MMT Disputes
Regarding my recent review of Kelton’s MMT book, Transformer here in the comments writes:
I just realized that the disconnect is that Bob is interpreting the phrase ‘how many dollars the federal government has added to people’s pockets without subtracting (taxing) them away’ in a way different to what (I think) Kelton intended.
I believe that Kelton intends it to mean ‘net dollars created via deficits at any point in the past irrespective if they were subsequently swapped for bonds’ .
But Bob interprets it as “dollars currently in existence’ . That is why Bob talks about ‘the outstanding Treasury securities [] sitting on the Fed’s balance sheet’ as that would indeed match that definition.
Yes, that’s exactly what’s going on. I have two defenses of my interpretation of what I originally took Kelton to be saying.
- Under the more moderate approach, we could say the same thing about a corporation as we’re saying about the US Treasury. E.g. “the current stock of debt owed by Google indicates how many dollars Google spent into The-Rest-of-the-World over and above how many dollars Google withdrew from The-Rest-of-the-World.” The accounting works the same way, at least ex post.
2. Just in terms of plain English, Kelton’s formulation is very confusing. I’m trying to think of a good analogy from a non-financial context. Does this help? “The amount of toast produced by the cook is a record of how many pieces of bread the cook put into the toaster without taking them out.”
Thanks Bob !
I will definitely be printing this one out and putting it on the fridge.
(I think that definition you give would represent the amount of burnt toast produced)
My wife gets upset because I’ve borrowed loads of money from our friends. She doesn’t seem to realize that this so-called debt is just a historic record of all the things we’ve bought where we didn’t use our own money and far from being a bad thing we’ve actually created a load of new savings (in the form of IOU’s) for our friends.
Hi Bob. Google analogy useful. Assume Google issues a $1000 bond. This money is borrowed from private sector agent A. Agent A’s bank deposits decline by $1000. In return, Agent A now owns the $1000 bond. Google then spends the $1000. Private agent B is the recipient of this $1000 in spending. Agent B’s bank deposits increase by $1000.
–
So, at the end of the day, private sector bank deposits are unchanged. Agent A now also owns a bond. That is, the Rest-of-the-World ex-Google (ROW), has a net increase of $1000 in financial wealth (the bond). This bond is, of course, Google’s liability.
If we substitute the Federal government (Gov.) for Google, it works the same way – as you noted. The Rest-of-the-World-ex Gov. has a net increase of $1000 in financial wealth (the gov. bond). This bond is, of course, the Gov.’s liability.
Doesn’t this narrative support Kelton’s point? She is saying that government borrowing increases net financial assets for the private sector. The Gov.’s red ink is the private sector’s black ink – as she puts it.
Or, as you say, the accounting is the same. Since Google is a private sector entity, in the Google scenario the private sector comes out even. Google’s liability is the private sector’s asset. However, in the Gov. scenario, the private sector comes out ahead as the private sector’s net financial asset – the bond – is not offset by a private sector liability. The Gov. bond is, of course, a public sector liability.
Does this make sense? Thanks!
Agent A’s financial we
In my last paragraph, third sentence would be a bit clearer if it read: “Google’s liability is Private Agent A’s asset. However, in the Gov. scenario, the private sector comes out ahead as Agent A’s financial asset – the bond – is not offset by a private sector liability. etc.”
–
I should add: In your review, you say “Suffice it to say that you could replace “government” in the MMT argument with any other entity and achieve the same outcome”. Yes, it’s the same outcome in either case in that the financial transactions are overall a wash. But, it is not the same outcome for the private sector – as the private sector gains financially in the gov. borrowing scenario. And it is the private sector we care about. That’s Kelton’s point.
Yes, as you touch on, prosperity is about our investment in tangible and intangible assets – improving the standard of living – it is not about “more money”. I’m just trying to understand the financial transactions correctly. Does this make sense? Thanks.