreign currency that can disrupt economic stability and cede domestic control over businesses, land, and resources to foreign interests. FMS recognizes the importance of long-term trade balance, proposing mechanisms that encourage productive international cooperation rather than allowing unchecked imbalances to persist.

Having dismantled these core pillars of MMT, we then outlined how FMS provides superior solutions to each of these economic challenges. By rejecting the idea that all money must be debt, FMS unlocks the ability for governments to create money as an asset rather than a liability, allowing for direct investment into the economy without the need for perpetual deficits. Unlike MMT, which struggles to reconcile the legal independence of central banks, FMS presents realistic structural reforms that allow for greater flexibility in money creation and fiscal policy.

Where MMT attempts to guarantee employment through direct job creation, FMS ensures stable employment through economic balance, universal education, and flexible retraining programs. Instead of relying on government jobs to prop up labor markets, FMS allows capitalism to function freely while providing individuals with the tools they need to remain employable in an evolving economy.

Trade under FMS is also structured to prevent long-term deficits or surpluses, ensuring that no single country accumulates excessive foreign currency reserves or cedes too much economic influence to foreign interests. By emphasizing cooperation and strategic investment rather than unchecked capital flows, FMS promotes global economic stability while preserving national sovereignty over industries and resources.

Beyond correcting MMT’s shortcomings, FMS also introduces new advantages that improve economic efficiency and social stability. Without debt-based money creation, capitalism is free to focus on real production rather than financial speculation.

FMS recognizes the dangers of allowing the formation of financial dynasties. FMS recognizes that just as monopolies distort economic production, dynastic wealth distorts social mobility and innovation. By proposing highly progressive inheritance taxation, FMS would ensure that large concentrations of wealth do not pass through generations unchecked, maintaining a level playing field for new entrepreneurs and businesses.

Additionally, as debt-free money gradually eliminates the need for private-sector debt, the financial sector’s ability to accumulate and control wealth will weaken. Money under FMS is a tool for driving economic production, not an asset to be hoarded indefinitely. Excess money is removed through taxation, ensuring that it continues to circulate rather than becoming concentrated in financial empires. Over time, the elimination of debt as a primary wealth-generating tool will further erode extreme wealth concentration, reinforcing economic balance.

This chapter demonstrated that while MMT revolutionized how we understand modern economies, it ultimately fails to provide a stable, long-term economic framework. By embracing debt-free money, balanced trade, competition, and a fairer wealth distribution, FMS provides a far more sustainable and efficient model for ensuring long-term economic prosperity. It not only corrects MMT’s errors but also introduces a vision for capitalism that maximizes innovation, efficiency, and social stability in a world where money is no longer the limiting factor, production is.

Recommended Reading:

https://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

https://assets.openstax.org/oscms-prodcms/media/documents/Macroeconomics3e-WEB_X69daYk.pdf