Here is the model:
- The central bank is part of the government
- All government spending is from newly made money (electronic or paper)
- All money from taxes is destroyed (electronic or paper)
- All money collected from government bond sales is destroyed
- All government bonds are paid off with newly made money
If the government is spending more than it is getting from taxes, and it is not selling bonds, then the money supply will go up.
In this model the government can make as much money as it wants, so the only reason for taxes and bond sales is to control inflation. Since money from taxes is destroyed, taxes reduce the money supply. Bond sales temporarily reduce the money supply. As far as the effect on the money supply, a bond sale is equal to a tax and then later a stimulus check.
In this model it is easy to explain hyperinflation. If the total value of the bonds is multiples of the money supply, and government spending is twice taxes, then it will be forced to make lots of money if people stop buying bonds. The money supply will increase because spending is twice taxes, so creation is twice destruction, and because money is created to pay off bonds. If people get worried that in the future the value of money will be less then they don't want to hold bonds. However, the faster people get out of bonds the faster the government makes new money to pay off bonds, so once this process starts it is a positive feedback loop that feeds on itself and gets out of control. If over a year or two people get out of bonds then the money supply will increase very rapidly and you get hyperinflation.
Another way to think about it is that bond sales temporarily control inflation, but if too many bonds are paid off at the same time it can result in hyperinflation.
Increasing taxes to destroy more money works to fight normal inflation; however, taxes are not up to the job of fighting the rapid death spiral of hyperinflation. The total debt can be many times the amount of taxes collected in one year, so this rapid monetization of debt is far greater than increasing taxes can cope with.
This CMMT model is just a slight correction to MMT or Modern Monetary Theory. While they have #1,#2,#3 above they are not consistent in how they treat bonds and do not have #4,#5. They say all government spending is from new money but then also have the government spending money from bonds. They say all spending is from new money but also say new money is not spent to pay off bonds. These errors make standard MMT far more complicated and not match reality. In particular, hyperinflation really happens but in MMT there is no reason for it. They have to say that the cause of the hyperinflation of money is outside their theory of money. This is just silly. With this little fix hyperinflation is easily explained. So CMMT is a big improvement over MMT. CMMT also stands for Corrected Modern Monetary Theory. :-)
An existing country, like the USA, could do everything it does exactly the same as it currently does and just with changes in accounting it could be like this model. Recycling tax money to be part of the money spent, instead of printing all new money, should be viewed as just a slight cost saving measure and not fundamentally changing things.
In the current system the US central bank pays its profits back to the government. So interest paid on government bonds held by the central bank mostly comes back to the government. So accounting for these as if they did not exist would not be far off. We can think of the government as just printing and spending money, instead of borrowing from the central bank, and not be far off. In reality governments never seem to reduce their total debt. We can imagine a black box around the central bank and government and ignore any accounting that goes on inside this box (social security trust fund, money owed by the government to the central bank, etc) as it does not change things in the real world.
This model is just a different way of thinking about what is really going on. The government can print money, so it really could burn all money collected from taxes and bond sales. We can match the current system by just saying that money inside the central bank and government is not part of the money supply. In fact, the definitions for M1, M2, and M3 do not include bank reserves or excess reserves, so this is already matching reality. Government spending adds to the money supply and bond sales and taxes reduce the money supply. With this definition we can save a lot of money burning and printing.
Note that in this model there is no difference between a bank keeping money at the central bank as excess reserves and buying a bond from the government, since the government and central bank are lumped together. In both cases the money is removed from the money supply and earns interest for the bank. In this model increasing excess reserves is not increasing the money supply. This model fits with the low inflation seen over the last few years even as base money in the form of excess reserves has shot up.
In real life, when things get desperate enough that hyperinflation is a real risk, the independence of the central bank always vanishes. If the government is spending twice what it gets in taxes and needs the central bank to buy government bonds and fund the deficit it always gets it to do so. So ignoring the official separation of central bank and government is reasonable when looking at hyperinflation.
This simple model makes it easier to think about some economic issues and it is reasonable to think about existing countries in these terms.