Money for nothing?

Whenever I write anything about public expenditure and taxation, I’m likely to get someone commenting that Modern Monetary Theory has shown that a government with its own currency does not need taxation to finance public expenditure. I’ve tried a couple of responses to this, but now I think I can explain better why this argument is
(a) wrong in terms of (what I understand to be) the central claims of MMT
(b) regressive in terms of taxation policy
(c) politically pernicious

Starting at the beginning, as I read the central argument of MMT on fiscal policy, it is based on the idea of functional finance. The idea is that governments should first decide on the appropriate level of public expenditure, that is on the allocation of resources between public and private consumption and investment. Next, they should consider the requirements of macroeconomic policy to determine appropriate levels of money creation and issue of public debt. Finally, they should set the desired level of taxation as residual, to balance the sum of total income (seignorage+net debt+ tax revenue) and total expenditure.

That’s one way of looking at things, and useful in a lot of ways. But now consider what happens to this story if governments decide that an increase in public expenditure is warranted. Assuming that levels of money creation and debt issue were already set appropriately in terms of macroeconomic policy, there is no obvious reason for them to change. But then the identity between income and expenditure implies that the increase in public expenditure must translate, dollar for dollar into an increase in tax revenue. Perhaps there is an explanation for why an increase in desired public spending would change the settings of macro policy in the direction of more money creation, but if so, I haven’t seen it. If the increase in public expenditure is only temporary (on a war, for example), it might make sense to run up public debt. But because this debt has to be serviced, it implies the need for lower spending or higher taxes in the future.

To turn this around, suppose you think, as most MMTers do, that the stance of macroeconomic policy is almost invariably too contractionary. Then, you would advocate more money creation and larger deficits. That implies lower taxation but, on the functional finance view, no increase in public expenditure. And, again, if you don’t accept that inference and say that higher public expenditure should be part of the fiscal policy mix that in turn implies that the level of taxes must be correspondingly higher than if public expenditure did not increase.

Turning to regressiveness, if the economy is fully employed (more precisely, if an expansion in public consumption and investment will take up resources that would others be used for private consumption and purposes) then any expansion of the money supply is effectively an inflationary tax on money balances – it must be, or else no resources would be transferred from private to public use. Considered as a tax, inflation is similar to a consumption tax (since money balances are used to provide liquidity for consumption) but more regressive, since high income households are likely to hold less of their assets in cash or near-cash forms. Either way, inflation is regressive when compared to an income tax with a progressive scale, or even a threshold.

Finally, the claim that government expenditure does not require taxation is politically pernicious. Even if it is true in some limited cases (I don’t think it is), the way it is made leads people to dodge the issue that taxation is the price of civilisation. One way or another we have to pay for what we consume, and it’s silly to try and dodge this. It’s particularly damaging to the extent that MMT is associated with the left. The last thing the left needs is to be portrayed as offering a deceptive ‘free lunch’, which is exactly what the misreading of MMT discussed here would seem to be.

92 thoughts on “Money for nothing?

  1. Bravo, I agree. I’m pleased to see you stay firm on this issue. MMT is a seductive set of smoke and mirror dressed up as insight.

  2. Thanks for that link, rog. I think the most relevant extract is

    None of this is to say that budget deficits don’t matter at all. The fundamental point that the original developers of MMT would make—myself or Randall Wray or Warren Mosler— is that the risk of budget deficits is not insolvency but inflation. In saying that, however, we would also stress that inflation is the risk of any kind of overspending, whether investment, consumption, export, or government spending. Any component of aggregate demand could push the economy to that point where we get inflation. Excessive government spending is not always to blame.

    In sum, we’re quite categorical that we believe that budget deficits can be excessive and can be deficient as well. Deficits can be too large, just as they can be too small, and the aim of government is to make sure that they’re just right to employ all available productive capacity.

    which seems pretty much right to me, and entirely consistent with what I’ve written in the post.

  3. That all seems perfectly reasonable in normal times. How does the picture change in a liquidity trap though? There it seems that if quantitative easing is barely inflationary at all, there would be no downside to financing the budget entirely through seignorage. Since no one seems to be advocating this in the US, I suppose I must be missing something, but what?

  4. This stuff is mind-bending – of course the government can print as much money as it likes, but since money is an abstraction for an amount of economic resource/fundamental value that is growing at a rate of – I’m taking a bit of a shot in the dark here, because of course there’s a whole lot of economic activity that isn’t actually genuinely productive – perhaps 0-3% per annum, surely any growth in government revenue as a proportion of total revenue comes tied to a debasement of the currency, making taxation a more attractive option, especially in the longer term?

  5. @Sam
    I thought I’d mentioned that, but it looks like I didn’t. I don’t think you are missing anything.

    Quantitative expansion essentially amounts to financing the budget deficit through seignorage, since the Fed is buying up the bonds used to finance the deficit. But the assumption is that once we are out of the liquidity trap, the monetary expansion will have to be reversed. OTOH, Japan has been in that situation for a v long time.

  6. John,

    Now that you have evidently read a recent article from a proponent of MMT entailing what they actually think MMT involves, which elements of what that proponent said did you not agree with???

    I’m not sure that your definition of what MMT entails would sit comfortably with many of its proponents Mosler, Wray, Mitchell etc…

    Bill Mitchell’s article in the Harvard International Review all seemed reasonably sensible to me, and wouldn’t sit too far out of place with somebody who held onto broadly old neo-classical synthesis/ IS-LM type views of how the macroeconomy operates in the short-run.

    Like Karl Smith for instance:

    Anyways, my two cents for whats its worth.

  7. @John Quiggin
    OK, I see why the expansion would need to stop once out of the liquidity trap, but why must we actually reverse it? Surely if we didn’t, all that would happen would be a one-off jump in the price level, and no long term inflation? That doesn’t sound too harmful, and in the meantime the government really could have enjoyed free money.

    N.B. I understand general concerns about entrenching inflationary expectations. My thinking is that with a credible central bank explaining the one-off nature of its liquidity-trap policies, the economy would expect a quick return to normal discipline. There’s no reason I can see why the economy should be more cynical about central bank credibility here than it is after a spell of low interest rates under normal conditions.

  8. Any civilized society would establish a maximum income, after which taxation would return the kleptocrats’ gelt to the society from which it was looted. No-one ‘works’ (in any meaning of the word)to a value tens of times (let alone hundreds or thousands of times) that of the average wage slave. These salaries and bonuses are pure larceny, but camouflaged by all the myriad habits, institutions and practises of capitalist parasitism and propaganda brainwashing. When millions in the USA work long and hard for such pathetic wages that they still live in dire poverty, and a tiny coterie of bankster foot-pads misappropriate hundreds of millions each per annum, you are witnessing human perfidy, based on greed, in its starkest form. Moreover accumulations of wealth must be redistributed, to raise up the general level, and attack the immense political power to corrupt and brutalise society that the money power wields, without conscience and no higher morality than the manic pursuit of ‘More’. Humanity has been held back for centuries from establishing a humane and sustainable global order by the predations of that insatiable incubus, the capitalist parasite class, and this failure has produced, as it always was bound to do, a terminal crisis of global human sustainability.

  9. Is it true that inflation is more regressive than consumption taxes or income taxes? While it’s probably true that most wealthy people hold less of their financial assets in cash, their financial assets would be greater multiple of their income than poorer people. In general I thought that periods of inflation have been relatively good for wage earners and bad for those who live of investment income.

  10. Given the modern debates about money and economics, given the wide disparity of opinions offered by economists and given a recent event (the Global Financial Crisis) which orthodox economists failed to predict and have still failed to explain adequately, one would have to draw the following (admittedly overlapping) conclusions;

    1. All or most economists do not know what they are talking about.
    2. All or most economists do not know what money is, nor how it is created, nor how it behaves.
    3. All or most economists do not know what an economy is, nor how it is created, nor how it behaves, nor that it is in fact a political economy and not just an economy.

    When viewing the schools of economics, I find myself in the same position as when I view the religions. Each school (or religion) is different enough from the others in key tenets and dogmas for one to be able to say the following. If one school (or religion) is correct then all the others are incorrect. In other words, the truth claims are mutually exclusive. In same cases, this judgement might be modified by a recognition that differences in terminology, definitions and emphases might be a factor. Generally speaking however, the bitter debates about terminology, definitions and conclusions convince us that the proponents themselves believe that their views amount to mutually exclusive truth claims.

    Since each of the major schools has a minority of adherents compared to the total adherents of all schools, and since all major schools adhere to mutually exclusive truth claims then the majority of schools and of adherents must be wrong. The only question needing specific determination in this sense is whether everyone is wrong or just the majority.

    Frankly, I am losing patience with all debates where truth claims cannot be objectively and empirically investigated or where truth claims can be objectively and empirically investigated but this is not done or, if done, the results are ignored by the majority who prefer dogma to real investigation.

    Can anyone explain to me why I should take any further interest in economics? I will continue to consider this question for myself as I am still open on the issue but any answers are welcome. I will come back to the issue of Prof. JQ’s disagreement with MMT. I honestly suspect to some extent that the tax argument (for example) is an argument about whether or not
    0 = 1 – 1 or 0 = -1 + 1.

  11. @Mulga Mumblebrain

    I must add that I completely agree with Mulga and that his comment highlights that the debate is and must be about political economy and not just economy. In fact there is no such thing as an economy. There are only political economies.

  12. I don’t think you are getting MMT right. Taxation plays a very important role in MMT, none of the MMTers would argue that taxes are unnecessary. In MMT, governments (that issue their own currency) spend money into existence, then collect taxes to control aggregate demand. The appropriate level of taxation is not determined by the level of government spending, but by whether or not the economy’s resources are fully employed. Unemployment (or low cap util, or some other metric) indicates that taxation, relative to spending, is too high. Demand-pull inflation indicates that taxation, relative to spending, is too low. So in MMT, the government still collects taxes (in fact taxes play a critical role); but they do not need to collect taxes to finance their spending.

    Next, in MMT, governments issue debt to control interest rates. Like taxes, government debt is not operationally required to finance deficit spending (although legally it may be), but that does not mean that debt issuance is unnecessary; the appropriate level of debt issuance is determined by the interest rate target (at all maturities), not by the fiscal budget position.

    I agree with your point about inflation during a period of full employment being a regressive tax, but it does not in any way undercut the MMT position on taxation. In MMT, demand-pull inflation indicates taxation is too low, relative to spending. So if the government increased spending and inflation resulted, the appropriate policy response from an MMT point of view would be to raise taxes, not to finance the increased spending but to reign in AD.

    Finally, you suggest that the idea that taxes dont finance expenditures is dangerous politically. Whether it is politically pernicious or it isn’t, what does that have to do with it being true or not? And, I would argue that it is not a dangerous idea (in fact, it is an idea with incredibly positive implications for macroeconomic stability) because under MMT you still measure policy success in terms of real economy outcomes, namely unemployment and inflation.

  13. “I don’t think you are getting MMT right. Taxation plays a very important role in MMT, none of the MMTers would argue that taxes are unnecessary.”

    I’m not saying they do, if by MMTers you mean Bill Mitchell, Randall Wray and so on. I’m saying, from personal experience, that people who have read, and misinterpreted MMT say this all the time.

  14. Dear John,

    Happy to see you making further effort to understand MMT. Please stick to Fulwiller, Kelton (Bell), Mitchell, Mosler, Wray, in your reading.

    From my lay-reader understanding, in an attempt to contrast MMT with your post:

    1) A monetarily sovereign govt. that issues its own currency is not revenue constrained. Govt. spending creates new NFA’s. Public ‘debt’ is just numbers on a balance sheet and match $ – $ NFA’s of the non-govt sector. Servicing ‘debt’ just more entries.

    2) Taxing destroys private sector NFA’s. Bond sales borrow back what Govt. has already spent into existence. Issuing debt maintains the target interest rate, giving the ‘appearance’ that it funds govt. spending. There are other ways of maintaining the rate without ‘corporate welfare’.

    3) It is normal for govt. to maintain a stock of debt: (G-T) + (I-S) + (X-M) = 0 if the private sector is to have a surplus not reliant on exports.

    4) Taxes function to regulate aggregate demand, not to raise revenue per se.

    5) Central banks cannot control the money supply, only the price of money. Central to MMT is the concept of horizontal money (bank loans meet with matching liabilities that sum to zero) and vertical money (creation ~ destruction of new NFA’s by govt. spending ~ taxation, bond sales).

    6) Idea I guess, is for govt. not to spend beyond the productive capacity of the economy, but to spend to pick up any slack unwanted by the private sector. Resource allocation between govt and non-govt keeps this economy wide overview whilst selectively targeting taxation and spending goals to achieve what the society considers to be the best mix. Spending and taxing are independent variables in that sense.

    ‘Money for Nothing’ in the sense that the govt. is the issuer of the currency and not the user of the currency is correct!

    Please forgive my simplistic rendition. In tandem with this and your next post, Michael Hudson placed some flesh on the OWS bone of contention recently: Simon Patten on Public Infrastructure and Economic Rent Capture

    Cheers …


  15. Good explication Cdb – if the spending does generate inflations, you could raise taxes under MMT or you could reduce government spending.

  16. I don’t think this is a particularly fair treatment of MMT, but as you say, there is a big difference between “pop-MMT” and the Wray et al variation, and perhaps you are critiquing the former.

    But I do want to take issue with this: “Considered as a tax, inflation is similar to a consumption tax (since money balances are used to provide liquidity for consumption) but more regressive, since high income households are likely to hold less of their assets in cash or near-cash forms.”

    That might be right in a narrow-sense, but it is wrong in a deep sense. The transfer of resources from households to governments associated with an unanticipated increase in inflation may indeed be regressive. But an unanticipated increase in inflation provokes other transfers, especially a transfer between debtors and creditors. The vast majority of financial savings is held by high income families, and the vast majority of that is held in the form of fixed-income claims. The overall effect of an unanticipated inflation is “progressive” in wealth distribution terms, whether or not it is fair or a good idea.

    To the degree that a fiscal regime normalizes high inflation as its means of extracting transfers of resources from the private sector to the state (so we are no longer talking about unanticipated inflation), the progressivity of the scheme depends upon the structure of interest rates. If real interest rates on government bonds are sufficiently low (not necessarily negative), then the bulk of the transfer is from savers of financial assets. This is sometimes referred to as “financial repression”, but that’s unduly pejorative. No law of nature guarantees low-risk savers any particular level of real return in the marketplace, and both real economic outcomes or political choices can mean that savers unwilling to bear investment risk must pay for the privilege of carrying perishable wealth into the future rather than be paid for it. Broadly, if the government offers real rates less than the growth rate of real GDP, and if market participants accept those rates in exchange for the unique safety of government debt, then the government is able to finance itself by selling the service of value storage. Sustaining the value of that service might entail restricting access to or disadvantaging alternatives value stores (thus “financial repression”), but it might not, as is the case right now in the US where investors are gladly purchasing 30 year debt the real interest rate on which is thought to be far less than the longer term growth rate.

    The question of when and whether inflation is “progressive” has nuance, and while it can sometimes be regressive, your blanket characterization of it as such is wrong. I agree quite strongly with your broader point that explicit taxation is a good way to finance government for deeper reasons, that we want to pay for what we value and understand that public goods have costs.

    But partially financing government by charging for its unique ability to provide a safe value store, by e.g. offering low or negative real rates to non-investing savers, strikes me as an option that is quite “progressive” and worthy of consideration.

  17. .Turning to regressiveness, if the economy is fully employed (more precisely, if an expansion in public consumption and investment will take up resources that would others be used for private consumption and purposes) then any expansion of the money supply is effectively an inflationary tax on money balances

    That’s when you run up the trade deficit, why limit yourself to potential GDP? :o)

  18. Thank you Professor Quiggin for that coherent layout of your position.

    My understanding of the MMT policy position (as opposed to the Functional Finance model of the economy) is that the point of disagreement arises at your paragraph 5, “if the economy is fully employed”. Most MMT people, in particular Bill Mitchell, argue that the economy is not fully employed – that the idea of a NAIRU is an ideological construct invented to justify running higher unemployment figures which serve to discipline the working class. Certainly, as you have pointed out, up until the early 1970s when Australia had a mandated unemployment rate of 2%, the wage share of gross national income was steady or slowly increasing; since monetary and fiscal policy shifted to solely targetting inflation and abandoned the idea of a phillips curve, the share of capital has steadily expanded and wages steadily declined, which has led us straight into the current crisis of insufficient demand, mass poverty and a bloated financial sector.

    MMT policy argues that a full employment program funded by a permanent shift upwards in government expenditure, financed by seigneurage, would not be inflationary up to the point where it shifted our current unemployment rate (5% here, god knows how high in Europe, the US etc when you consider all the underemployed and abandoned and jailed) down to that 2% mark, as it would clearly be putting idle resources (that is, human beings) to work creating public goods and infrastructure that are clearly needed. Once you reached that point you would not increase deficits any further (except in the case of recessions, wars, national emergencies, etc) for the reasons that you have outlined – it would be inflationary without heavier taxes. In fact as private business adjusted to the increased demand, decreased crime and violence, etc created by full employment, deficits would probably reduce or even become surpluses in some years in order that the private sector not be crowded out.

    However there is no reason that governments could not run a permanent “unfunded” deficit equal to the annual increase in growth of GDP; the money to lubricate that economic growth has to come from somewhere, and if the government doesn’t supply it, it will be created by steadily increasing private debt leading eventually to crisis, as Steve Keen and the Minskyans have repeatedly highlighted. Stable money creation by government seems to be the only way to prevent accumulation of private debt eventually blowing the system apart, as the US is showing.

    On the regressiveness of inflation; it strikes me that, as the “we are the 99%” photos have shown, most of the west’s working population are “holding” far more debt than they are holding cash. Since inflation erodes the value of debt and wages normally keep up with inflation, surely moderate (a weasel word – I’m using it to mean “not hyper”) inflation is going to be progressive.

    Further, an underemphasised point of much MMT thinking has been that they normally agree with the Georgists, Ricardians (eg Michael Hudson), etc that taxes should fall much more heavily on land and economic rent and monopoly income. My sense is that whether a monetary expansion is inflationary or not would to a large extent depend on whether the new money goes on bringing new or underused resources into production/consumption (which expands the real economy in line with the money, and is therefore not inflationary) or goes on speculation, that is, driving up the price of “fictitious capital” assets like real estate and stock market share speculation and in general raising the price of existing things rather than being used to make new things. Heavy taxes on speculative gains would ensure that more money is put into founding new businesses, exploiting new discoveries, etc, rather than speculating on the increasing value of preexisting assets. This would help to discipline any inflationary breakout caused by governments being over-eager to “roll the presses”, or rather add some numbers to a database at the RBA.

    Similarly I suspect MMT would argue that if there is to be some form of QE, it would be much better done by either direct government spending of the new money on intiatives which create jobs & demand, or by distribution to the general public as Kevin Rudd did. The effect of US style fed QE seems to be to massively raise the level of bank reserves, as the banks are the bond holders. Since there is no demand in the economy the money isn’t being loaned out and is just sitting there, hence the complete non-correspondence between the expanded monetary base and no growth in inflation, investment, etc that Krugman has frequently noted.

    Anyone who knows more about MMT feel free to correct me on any of the above. As I’ve noted before, I’ve come to MMT via chartalist history; it’s an empirical fact that governments are the historical creators of money and it has usually been “created” by imposing taxation on subject peoples. Australia was doing this in PNG up until 1975 in order to forcibly monetise their economy. The rest of MMT seems to me to follow logically from that insight.

  19. John, your point in comment #15 is well taken. Another incorrect statement that is often heard is that “taxes don’t fund anything”. While internet MMTers like to use this as a slogan, most, if not all, modern money economists would disagrees with this statement. Rather, MMT economists would argue that taxes (levied by sovereign issuers) finance the government’s spending in real terms (i.e., in terms of utilization of productive capacity) rather than in nominal terms. I should point out that this is not a completely novel observation. The late macroeconomist Robert Eisner said essentially the same thing in his 1994 book “The Misunderstood Economy”. See page 196: “[t]axes serve a number of purposes. The most important is to reduce the purchasing power of taxpayers. Resources are then freed from production of the goods and services that they would otherwise buy. It is in this sense, in real terms, that taxes pay for government expenditures.”

  20. @circuit
    Agree; there is also a sequencing/logistical issue to that nominal spending that is important in terms of insight but doesn’t have many practical implications; essentially that taxes do not go into a government “bank account” from where they are spent, as households do, but are simply removed from the books or “destroyed” when received. In a logistical sense, spending proceeds ex nihilo, the government doesn’t have to withdraw money from a bank account to do it. But there still needs to be taxation at an appropriate level to ensure resources are available and there isn’t crowding out/inflation, as you say.

  21. A few thoughts:

    “Assuming that levels of money creation and debt issue were already set appropriately in terms of macroeconomic policy, there is no obvious reason for them to change.”

    First, I think MMT would say that the mix of “money creation and debt issue” is a non-issue. E.g. it’s a primary tenet of MMT that governments with fiat currencies don’t need to issue bonds. The entire thing can be done through net deficit spending as a source of incremental bank reserves – like a sort of permanent QE, except with deficits as opposed to central bank asset swaps. The CB pays interest on reserves, assuming it wants a non-zero policy target rate. Some MMT proposals (e.g. Molser) suggest a permanent zero interest rate, with a unified fiscal/monetary policy calibrated by taxation policy. Institutional arrangements are easily proposed to accommodate any of these functional options.

    So MMT would refer to “net deficit spending” rather than the mix of liabilities per se. It is also assumed, behind this, that the demand for central bank notes is endogenous to the system, which is pretty much a fact. So that’s a part of the mix that government/CB doesn’t have to determine. It is an embedded given.

    Second, I’m not sure of the meaning above of “set appropriately”. That seems to suggest a non-dynamic situation regarding aggregate demand and resource utilization. MMT would advocate responding actively to changing conditions in aggregate demand and any extant pressures on inflation.

    The concept of fiscal sustainability is important to MMT. First, a fiat currency issuer can always make the payment operationally to pay principal or interest on any maturing debt. It is a book keeping entry at the central bank in the form of a reserve credit. From there, it is a question of whether the government wants to issue a replacement bond to roll over the maturing one. But it doesn’t have operationally, as noted above. Second, in addition to the point about the option not to issue bonds, and the option to set policy rates permanently at zero, an additional point of flexibility regarding fiscal sustainability is the option to issue bonds with very short duration – e.g. exclusively short term t-bills. This provides an avenue either way to set the interest rate cost of the cumulative deficit according to the short term policy rate rather than according to term bond risk premia as is currently the case. All of these options point to the possibility of structurally holding down the interest rate applicable to the cumulative deficit. For much more detail on the fiscal sustainability issue, including some interesting empirical evaluation of historical interest rate behavior, I recommend this rather heavy analytical paper by Scott Fullwiler, one of the leading academics on MMT:

    Click to access WP53-Fullwiler.pdf

    So in total, a way to think about it is that MMT prefers to use tax policy to calibrate aggregate demand – e.g. to reduce it, ceteris paribus, when necessary, when inflation threatens or becomes problematic.

    MMT absolutely rejects the idea that money supply per se is a cause of inflation. Money doesn’t spend itself, as they like to say. Apart a self-imposed taxation policy constraint, the government can spend what it wants to where it identifies useful ways to spend – and essentially get rid of its other self-imposed finance and expenditure constraints, such as bond financing requirements and worries about debt ratios per se – all of this under a fiat currency issuer environment.

    The important point here I think is that the usefulness of taxation is absolutely critical to MMT. They talk about taxation sometimes as a “thermostat” for a more unified approach to fiscal and monetary policy.

    “Finally, the claim that government expenditure does not require taxation is politically pernicious. “

    They wouldn’t put it that way in any case. A particular expenditure would not be linked to a particular taxation requirement. The effect of the entire budget, cumulatively and incrementally, would be taking into account in assessing the status of aggregate demand relative to resource utilization. Tax policy would be set accordingly, including the requirement to ramp up taxes in an environment where inflation is a threat to price stability.

    I haven’t addressed all points you make, but I think that’s a top-down start, based on my impressions of MMT.

  22. @jrbarch

    I am surprised how poorly this area is covered in tertiary courses.

    Anyway what is the source of:

    3) It is normal for govt. to maintain a stock of debt … if the private sector is to have a surplus not reliant on exports.

    Why is it normal to have debt if the private sector is to have a surplus?

  23. @Chris Warren
    Because, neglecting external trade for a moment, and accepting that because every private bank loan creates an equivalent debt so the private financial sector nets to zero, net private sector income = government spending – government taxation. If the private sector is to have a surplus then the government has to spend more than it takes in by taxation, that is, run a deficit; this is only a “debt” that has to be repaid if they choose to borrow to cover this gap, which they may or may not do depending on the state of the macroeconomy (inflation, recession, etc) and the target interest rate.

  24. @John Quiggin

    Sorry John, I wasn’t intending to be snarky, but i can understand how it came across that way. The point I was making is that when people criticise MMT, it is sometimes difficult to understand whose arguments in particular they are criticising. It is hard to attribute the particular criticism to the people actually making the arguments and what they have said. I think there needs to be more of a dialogue as there seems to be a lot of arguing at cross purposes when MMT versus the mainstream is concerned. I don’t think the impersonal nature of the internet and blogging helps this pattern in anyway. I guess another problem is who is a MMT theorist? There isn’t a formal MMT journal or anything like that and there seems to be a fair degree of self-selection involved in being a MMT expert.

  25. @JamesH

    This area is a brain-ache.

    My first instinct is to query why the private sector needs any surplus, but, skipping this, why a surplus should be generated by this (G-Tdebt) route.

    If we assume a private sector needs surplus – why dos this need to be additional to the surplus obtained through 1) gains found during periods of adjustment after an innovation and/or 2) the gains realised through some degree of monopoly?

    If the government has debt for sound economic reasons (?), then presumably the next cycle starts with an albatross around its neck, and if the same logic continues, the government must again produce more debt (and for each subsequent cycle). You can see where this is leading.

  26. Paul Krugman has a shot at public debt

    Here’s what we agree on: if consumers have perfect foresight, live forever, have perfect access to capital markets, etc., then they will take into account the expected future burden of taxes to pay for government spending. If the government introduces a new program that will spend $100 billion a year forever, then taxes must ultimately go up by the present-value equivalent of $100 billion forever. Assume that consumers want to reduce consumption by the same amount every year to offset this tax burden; then consumer spending will fall by $100 billion per year to compensate, wiping out any expansionary effect of the government spending.

    But suppose that the increase in government spending is temporary, not permanent — that it will increase spending by $100 billion per year for only 1 or 2 years, not forever. This clearly implies a lower future tax burden than $100 billion a year forever, and therefore implies a fall in consumer spending of less than $100 billion per year. So the spending program IS expansionary in this case, EVEN IF you have full Ricardian equivalence.

  27. Most economics is straight out bulldust, intended to befuddle the public and politicians into accepting various social arrangements based on the crudest class prejudice. The Rightwing types of economists, whether labeled ‘neo-liberal’, ‘Hayekian’, ‘Austrian’, ‘voodoo economics’ or the risible ‘economic rationalism’ are the most pernicious and have caused the most suffering. Their real motivations are to increase the wealth of the parasite elite who pay for their propaganda work, while immiserating the rest of humanity and destroying the ecosystems that sustain life on the planet.
    They have been startlingly successful in recent decades, and, hence, inequality is greater than ever, human suffering greater than ever, hunger and malnourishment greater than ever and the ecology of the planet is being rapidly destabilised. All these calamities are left unaddressed because to do so would require loosening the grip of death of the parasite elites from humanity. Politicians everywhere in the capitalist world are owned, body and soul,(all right-just body) by the money power, and ‘democratic choice’ at election time is now utterly meaningless. The masters simply deny every calamity and employ an army of propagandists to spread the lie that nothing is amiss. Their spectacular triumphs in creating a world where 30,000 children under five still die needlessly every day from preventable disease, or where the planet’s 1,000 odd billionaires control more wealth than the bottom three billion human beings, are celebrated by their psychopathic apologists as the ‘triumph of freedom’, or ‘Market Magic’. ‘There is no alternative’ they proclaim, and pursue the production of crude agit-prop, masquerading as ‘economic science’ with gusto. Their spectacular hubris, so common amongst those intellectually and morally insufficient, is currently keeping an appointment in Samara with Nemesis.

  28. Ikonoklast@12

    This is why economic history, a dreadfully underrated discipline, is so important. The truth is, the real-world economy is poorly understood from a deductive perspective.

    imo, economics should be practiced more like medicine – we don’t always, or usually, know why what works works, we just have an inductive pattern of evidence suggesting that such-and-such happens when we organise things a particular way.

  29. @Ikonoclast
    “Can anyone explain to me why I should take any further interest in economics?”

    I ask myself the same question. As you observe, all economies are political economies, and insofar as politics is driven by power and self interest, rational analysis merely makes clear how thoroughly we are being f—-d and how impotent we are to do anything about it. I am involved in an MMT group, where I’m still trying to get an answer to this question: If government “spends money into existence”, then why does all spending over and above tax receipts generate government “debt” exactly equal to the deficit spending? That looks more like government “borrowing” the money that it deficit spends, not “creating” it. If government creates money by spending it, then why is there debt?

    If I have a magic marble machine that creates marbles as I spend them into the economy, then
    do I owe the debt to my magic machine? And why does my marble machine charge me interest
    on all the marbles I deficit spend into the economy? Am I not the sovereign of marbles, with the power to create and spend all the marbles I want without constraints like “debt” and “interest” that I HAVE TO PAY BACK TO WHOEVER LOANED ME THE MONEY. Sorry for yelling, but it’s one thing to characterize MMT as “counterintuitive”, and it’s something much more maddening when it is arithmetically and logically contradictory.

  30. Professor Quiggin,

    Let me first state that I am not an economist and I am hardly a follower of anything. I saw a reference to this blog entry on Warren Mosler’s blog.

    I don’t agree with the analysis because I think that MMT theorists talk about 2 separate issues:
    1. financing the government spending
    2. the function of taxation.

    These are related but we must not assume that they are the same. Let’s look at the exact meaning of the following sentence you have analysed:

    “Modern Monetary Theory has shown that a government with its own currency does not need taxation to finance public expenditure.”

    What is the exact meaning of the verb “finance”?

    “verb (used with object)
    to supply with money or capital; obtain money or credit for.
    verb (used without object)
    to raise money or capital needed for financial operations.”

    In the commodity monetary system the ruler needed to obtain gold and silver before paying for the goods and services he purchased (usually for the army). There are no doubts that the metal had to be obtained prior to minting coins and spending them. This explains the original meaning of the verb.

    A non-government entity must obtain funds before spending them. Again – the verb financing can be correctly used in that context.

    However the sovereign government in the fiat monetary system does not need to finance its spending in the narrow sense. The act of spending usually involves a series of electronic transactions altering the state of several linked databases. These numbers do not come from anywhere. They are merely a record of assets and liabilities held by the economic agents.

    Let’s assume that the economy is run according to functional finance principles and look at the examples provided.

    If the economy is running close to the full capacity then extra government spending needs to be offset by increasing taxation. Does the delta need to be “financed” and does it mean that everything needs to be “financed”? Does it need to be offset in 100%? (an extension to the “balanced budget multiplier” story) Only if (S-I) and (X-M) are not altered by the change. It may need to be offset in 95% or in 105%.

    What is worth mentioning is that accelerating inflation may be triggered by attempting to exceed the productive capacities in one of the sectors of the economy while other sectors are underutilised and that prices of imported commodities affected by the exchange rates may also play a significant role in affecting the CPI. So the system is much more complex and I would not make any attempts to oversimplify these issues.

    Selling bonds to increase the saving desire of the private sector is not an exact equivalent of taxation. A political decision was made during WW2 to use that method rather than to increase taxes. The debt usually does not need to be retired and the “financial markets” do not have to determine the bond yields. These were fixed during and after WW2. There will be some future fiscal flows generated by the debt.

    Does an increase in taxation have to precede the increase in spending? This would be the case if “financing” was required.

    I would not substitute the phrase “offsetting an increase in spending by increasing taxes if the full productive capacity of the economy has been reached” by the word “financing”. Therefore the claim that “taxation is not needed to finance public expenditure” is still valid in the narrow sense (as defined in the dictionary).

  31. Derryl, to answer your question, there is debt because all money is a form of debt, a social relationship. Always & everywhere. There is no such thing as commodity money, and never was, and never could have been. Money is not a marble. A marble could at best be an accepted representation of the relationship between an issuer/debtor & a holder/creditor, the IOU, the credit/debt relationship which is money.

    If government “spends money into existence”, then why does all spending over and above tax receipts generate government “debt” exactly equal to the deficit spending? Gubmints do “pretend-borrowing” = selling bonds, which are just another form of government debt, and trade them for the form of government debt called currency. Some have laws about 1-1 matching of deficit spending & bond-issuance, which the Central Bank can & sometimes does reverse at will, making the whole exercise even more idiotic.

    So there are two answers – (a) net spending above taxes creating debt is a tautology, true by the dictionary definition of spending & debt & (b) net spending above taxes creating bond debt, interest paying debt is a stupid game to monkey around with the natural rate of interest, which is zero or infinity. It’s (sometimes) true because governments & stupid, pointless laws enforce it, even though the laws don’t mean all that much. It is NOT a real constraint on a monetary economy the way a commodity standard is, it is NOT a surrender of monetary sovereignty to banksters because all it does is play around with the nominal. Sure, the game provides an interest rate vig to banksters, but the main function is to confuse people, and it is very successful at that.

    It’s modern mainstream macro including unfortunately many/most “Keynesians” which is logically and arithmetically contradictory, not “MMT”, which is what Keynes & Kalecki & Lerner & many others knew to be true.

  32. @Chris Warren
    It’s important to clarify that we are talking about a nominal surplus/deficit of money, not a real surplus/deficit of goods.

    The more normal name for a private sector monetary surplus is “savings”; it’s the excess of what they earn over what they spend. The issue of monopolies etc does not apply as that is one part of the non government sector exploiting another part of the non government sector; it is (unjust) redistribution, but does not affect the total amount of money in the economy as one’s loss is another’s gain.

    Gains made by e.g. “found during periods of adjustment after an innovation” are gains in real goods/services produced by the innovation. The money supply has to increase to cover the real gains, otherwise there will be deflation. Currently the money supply is increased by people borrowing money from the banks to develop/exploit/purchase the new good/service. But this creates an equal amount of private debt which has to be paid back at some point. Hence, as Steve Keen, Dean Baker, et al, have pointed out, crises are usually heralded by an explosion in private debt, which governments have (misguidedly? or in service to wall st?) abetted by running tight budgets.

    Stable growth in the supply of base/high powered government money, that is money which is not offset by debt, is the only way the private (households & businesses) sector can buy the things it wants and save for a rainy day without blowouts in private debt. Government deficits don’t have to be financed by debt because money production is a government monopoly and is backed by taxation power.

    However governments have to be careful not to expand beyond the ability of the real economy to grow. They might choose to “borrow”, that is drain funds from private sector saving by offering bonds as a vehicle for that saving, in order to create fiscal space for their own programs; the decision to create, borrow or tax money is/should be driven by macroeconomic considerations not the fictitious need to “balance the budget”.

  33. @Adam (ak) I’m with Adam in that

    I am not an economist and I am hardly a follower of anything.

    To date the performance of free marketeers has been only slightly less catastrophic as statists. Time to dump the ideology.

  34. I came here via the Levy Page ( where Michael Stephens amphasizes a different passage from Bill Mitchell’s interview:

    Particular budget outcomes should never be a policy target. What the government should be targeting is real goals, by which I mean a sustainable growth rate buoyed by full employment. Why do we want governments? We want them because they can do things that improve our welfare that we can’t do individually. In that context, it becomes clear that public policy should be devoted wholly to making sure that there are enough jobs, that poverty is eliminated, that the public health and public education systems are first class, that people who are less well off are able to become better off, etc. From a macroeconomic point of view, the spending and tax decisions of government should be such that total spending in the economy is sufficient to produce the level of real output at which firms will employ the available labor force. This is the goal, and the particular budget outcomes must serve this goal.

    None of this is to say that budget deficits don’t matter at all. The fundamental point that the original developers of MMT would make—myself or Randall Wray or Warren Mosler— is that the risk of budget deficits is not insolvency but inflation…. Deficits can be too large, just as they can be too small, and the aim of government is to make sure that they’re just right to employ all available productive capacity.

    and Warren Mosler comments with:

    for a given size govt, there is a ‘right’ level of taxation that results in full employment.

    Viewed as a mechanical model, one could say that MMT reduces the over-determination of the system by one variable by explicitly ‘floating’ the budget outcome vis a vis other policy targets. MMT rejects the neccessity, in fact even the possibility, to target budget outcomes saying they are safe to neglect as an overall measure if its criteria of a free floating, non-convertible fiat currency with no foreign denominated public debt are met.

    As a macro theory, MMT is not judgemental about why full employment, price stability and a balanced budget often do not coincide, but does offer explanations either through sectoral balance readings or by pointing to micro economic problems such as bottle necks in specific markets that are beyond the scope of a macro theory. An important concept is what MMT calls ‘savings desires’, i.e. the desire of the domestic private and foreign sector to hoard government financial assets in excess of what it itself generates through credit or exports. The postulate is that government must accomodate these desires (or get rid of them by other means, I guess) by creating ‘net finanical assets’ sufficient to bring about full employment / price stability.

  35. @Chris Warren

    Hi Chris – I think if you read Michael Hudson’s piece I linked to above the surprise will be replaced by something else.

    The US apparently has run a deficit for something like 80% of its life. Have a close look at this graph – sectoral-balances-and-the-united-states – to get a feel for the sectoral balances. You will see how govt. deficits sustain private sector saving.

    You will find more here at the MMT Primer: THE BASICS OF MACRO ACCOUNTING

    I would recommend the Primer – and then make up your own mind.

  36. This post is my short proof. My next post is my long proof with prefatory (and supportive) remarks on what I think JQ actually said and also some questions for JQ.

    Demonstration of the correctness of the MMT description (of fiat system money and taxation) is blindingly simple. A new country could implement a fiat currency from scratch. We will call its currency the Neo. This country’s national government would decree all the usual things about the Neo. It is legal tender for all debts in the country and only the Neo can be used to pay the taxes denominated in the Neo. It is patently obvious that the government must first create a number of Neos in its first budget. Without that first creation there would be no Neos, no way to earn Neos and no way to pay taxes in Neos. QED, the creation of money in a fiat currency system comes first.

  37. Here is my longer discussion.

    JQ is calling certain misconstructions of MMT pernicious. He is not calling MMT pernicious. This leaves us with the open question of what JQ’s opinion is of fully developed, academically rigorous MMT of the Mitchell-Wray variety? It also leads us to further questions. Is it equally important to note pernicious common misunderstandings of other economic schools or is MMT more open to pernicious common misunderstandings because it is on first view more counter-intuitive than most economic schools? Does JQ have an entirely different, partially different or nearly congruent view on money creation to MMT or Money Circuit theory? Will JQ write a post on his view of money creation? I ask this last question because I view the issue of money creation, money destruction (and subsequently money supply) as central in many ways to the managing of the modern economy.

    With regard to taxation and money creation, it is certainly worth having a discussion of the logic of the true MMT position, if I understand it correctly. The MMT position does run counter to intuitive and naïve positions on money and taxation. From the intuitive and naïve position, money is pre-existent and real. I mean that extant money is seen, by the intuitive and naïve, as fully pre-existent to any point in fiscal-monetary time, like the time of the bringing down of the national budget, and that all this existent money (taxed or not) continues to exist over the cycles not only as an accounting fact but also as a real fact. I also mean that, to the naïve person, the reality of money seems pretty much on a par with the reality of any other material thing. The fact, that money appears “pre-existent” and “real” in these senses to the naïve understanding, militates against any understanding that money can arguably (under the fiat currency system) be created and annihilated at will simply by national accounting. Of course, it is a misconstruction of MMT to assert that money can be created and annihilated at will without any effects on the real economy or on the accepted exchange value of money. MMT does not assert this.

    The real difficulty in logical analysis lies in the fact that we are dealing with a system already running, a system with a history. What is more, the history is an evolved history or more precisely a history of evolving entities and phenomena, including a “store” of money or a “converted store” from earlier forms of money creation. It is this store and the mental furniture it occasioned and still occasions in us (along with the private bank “money multiplier” where debt money can hang around for a long time but must be eventually annulled or destroyed again) that predispose us to the think (incorrectly) that money creation, even in a fiat system, cannot lie wholly in fiat creation.

    Demonstration of the correctness of the MMT description (of fiat system money and taxation) is blindingly simple. A theoretical new country could implement a fiat currency from scratch. We will call its currency the Neo. This country’s national government would decree all the usual things about the Neo. It is legal tender for all debts in the country and only the Neo can be used to pay the taxes denominated in the Neo. It is patently obvious that the government must first create a number of Neos in its first budget. Without that first creation there would be no Neos, no way to earn Neos and no way to pay taxes in Neos. QED, the creation of money in a fiat currency system comes first.

    Furthermore, fiat money is destroyed by taxation and debt money is destroyed by paying off the debt. Therefore (it seems to me) that money creation under our system is effected only by the excess of money creation by fiat over money destruction by taxation. I would be interested if anyone could demonstrate any other enduring money creation mechanism under the fiat system. Debt money certainly “hangs around” in circulation for a long time and even spirals up and up (often for generations) while private debt escalates. Eventually however, all that money surely must be destroyed when debt is paid off or defaulted.

    The whole debate really boils down to this. Do we know or do we not know where modern money comes from?


    Overall, I am not a hard-line MMT proponent. Rather I have a general sympathy for the broad area of MMT, Steve Keen style Money Circuit Theory and classical Keynesianism which all advocate variants of what is basically counter-cyclical government spending. I am not refined enough in my research, understanding or views to determine any more precisely where I stand on that spectrum. I am not even certain such a degree of refinement is necessary for employing broad MMT-Circuit-Keynesian precepts and prescriptions and applying them to the economy in a heuristic fashion. The whole political economy “problem” strongly suggests that it is only heuristically “solvable” and not algorithmically solvable.

    The purpose of an economy (or more correctly a political economy) in a democracy is to deliver individually desirable, socially desirable and democratically determined outcomes and not merely to deliver wealth in an unplanned manner. Unplanned delivery of wealth implies an economy running on nothing but the autopilot of an unregulated free market. The empirical, historical results of unplanned, unregulated exploitation (of humans and environment) via free markets fully attest to the failures of laissez-faire capitalism. Wealth is delivered in a haphazard and highly inequitable manner. Whole classes of people are impoverished and immiserated. Wars, protests and revolutions typically ensue when these problems come to their cyclical head. Finally, to rely on an unregulated market alone (in a democracy with the possibility for democratically decided goals and plans), is to foreclose on strategic social and environmental possibilities and render democracy itself non-operational.

  38. @Ikonoclast

    You may wish to look up Dr Andreas Furche’s PhD thesis, titled “A model of Moneyy Tokens”, 2001. This thesis contains a uniform description of all forms of monetary objects, their creation, circulation and destruction. It provides an alternative information recording system to the balance sheet and is therefore suitable to deal with financial securities with non-linear payoffs such as options. The thesis is in the library of Macquarie University.

  39. @Ernestine Gross

    Thank you Ernestine. I am not sure if you are implying my largely untutored meanderings on money show some promise of hitting the mark or if you are saying I am being a complete (though not unreformable) idiot and that Dr Andreas Furch will provide me with a modicum of much needed enlightenment. Either way, I appreciate the pointer. 🙂

  40. @Steve Waldman

    Hi Steve,

    I’d add that this concern about inflation is also wrong in another deep sense.

    A strain running through MMT thinking is that maximizing real growth is the most important thing we can do, and the way to maximize real growth is to get everyone working.

    Inflation is a tax on savers are you point out, and the distribution of this tax shouldn’t be swept under the table because it matters.

    Inflation is also a quite famous “illusion”. It doesnt matter if we pay $1 or $100 for a candy bar, what matters is the candy bar exchanged for some amount of our labor or thought.

    MMT says that moving from 3.5% to 4.5% real long term growth has dramatic effects over a lifetime, and that these effect swamp any concerns about inflation.

    If we need a bit higher inflation to get everyone working, and those extra people working boost economic growth by even a few tenths of a percent, well, we should consider that trade very, very carefully.

    I don’t think this is widely talked about in MMT writings by Mosler, Wray et all, but it clobbers you over the head once you see it. They – and I – are willing to tolerate higher inflation in the quest to maximize real growth.

    Mosler thinks we could have very high levels of real growth if we got policy right. Wray thinks full employment would reduce economic volatility.

    Over a lifetime, say 75 years, 3.5% real growth means your world will get 12 times richer. With 4.5% growth it will get 26 times richer. This analysis doesn’t even take into account the potential reduced volatility – and we know higher volatility reduces long term returns.

    I also think we should consider risk adjusted GDP growth. That’s a long way from being impacted, but if we believe Mosler and Wray, we could have a better “Sharpe Ratio” GDP by going after full employment and tolerating a bit more inflation. But that’s another topic entirely.

    So I’d say concerns about inflation are should be tempered for distributional impact of inflation, and for increased real growth reasons. Both of these are deep reasons to question the downside of inflation.

  41. @Ikonoclast

    It should be obvious to anyone in your position that the reality of the study of economics is generally upon the shifting sands of present paradigms.
    There IS no foundation, just theories that situationally get accepted as proven.
    MMT is an emerging present paradigm.
    As such, it is essential that it get its due in our intellectual pursuit of political and social economic understanding.

    My own take on MMT doesn’t begin with neoliberal or market economics.
    It is from the works of Frederick Soddy, noted Nobelist in Chemistry who undertook to comprehend economics as a means to provide well-being to the masses.
    In his study, he found economics a failure, in its basic inability to account for the under-pinning nature of the monetary system to the financial and economic system.
    As does MMT.
    As do some of the latest BIS research papers on our crisis.
    I view MMT as its own failure to correctly identify what Soddy wrote about in The Role of Money and in his Wealth, Virtual Wealth and Debt.
    In discovering the role of the monetary system to economic outcomes, Soddy decried the present so-called ‘system’.
    Being a scientist, he described the debt-based system of private fractional-reserve lending as “not a system, but a confidence trick”.
    Is it any wonder that we end up here?

  42. Sound economic policy eventually leads to a reduction in the deficit, which is dangerous because if we balance the budget, a recession will occur. This was one of the failures of the Clinton years.

    To appease the inflationistas, Bernanke can go ahead and raise interest rates, which would allow a massive increase of the deficit – and that’s exactly what we need right now.

  43. @Derryl Hermanutz

    “If government creates money by spending it, then why is there debt?”

    Maybe because bankers lobbied Congress to make sure that in order to create money banks had to profit from it – it’s their divine right?

    Does it not pique your curiosity that borrowing something from a closed system cannot make the closed system larger? An exogenous source is needed to expand the system. To fill a swimming pool you cannot bail water from the pool back into the pool to fill it.

    Thus, in order for the economy’s supply of cash to expand (and I define cash here as financial assets that bear no offsetting liability within the closed system) it must come from an outside source, i.e. direct government spending. There is no other possibility. The “borrowing’ part is a charade, a kind of dance to fool the rubes.

  44. @Oliver

    “Viewed as a mechanical model, one could say that MMT reduces the over-determination of the system by one variable by explicitly ‘floating’ the budget outcome vis a vis other policy targets.”

    This, IMO, has to be the single most profound comments in the thread so far. Oliver has hit the nail on the head.

    In past comments on other threads, I have preferred JQs Hard Keynesianism to no Keynesianism at all. This does not mean that I agree with his hard line on “repaying government debt”. It simply means that I view some counter-cyclical spending as better than no counter-cyclical spending at all. JQ appears adamant that “public debt… has to be serviced”. Under a fiat money system there is no imperative for this to happen. (I assume “serviced” means interest payments to bond holders, where bond holders are created by the use of govt bonds, and eventual “repayment” of the “debt” or accumulated deficits by taxation under orthodox accounting.)

    To reiterate, I say above that under a fiat money system there is no prima facie imperative for bonds to be created to fund deficits nor for public debt (government debt) to be “repaid” by taxation ie. by surpluses. It may be repaid. In some circumstances (overheating of the economy) it may be advisable to repay it in part or in full but it is not imperative that it be repaid. The logic of Hard Keynesianism implies that balancing the budget over many cycles (a mere numbers game) is more important than what is happening to the real economy and to real people in the real economy.

    It seems to me that an opponent of genuine MMT (not merely an opponent of misconstrued MMT) would have to demonstrate why the MMT description of money creation is incorrect and in particular why persistent government surpluses do not equal rising private indebtedness. An advocate of Hard Keynesiansim would have to demonstrate where persisting net money creation occurs over the balanced multiple-cycle span.

    The orthodox view (further to the right of JQ) of aiming to balance all government budgets and being virtuous if running continuous surpluses, in isolation of what is happening in the real economy, seems to me to be the most of absurd form of budget fetishism or accounting fetishism. Either that or it is downright Machiavellian, with the secret intention of overcoming capitalism’s profits crisis for a period by completing indebting workers and recreating a form of indentured labour to be exploited in new ways in a subsequent period.

  45. @TerjeP

    Bravo, I agree. I’m pleased to see you stay firm on this issue. MMT is a seductive set of smoke and mirror dressed up as insight.

    Or, MMT is In-sight shining its little light through a seductive set of smoke and mirrors dressed up as reality called mainstream neoliberalism.

    My hope would be JohnQ does not stand ‘firm on this issue’ like Custer – but uses his customary intellectual integrity to think things through carefully, for himself.

    Cheers …
    (Sophistry Inc.)

  46. @jrbarch

    Good chart. It seems to show a tight relationship and a general (overall) sinking trend in these balances. So it seems logical to question this mechanism.

    This structural tendency for the increase in -ve balances – after the above theories have been taken into account, is the real problem. The sinking represents increasing macroeconomic instability. This is well established in the literature, for example:

    If you take the United States chart for 1959-79, and add in modern data (external balance and net lending of government around -5% GDP, unemployment at 9%, CPI at 3.9%), then a real picture emerges.

    So even if some want to explain government debt in a mundane way, in reality this cannot be seen as a benign tendency.

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