Why ‘The Magic Money Tree’?

We are all used to hearing politicians say ‘There’s no such thing as a magic money tree’, to explain why they can’t afford (for example) to improve public services.

But there is such a thing as a magic money tree. And what’s more, every sovereign government has one!

Modern Money Theory (MMT) is a method of analysis that shows how that magic money tree works. Conveniently, it has same the acronym as Magic Money Tree. Hence the title of my book.

Incidentally, although MMT is not yet wholeheartedly embraced by ‘classical’ economists it has some very eminent advocates, including Stephanie Kelton, who explains it in her new book, The Deficit Myth—also highly recommended.

The idea of a magic money tree is particularly apt in relation to a sovereign government’s economic and fiscal policies, since MMT makes it clear that there are no financial constraints on government spending. A sovereign government can always spend what it needs without running out of money, and without borrowing or taxing to ‘pay for it’. Just as if they really had a magic money tree.

When you understand how money really works you realise that although there are important constraints on government spending, they are never financial. Essentially the constraints are just the limits on sustainable non-inflationary productive capacity. These constraints are serious, even critical, but the government does itself—and us no favours by focusing on the totally irrelevant question of the (so-called) ‘deficit’.