What is PURE MMT ?

NOTE: This is only talking about FEDERAL GOV’T fiat money creation (a.k.a. ‘vertical’ or ‘exogenous’ creation of dollars authorized by Congress that is facilitated by the public-sector central bank) when the federal gov’t deficit spends; and this is NOT talking about the rest of us, the non-federal gov’t money creation (a.k.a. ‘horizontal’ or ‘endogenous’ creation of dollars facilitated by the private-sector financial institutions) when households, businesses, state & local governments deficit spend.

In other words, this is a focus on fiat money creation by the ISSUER of fiat money, same as the Monopoly Game, where only the Monopoly Bank (the US federal gov’t) issues and enters additional Monopoly Money (issues and enters additional US dollar ‘Net Financial Assets’) into the Monopoly Game (into the US banking system), and not anyone else (as per the Monopoly Game rules, “No player may borrow from or lend money to another player”).

In addition, similar to the US federal gov’t (or any monetary sovereign issuing its own free-floating, non-convertible fiat currency), the Monopoly Game doesn’t ‘borrow’ Monopoly Money (as per the Monopoly Game rules, “The Monopoly Bank never goes broke, if the Monopoly Bank runs out of money, the Monopoly Bank may issue as much as needed by writing on any ordinary paper”). For both the US federal gov’t and the Monopoly Bank, there is no ‘financial’ constraint to spending.

The only difference is that the US federal gov’t has a ‘political’ constraint to spending and that’s why it still performs the idiosyncratic formality of ‘borrowing’ (only to maintain the constitutionally-enshrined Power of the Purse of Congress because on the federal level, ‘funding’ pertains to the appropriation of, or more specifically, the ‘approval’ of deficit spending).

By eliminating horizontal ‘endo’ creation, the Monopoly Game is a perfect example that helps us distinguish the paradigm distinctions between the vertical ‘exo’ creation of fiat dollars by the issuer (without attached debt) vs. the totally separate creation of dollars by the users (with attached debt). (with attached debt).

So what is meant by ‘Pure’ MMT (Pure Modern Monetary Theory) (?)

The US monetary system began the phase-out away from the gold standard regime in 1933

when President FDR ended gold convertibility to domestic holders of US dollars;

and then the United States completed the process

when President Nixon ended gold convertibility to international holders of US dollars as well in 1971.

However, some remnants of that bygone gold standard era,

some old processes, like federal gov’t accounting constructs and US appropriations laws, still remain in place.

Meaning that the phase out from the gold standard era is NOT totally complete, not quite yet.

Not until these pesky laws and accounting rules are changed.

Not until the mainstream has completely accepted MMT,

and the economics books are being rewritten.

Not until then is the gold standard era completely ended,

and a full-blown MMT, or a ‘Pure’ MMT, is firmly in place.

That’s when our monetary system officially enters the ‘After’ phase.

Meanwhile, there’s still a difference between that ‘After’ phase,

the ‘theory’ in Modern Monetary Theory;

and the “now”, existing, modern monetary ‘reality’’.

Those not-so-modern monetary ‘formalities’, like political constraints,

that are still here in the ‘now’ whether we like it or not.

J.D. Alt, author of ‘The Millennials’ Money’,

has a video that visualizes nicely how our monetary system works using a ‘bathtub’ analogy,

with both a ‘before’ diagram (using gold standard era mentality);

and an ‘after’ diagram (using post-gold standard era mentality).

The first diagrams show ‘Before’,

meaning the gold standard era,

when the federal gov’t was a USER of dollars,

same as a household, and like a household the federal gov’t had to GET dollars first, before spending.

Only once the federal gov’t first collected revenues from taxation or borrowing by selling Treasury bonds,

could the federal gov’t then spend and pay interest on those bonds, pay them off,

and the largest federal gov’t expense being those nasty entitlements;

and the largest revenues coming from someone else,

like China, which adds to that even nastier US National Debt.

Again, the main point is the order of operations, that ‘before’, during the gold standard era,

it all has to start with the federal gov’t getting the money from the private sector FIRST

and then the federal gov’t spends it back to the private sector,

which like just households, puts a squeeze on spending if revenues fall.

Therefore, ‘Before’, during the gold standard era when the federal gov’t was a USER of dollars,

the federal gov’t has a constraint because it has to get the dollars first before spending;

and, there is a solvency risk, of default, because there’s that chance the federal gov’t may not get the dollars.

In his ‘after’ diagrams J.D. Alt shows the paradigm difference after President Nixon closed the gold window,

completely ending the convertibility of dollars.

On that day in August 1971, the federal gov’t was no longer a USER of dollars,

no longer like a household.

After the gold standard era ended, the order of operations switches.

The federal gov’t no longer needs to get its own dollars to spend,

so the beginning step is that the federal gov’t now spends first.

Financing the federal gov’t with taxes takes the back seat.

After the gold standard era ended,

federal tax collections perform other functions,

like maintaining price stability to control inflation.

The key point being that after the gold standard era ended,

rather than being a USER of GOLD BACKED DOLLARS,

the federal gov’t became the ISSUER of FIAT DOLLARS.

The federal gov’t began spending its own fiat currency and most importantly,

the federal gov’t doesn’t need to first get its own fiat dollars from anyone.

The federal government’s power to levy taxes is what creates the initial need for dollars.

Rather than wanting dollars because they are convertible to gold,

households still need dollars to pay taxes which can only be paid in dollars.

Rather than the private sector first needing to supply the federal government’s sovereign spending,

in the post gold standard era, the federal gov’t, the issuer of dollars,

is the sole monopoly ‘supplier’ of dollars to the private sector.

Again, the main purpose of federal taxes now are to prevent bathtub overflow,

to control inflation, they are NO LONGER NEEDED to finance spending…

…and the same goes for federal gov’t bond sales,

they also perform much more important functions,

like defending the target overnight interest rate,

so bond sales as well are NO LONGER NEEDED to finance spending.

The key takeaway,

the MMT pillar is that because the federal gov’t is the issuer of dollars,

there is no financial constraint on federal gov’t spending nor is there any federal gov’t solvency risk.

Federal taxes and bond sales are no longer needed to finance federal spending,

but not that they don’t because even though the gold standard era ended,

and even though the federal gov’t no longer has a financing constraint,

there still remains a political constraint to spending.

So we have the JD Alt ‘Before’ diagram,

and the ‘After’ diagram,

and where we are ‘now’.

AFTER we start calling deficit spending something like “Net Spending Achievement”,

AFTER we start calling  the national debt something like “The National Savings”,

AFTER we stop saying ‘deficit spending’

and instead the federal gov’t simply announces how many additional dollars they supplied to the banking system,

AFTER we stop saying ‘surplus’ spending

and instead the federal gov’t simply announces how many dollars they relieved from the banking system,

THAT is the MMT endgame, AFTER, when we are at ‘pure’ MMT.

But we’re not there yet,

there are some remnants,

like a debt ceiling,

that’s our present modern monetary ‘reality’.

So what does would a diagram look like NOW?

In the next video, I’ll add that third diagram, a ‘now’ diagram. 


So what is meant by ‘Pure MMT?

Similar to what JD Alt describes in his ‘After’ gold-standard-era diagrams,

Pure MMT is that ‘After’ phase,

when the mainstream stops using gold standard thinking,

such as calling Treasury bonds, ‘debt’,

as if federal ‘debt’ was the same thing as an actual household debt.

Pure MMT is AFTER, when we stop using gold standard terminology like federal ‘deficit spending’

because everyone understands that unlike the deficit spending of a household,

which is a user of dollars,

any deficit spending for the federal gov’t, the issuer of dollars,

just means how many additional dollars was SUPPLIED by the issuer, to the users,

to accommodate a growing economy.

Pure MMT is that day in the not-too-distant future,

when MMT, or modern monetary theory,

how the post-gold-standard, modern monetary system really works,

has gone completely mainstream and a full-blown, or ‘pure’, MMT is firmly in place.

In the book The Wonderful Wizard of Oz,

an allegory that promoted staying on the gold standard,

Dorothy and the others get to the end of the gold-standard era

and enter the fiat-greenback-dollar era. There they find themselves in front of a curtain,

a screen projecting fear mongering narratives that makes Dorothy terrified.

The same goes for today regarding our monetary system

except that curtain is a screen,

like a modern television or a computer screen,

that serves as a façade,

that ‘masks’ the more important functions of federal taxation and bond sales,

as if the federal gov’t was still financed the same way as during the gold standard era.

Same as Dorothy then, groupthink today is easily frightened

and will continued to be played,

by this outdated, ‘federal gov’t is the same as a household’ narrative used by unscrupulous policymakers,

until Toto pulls back that curtain.

MMT is the dog.

Until then, while here in the “Now”,

we still have to play the cards that are dealt,

so similar to that curtain in Oz,

the “Now” diagram,

recognizes the processes from the old system except without the overdramatic bluster.

The paradigm difference between the gold standard era, and “Now”,

is that the federal gov’t doesn’t have to collect dollars before surplus spending or deficit spending.

Since the federal gov’t stopped spending gold-backed dollars, the order of operations switched.

For example, “Now”, the federal gov’t is like the Monopoly Game.

Before starting any game of Monopoly,

the ‘Bank’ passes out $1500 in Monopoly money to each ‘Player’ first.

That is exactly the same as the modern monetary system “Now”.

“Now”, the federal gov’t, the issuer of their own monopoly money,

spends into the private sector first,

and then collects it back from us when we pay taxes.

Same as the modern monetary system “Now”,

the Monopoly ‘Players’ are paid to provision the federal gov’t,

just like at the start of every Monopoly game,

the ‘Players’ are paid $1500 each,

to set up the board, to shuffle the Chance cards, and whatever other work is needed to start the game.

That initial spend by the Monopoly ‘Bank’ is deficit spending that adds Monopoly money to the Players,

which is exactly the same as the modern monetary system “Now”.

Only ‘Bank’ or federal gov’t deficit spending adds additional dollars to the Private Sector,

also known as Net Financial Assets,

only deficit spending adds Net Financial Assets to the banking system.

Let’s say that first Monopoly Player rolls a seven, lands on Chance, and has to pay a $50 tax to the Bank,

meaning $50 is ‘destroyed’ or in other words, ‘defunded’ from the Players,

out from the Private Sector.

So, taxes ‘defund’ Net Financial Assets.

Then the second Player, also lands on Chance and gets paid $50 from the Bank.

That $50 the Bank pays is surplus spending.

Surplus spending does not add dollars to the Players.

Rather than a net addition of dollars to the Private Sector like when deficit spending,

Bank surplus spending only ‘refunds’ a tax destruction of dollars out from the Private Sector.

This is why the newly-created surplus spending dollars does not have an inflationary

bias like the newly-created deficit spending dollars. Furthermore, another key

distinction, is that because surplus spending is ‘offset’ by tax collection,

it does not need to be authorized by Congress, like deficit spending does.

So does that $50 the Bank collected in taxes subtract from a Bank ‘debt’ of $6000 (?)


In the Monopoly rule book there is no mention of the Bank ‘selling bonds’ and going into ‘debt’ to ‘fund deficit spending’

nor the Bank ever having to ‘pay back’ anything.

The Monopoly game is the “After” phase,

where you no longer go through the charade that deficit spending is ‘bond-financed’.

Instead, the Monopoly game is Pure MMT, all federal deficit spending is ‘cash-financed’.

The main takeaway, the MMT pillar,

is that the order of operations has switched,

that because the federal gov’t issues and spends its own fiat dollars,

there is no longer any ‘solvency risk’.

For the federal gov’t, the issuer of dollars, same as the ‘Bank’ in the Monopoly game,

you can never run out of dollars,

there is no ‘financial constraint’ on federal gov’t spending.


in the “Now”,

in the modern monetary reality,

there still remains those formalities,

those political constraints,

the appropriations laws,

the accounting construct that governs federal spending.

As a result, even to this day,

many have a failure of the imagination,

to see past those idiosyncratic formalities being projected on the screens.

In 2017, total federal gov’t spending was just under $4T

and total tax revenue was $3.3T.

Now to just say that 4T came out of the ‘faucet’,

3 trillion odd in taxes went down the ‘drain’

and the difference was added to the bathtub is fine if talking about the “After” diagram,

the modern monetary THEORY,

but that’s too much of an oversimplification for the “Now” diagram,

the modern monetary REALITY.

Since MMT is the unorthodox,

the “Now” diagram needs to help make the MMT case to professionals in the field,

like the lawyers, the accountants, and most importantly, the constituents,

the ones that will help change those pesky laws and accounting rules

to finally get the monetary system from “Now”  to “After”, to that Pure MMT.


So, how does the shape of the “Now” bathtub,

meaning the economy, where the dollars are sloshing around, look like “Now”?

The “Now” ‘bathtub’ is not that cozy-looking, evenly-shaped one like in the J.D. Alt diagrams.

The bathtub in the “Now” is quite uneven, so that’s how we show it in the “Now” diagram.

A graph of US household wealth distribution, with a very small part of it being very deep with plenty of water at one end,

and the other end is not so liquid, that graph upside down, that’s your actual bathtub shape in the “Now”.

On the “now” bathtub diagram,

to show those crucial distinctions between deficit spending and surplus spending,

which is as different as hot and cold water,

in addition to the ‘faucet’, the “Now” diagram also has the ‘shower head’.

The faucet is deficit spending. The showerhead is surplus spending.

The water, or the assets denominated in dollars, in the tub takes many forms

For this video, we’re just going to talk about two of these,

Treasury bonds, which has a coupon interest rate and a maturity date;

and cash, which has neither.

We pick up it up where that second Monopoly Player has just been paid $50 by the Monopoly ‘Bank’

which is surplus spending, the newly-created fiat-dollars coming out of the showerhead.

Again, the important difference between surplus spending and deficit spending

is that even though both are newly-created dollars,

these newly-created surplus-spending dollars are NOT net additions of dollars to the Private Sector,

to the Monopoly Players;

because an equal and opposite amount of dollars that are being paid in federal taxation are being ‘destroyed’,

are going down the drain, or more specifically, being debited out from the Private Sector.

Here at arrow 2, is why some MMTers like to say ‘taxes don’t fund spending’.

However, even though *technically* correct, saying that is jumping the gun to the “After” phase,

so Pure MMTers don’t say it that way.

To recognize that there still are political constraints in place in the ‘Now’,

Pure MMTers say ‘taxes ARE NOT NEEDED to fund spending.

As per accounting rules and appropriations laws from long ago,

yet still in place,

here in the “Now”, is the US Treasury’s General Funds Account,

at the Federal Reserve Bank, the same account where all federal taxes wind up

and where all federal spending is drawn from.

Thus, there is no longer any financial constraint to federal gov’t spending

but there is still a political constraint.

It is still US law that federal surplus spending must be “funded” by federal taxes, and by ‘funded’,

it means that the Treasury’s General FUND account must be replenished by federal taxes.

The exact amount of reserves are credited into the Treasury’s GFA

and those reserves are immediately debited

and go full circle when newly-created dollars are credited

and spent back into the banking system

to pay anyone that just provisioned the federal gov’t.

Which gives the appearance,

which continues the gold-standard-era narrative,

that surplus spending,

even in the “Now”,

is “funded” in a financial sense,

when in reality it is only being “funded” in a political sense.


after spending has reached the amount of federal taxes collected,

it is no longer surplus spending,

and deficit spending begins.

The biggest distinction of deficit spending is that UNLIKE surplus spending which,

once tax rates have been set, simply run on automatic pilot and does not need to be authorized by Congress,

all deficit spending must be authorized by Congress;

because also UNLIKE surplus spending,

only deficit spending adds ADDITIONAL dollars to the Private Sector,

only deficit spending increases Net Financial Assets.

This is why only the newly-created dollars of deficit spending has an inflationary bias.

Same as surplus spending,

there is no financial constraint to deficit spending

but there is still a political constraint,

which is, that it is still US law that federal deficit spending must be “funded” by selling Treasury bonds.

Again, this added federal ‘debt’ is not an actual debt like a household,

just a traditional formality to maintain the Constitutionally-enshrined ‘Power Of The Purse’ of Congress.

Same as the separate Treasury Bond pot that is connected to the bathtub pot in the JD Alt diagram,

when you buy a Treasury bond those dollars do not leave the Private Sector,

those dollars simply take a different form.

A crucial distinction with deficit spending is that no dollars are ‘destroyed’,

none are debited out from the Private Sector.

Unlike taxation,

nothing goes down the drain when Treasury bonds are paid for.

Meanwhile the hand of Congress is opening the faucet

and the newly-created deficit-spending dollars being added to the Private sector

are net additions of dollars that adds Net Financial Assets to the banking system.

Same as taxes,

the financing function of Treasury bonds takes the back seat to many more important federal gov’t operations,

like controlling inflation, defending the target overnight rate set by the Fed,

and providing a liquid, risk-free, safe haven for global savings desires.

No matter whether you are talking about “Now” or “After”,

it’s still a charade,

an outdated formality,

a bygone idiosyncrasy,

that the federal gov’t has to ‘borrow’ money to fund deficit spending like a household



P.S. What’s also meant by PURE MMT?

A PURE MMTer plays the cards that are dealt,

and never bothers with ‘feelings’ or ‘hunches’.

To formulate opinion,

rather than relying on anecdotal ‘stories’

or gloom & doom ‘narratives’,

a PURE MMTer uses FACTS, MATH, and DATA.

WHATEVER specific proposal,

from whichever side of the political aisle,

for a policy initiative that you believe

would serve the common good

for the public purpose,

if that gets approved,

if that gets passed and signed in law,

that’s fine.


a Pure MMTer avoids having a ‘bias’

towards an ideological proposal promising ‘economic’ and/or ‘social’ justice,

especially a POPULAR one,

disguised in MMT wrappings;

because a Pure MMTer,

just like the person

who is more a parent than a friend to their children,

understands the sober reality,

that sometimes

an UNPOPULAR measure

needs to be implemented

for the sake

of the greater good.