Saturday, 18 November 2017

MMT an intellectual slight of hand

Imagine you pour some water into a bucket at a rate of one litre per minute... a minute goes by... how much more water is there in the bucket compared to when you started? One litre more? I hear you say. Wrong! I forgot to mention that there was a hole in the bucket which leaked water at half a litre per minute. What kind of dirty trick is that! I hear you say... well its the same kind of trick used by MMT'ers when they tell you about their beloved "sectoral balances" graph:

The graph seems very compelling - if the government spend $1 billion more then they take in taxes then the private sector has 1 billion more dollars to use... right?... wrong! (hole in the bucket coming up)... the thing they forget to mention is that the private sector can make and destroy money independently of the government via the magic of fractional reserve banking. So the amount of money the private sector has to play with could have gone up by much more or much less than $1 billion. It could even have shrunk. Many people will assume that the vertical axes on the graph corresponds to "money", but it doesn't... instead it corresponds to a rather odd concept of "financial assets" which is not the same thing at all.

It may well be that if you read some MMT books in detail that the precise truth of what's going on in the sectoral balances graph is revealed, but I can't help feeling that the graph is being over-sold.

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