Spending Money Into Existence
An inversion of conventional wisdom
Modern Monetary Theory and its Critics by Edward Fullbrook, Jamie Morgan MMT has been gaining credibility a lot lately though it runs contrary to mainstream popular economics. This is not a problem for me. Mainstream economics doesn't exactly have a good track record.
Money is funny stuff.
I'm struggling to understand how it works so I may not have it right yet :-)
One way money is created is when banks lend money.
There are complications like reserve requirements but basically the bank just increases the borrower's bank balance on the borrower's promise to repay.
Commercial banks are required to have a positive balance at the end of each day and if the balance the bank must borrow from the central bank to make up the difference.
The central bank has no such requirement and the amount it lends out is an increase in the money supply.
This is very different from lend/borrow among individuals where the transaction balances and the money supply stays the same.
This difference between a sovereign state and an individual is what mainstream economics (especially pundits) get wrong.
A sovereign state cannot run out of money to fulfill its obligations because it can make as much money as it wants.
The thing that must be done is to keep the money supply balanced so there is sufficient money to do the transactions of the economy but not so much as to cause inflation.
So a sovereign state can do this by creating money to fulfill needs when there is not enough and removing money from the system via taxation when there is too much.
Thus a government deficit is not a charge on future generations as is said.
It's actually an injection of cash into an economy that enables new investment and development.
And taxes are not what finances government. Taxes remove excess money from the system.
And we see what happens when taxes aren't adequate to the need.
We get this absurd situation where most of the money is in the hands of very few people.
In the economic response to the pandemic governments started increasing the money supply by cutting out the middleman and sending cheques to citizens directly. They didn't borrow that money as far as I know.
The government does borrow money of course by selling bonds.
MMT says: "the issuing of government bonds is best understood as an operation to offset government spending rather than a requirement to finance it."
It's complicated I know. Check out
https://en.wikipedia.org/wiki/Modern_Monetary_Theory
MMT amounts to an inversion of economic conventional thinking.
I like the economist Paul Krugman's thinking a lot. He has a Nobel Prize and writes a couple of times a week in the NYTimes.
He has written critically of MMT but I don't think he gets the idea - his critique is a technical argument about inflation as if the point of MMT was to control inflation.
It's not.
The point of MMT is to find a reasonable way of understanding money and its role in an economy.
What do you think?
I present regular philosophy discussions in a virtual reality called Second Life.
I set a topic and people come as avatars and sit around a virtual table to discuss it.
Each week I write a short essay to set the topic.
I show a selection of them here.