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August 11 - October 16, 2019
MMT would go through three phases: First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.
Three phrases of acceptance
logically money cannot be a commodity – like gold; rather, it must be an IOU.
IOU, "I owe you"
It seems to make sense to argue that governments need “revenue” from household tax payments before they can spend. In fact, the reality is precisely the opposite: households need the government to spend before they can pay taxes!
Main. Gov spends before private pays
the operational purpose of such bond sales is to help the central bank hit its overnight interest rate target. Sales of bonds are used to remove excess reserves that would place downward pressure on overnight rates. Bond purchases by the central bank add reserves to the banking system, preventing overnight rates from rising.
Function of bonds
taxes create a demand for the government’s own currency so that the government can spend (or lend) the currency.
Tax drives money/currency
“money pyramid”, with the state’s own currency at the top. Bank “money” (notes and deposits) are below the state’s “money” (reserves and currency). We can think of other financial institution liabilities as below “bank money” in the pyramid, often payable in bank deposits. Lower still we find the liabilities of nonfinancial institutions. And at the bottom we might find the IOUs of households – again normally payable in the obligations of financial institutions.
Pyramid of money
The most “unsound” budgetary policy is mindless pursuit of something called a “balanced budget” – meaning one in which tax “revenues” exactly match government spending over a stated period (usually a year).
Main.the meaninglessness of balanced budget for tax and spending
the government’s debt (including currency, bank reserves, and treasury bonds) is the nongovernment’s financial wealth. Government deficits equal nongovernment’s surpluses, generating income that can be saved. And that savings is in the safest form – in claims on a sovereign government that cannot become insolvent in its own currency, that cannot be forced to miss any payments when they come due.
Main. Gov account. Non gov account. And foreign account
What is necessary to understand at this point is that the net financial assets held by the private sector are exactly equal to the net financial liabilities issued by the government in our two-sector example.
Assets for one is the liability for the other
it is impossible for both the public sector and the private sector to run surpluses.
No surplus for everybody
the business sector goes into debt in order to expand capacity to make profits. The household sector goes into debt to buy houses and consumer products;
goes in debt to own properties or products
a budget surplus is the same thing as a saving flow and leads to net accumulation of financial assets (an increase in net financial wealth). By the same token, a budget deficit reduces net financial wealth. The sector that runs a deficit must either run down its financial assets that had been accumulated in previous years (when surpluses were run) or must issue new IOUs to offset its deficits.
budget surplus and budget deficit
If you decide you do not want to hold your savings in the form of a checking deposit, you can write a check to purchase, say, a painting, an antique car, a stamp collection, real estate, a machine, or even a business firm. You convert a financial asset into a real asset. However, the seller has made the opposite transaction and now holds the financial asset.
Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0
economic phenomena are subject to interdependence, hysteresis, cumulative causation, and “free will” influenced by expectations.
economic phenomena
causation tends to run from individual deficit spending to accumulation of financial wealth, and from debt to financial wealth.
we can also conclude that causation tends to run from deficit spending to saving since the deficit spending unit provides the financial wealth to accumulate by units with surpluses.
Aggregate spending creates aggregate income.
main
A society cannot decide to have more income, but it can decide to spend more. Further, all spending must be received by someone, somewhere, as income.
Main
we must reverse causation between spending and income when we turn to the aggregate; while at the individual level, income causes spending, at the aggregate level, spending causes income.
Deficits in one sector create the surpluses of another.
Main
While we recognize that no sector can run a deficit unless another wants to run a surplus, this is not usually a problem because there is a propensity to net save financial assets. That is to say, there is a desire to accumulate financial wealth – which by definition is somebody’s liability.
Interesting
If we added a foreign sector, we would need another faucet (exports) and drain (imports), and then our full identity would be: S ≡ (G – T) + I + NX (where NX is net exports). This is our aggregate saving identity.
Identity
the three balances must balance to zero. This implies it is impossible to change one of the balances without having a change in at least one other.
Main
at the aggregate level, spending (mostly) determines income. A sector can spend more than its income, but that means another spends less.
Main
It makes most sense to promote spending that will utilize domestic resources close to capacity, and then let sectoral balances fall where they may.
what if everyone did the same thing as Mary – would the reduction of the consumption of hamburgers raise aggregate (national) saving (and financial wealth)? The answer is that it will not. Why not? Because the fast-food chains will not sell as many hamburgers, they will begin to lay off workers and reduce orders for bread, meat, catsup, pickles, and so on. All those workers who lose their jobs will have lower incomes and will have to reduce their own saving.
Main.chain
The final point to make here is that much of the provisioning process takes place outside markets and does not directly involve money.
owe you, you owe me, let’s cancel each other’s debt”. Private sector “inside” financial wealth nets to zero. Only the real asset – the car – remains.
Street’s excesses led to too much private sector debt that crashed the economy and reduced government tax revenues. This caused a tremendous increase of federal government deficits.
Why1
the downturn hurt state and local government revenue. Hence those governments responded by cutting spending, laying off workers, and searching for revenue.
Why2
Federal, state, and local government deficits began to fall with recovery, ending the perfect fiscal storm that had destroyed tax revenues. While the recovery was weak – creating few jobs in the first five years – it was strong enough to gradually reduce government deficits. As of 2014, job creation had picked up its pace.
Why3
Me: Asset = $5 coconuts; Liability = My $1 IOU; my assets exceed my liabilities by $4, which is my net worth until I eat the coconuts. You: Asset = $4 fish + My $1 IOU; Liability = 0; so your net worth is $5 until you eat the fish.
calculation
the financial deficit of one sector (me) equals the surplus of the other (you). And that once we net out the financials, we are left with the real stuff (fish and coconuts). No magic involved.
Main
it is because anyone with tax obligations can use currency to eliminate these liabilities that government currency is in demand, and thus can be used in purchases or in payment of private obligations.
Currency
neither reserves of precious metals (or foreign currencies) nor legal tender laws are necessary to ensure acceptance of the government’s currency. All that is required is imposition of a tax liability to be paid in the government’s currency. It is the tax liability (or other obligatory payments) that stands behind the curtain.
Tax liability
We concluded that “taxes drive money”: if a sovereign has the power to impose and enforce a tax liability, it can ensure a demand for its currency.
The best kind of payment to be used to drive a currency is an obligatory one – one that must be made in order to stay out of prison, or to avoid death by thirst.
The government needs a tax not to produce revenue but to produce sales of labor, resources, and output for currency.
Government can always “afford” to spend more (in the sense that it can issue more currency), but if it cannot enforce and collect taxes it will not find sufficient willingness to accept its domestic currency in sales to government.
If desired, the worker can cash the check at her bank, receiving the government’s currency – again an IOU, but this time a debt of the government. The central bank will debit reserves of the employer’s bank, by an amount equal to the cashed check.
Wage income that is not used for consumption purchases represents a flow of saving, accumulated as a stock of wealth.
FloW and stock
So when taxes are paid, the taxpayer’s tax liability to the government is eliminated. At the same time, the government’s IOU that takes the form of bank reserves is also eliminated.
At the same time, the government’s asset (the tax liability owed by the worker) is eliminated when taxes are paid, and the government’s liability (the reserves held by private banks) is also eliminated.
in the game of life every “point” that is awarded to one player is deducted from the “score” of another – either reducing the payer’s assets or increasing her liabilities.
Concept
all money “tokens” are records of debt.
To sum up: real assets can get monetized when someone goes into debt.
How does someone buy the gold from me? In exactly the same manner as the home mortgage example discussed above: the buyer goes to a bank, proffers an IOU, gets a credit to a demand deposit, writes a check, and transfers the demand deposit to gold seller.
In other words, the gold cannot become financial wealth unless there is a debtor to a bank, allowing the gold to be monetized through a sale.
If I sell gold to the government, it credits my demand deposit and credits my bank’s reserves.
