Friday, 20 December 2013

An irritation with MMT'ers

The sectoral balance equation gives the *impression* that if the government runs a surplus of $X during one year then the money supply available to the private sector to use must be whatever it was at the start of the year minus $X.

But this is not true. Fractional reserve banking allows the private sector to increase or decrease the money supply independently of whatever the government does. So the *contribution* of the government's policy to the money supply may indeed be -X, but the size of the private sector's money supply could have changed by any amount.

Maybe an MMT'er would admit this if probed, but why don't they say it in the first place instead of misleading everyone?


After some back and forth on Twitter, and being directed to read this, I'd like to say some more...

A huge component of the current economic crisis is the size of the money supply and the amount of private debt (the two are closely related). But the debt is not debt *to* the government sector. It is debt to others within the private sector (I'll label this as internal borrowing). Note that MMT'ers favourite quantity, the "net financial assets" does not measure the private sector's internal borrowing, because it nets out as zero.

Having a conversation about what to do about the economic crisis and debts without talking about the private sector's internal debt is just leaving a huge elephant in the room. Where is an MMT article about the that? Where is the article "MMT'ers use sectoral balance equation to deduce policy to control internal private debt"?


  1. You don't seem to have tried very hard to comprehend the MMT argument. I'll try to summarize.

    If there is a desire in the private sector to accumulate assets (net save), this desire can be supplied for a while by a growth in private debt. But private debtors face a solvency constraint, and if they keep increasing their liabilities in order to supply the desire for assets, you get a crash when the debts can no longer be serviced out of real income.

    If, by contrast, the desire for net savings is provided by the government then there is no risk of insolvency.

    So the MMT line is that when there is a desire in the private sector to accumulate financial assets which outruns the ability of the private sector to increase liabilities long-term, the only way to avoid a future crash is for the government to supply the savings desires of the private sector. It does this by continually increasing its own liabilities, i.e., running a permanent deficit.

    So that's what the sectoral balance equation has to do with the problem of unsustainable private debt acceleration.

    It's absurd to suggest that MMTers don't think about the dynamics of private debt bubbles. Randall Wray is a student of Hyman Minsky!

    Also, the way to control internal private debt is to reform the banking system. Are MMTers short on ideas about that? Try:

    1. Now I'm really confused. In your comment in response to my earlier blog post "MMT and The Problem with Government Bonds", you said "I can't think of a single MMT proponent who doesn't say that the government should not only NOT pay interest on bonds, it shouldn't issue them at all.", and now you are telling me that "the only way to avoid a future crash is for the government to supply the savings desires of the private sector. It does this by continually increasing its own liabilities" (which presumably means issuing bonds).

    2. The causality is this.

      Government spends. If everybody spends the money they earn then the government will get back everything that it spends - to the penny. Each time, every time regardless of the quantity of money it spends. That is a simple mathematical truth for any positive tax rate.

      The only thing that stops that happening immediately in any given accounting period is that people don't spend everything they earn! That $100 in your wallet is savings. By holding it there you are denying somebody else an income.

      The transitive nature of the banking system means that any government spending that is saved ends up as reserves at the central bank largely in the accounts of the commercial banks.

      The Treasury half of the government (bearing in mind that the central bank is part of government too) then offers savings bonds which it swaps for the reserves held at the central bank.

      It doesn't have to do that. The central bank could easily cut out the middleman and just offer an overdraft to the Treasury to the same level as the reserves saved in the accounts of commercial banks.

      Bonds are a political choice. Paying interest on bonds is a political choice.

      Reserves are savings like bonds with the interest paid by the central bank rather than the Treasury.

  2. The government can easily supply savings to the private sector without issuing bonds: it just needs to deficit spend and then leave the spending as excess reserve balances with the banks rather than selling bonds to offset the spending. These reserves balances are the liabilities being increased rather than government bonds.

    Operationally, of course, there is little difference between reserve balances and bonds besides the term structure and yield. Deciding that is a matter of monetary policy.

    Raising the price of money doesn't seem to be the most effective way of preventing private debt bubbles. It's much better to regulate banks on the assets side than on the liabilities side - that's what all the links I posted explain.

  3. From Bill Mitchell, one of the main founders of MMT: "Too much private credit undermines growth and increases inequality"

    I think this article addresses your main issue directly and clearly:

    "So if there is a desire to reign in the overexpansion of private credit (particularly in the case of household debt) then the national accounting logic that Modern Monetary Theory (MMT) demonstrates will lead to the conclusion that a growth strategy based on fiscal austerity will be damaging to prosperity.

    If private spending is to be moderated as credit is reduced, then the public sector will have to take up the spending slack.

    It isn’t rocket science. But Groupthink oblivion is just that!"