If you extend that logic a little further, you might ask, “Well, don’t we pay taxes and buy bonds so that the government can spend?” Well, you first have to ask yourself the question, “Where do you get the money to pay taxes and buy bonds?” And the answer is that we can’t get our hands on the currency until the national government spends it. Spending is the prior act in a fiat monetary system; taxing and borrowing are following acts. In effect, the government is only taxing what it has already spent, and it’s only borrowing back money that it has already spent. Once you start pursuing this logic, you realize that most of the propositions that are occupying the current debate around the world are based upon false premises.
If you extend that logic a little further, you might ask, “Well, don’t we pay taxes and buy bonds so that the government can spend?” Well, you first have to ask yourself the question, “Where do you get the money to pay taxes and buy bonds?” And the answer is that we can’t get our hands on the currency until the national government spends it. Spending is the prior act in a fiat monetary system; taxing and borrowing are following acts. In effect, the government is only taxing what it has already spent, and it’s only borrowing back money that it has already spent. Once you start pursuing this logic, you realize that most of the propositions that are occupying the current debate around the world are based upon false premises.
If you extend that logic a little further, you might ask, “Well, don’t we pay taxes and buy bonds so that the government can spend?” Well, you first have to ask yourself the question, “Where do you get the money to pay taxes and buy bonds?” And the answer is that we can’t get our hands on the currency until the national government spends it. Spending is the prior act in a fiat monetary system; taxing and borrowing are following acts. In effect, the government is only taxing what it has already spent, and it’s only borrowing back money that it has already spent. Once you start pursuing this logic, you realize that most of the propositions that are occupying the current debate around the world are based upon false premises.
The mainstream believes that taxation distorts individual incentives, that government borrowing pushes interest rates up and thereby undermines private sector investment, and that ultimately the danger of government spending is hyperinflation.
Well, there is certainly a mischaracterization among mainstream economists about how the modern monetary system operates. In mainstream textbooks you’ll find a chapter about the role of the central bank, and that chapter will describe how the central bank’s main function is to control the supply of money through open market operations—that is, buying and selling government bonds to regulate the demand of money relative to the supply. Through this process, the story goes, the central bank is able to target interest rates.
That textbook explanation is quite wrong. Central banks cannot control the money supply. And not many central banks past the mid-1980s gave any credibility to monetary targeting. They realized that central banks can control only interest rates, not the money supply. After this realization, monetary policy became expressed through setting a short-term interest rate by managing the liquidity in the overnight cash markets.
In the US and Japan, for example, there has historically been zero return on those reserves. So banks will try to lend out excess reserves to other banks that may be deficient in reserves. The competition in this market, called the interbank market, starts to drive interest rates down, because the banks will take any return instead of zero. If the central bank allows that process to continue, it loses control of monetary policy.
The way the central bank can maintain control of its target interest rate is to manage that liquidity that’s embodied in these reserves. So if the central bank perceives that the banks consider their reserves to be excessive on any particular day, it drains those reserves out of the system by offering an interest-bearing asset in the form of a government bond. The role of government bonds, then, is to provide the central bank with the capacity to ensure that there is no competitive pressure on the target interest rate. So you can see that the function of government bonds is something quite other than to lend the government money.
The only issues a progressive person might have with public debt would be the equity considerations of who owns the debt and whether there an equitable provision of private wealth coming from the deficits. There is a debate to be had about that, but there is no reason to obsess over the level of outstanding public debt. The government can always honor its debt; it can never go bankrupt. There’s no question that the debt obligations will be met. There’s no risk. What’s more, this debt provides firms, households, and others in the private sector a vehicle to park their saved wealth in a risk-free form.
Here's an interesting article about about monetary policy. I'd be interested in those of you who have an economics background to get your thoughts. My feeling is that the national debt crisis may be blown somewhat out of proportion, but this subject is much more complicated than saying, "The sky is falling because of our debt." — Sam26
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.
I think that Japan is the case experiment for the MMT. If it gets into trouble with it's huge domestically owned debt and Abenomics sometime in the future, that's bad for MMT. — ssu
Not at all. People who already held gold turned it in to receive back from the government less gold, but in the form of a coin that could be used to buy things. So, while MMT is correct that all currency is based on a political organization that legalizes the use of a currency for the payment of debts, goods and services, it is wrong when it claims money originated by governments making it up out of thin air. — LD Saunders
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