An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
Thanks for highlighting. I left a couple of comments.
Windmill economicsComment on Lars Syll on ‘Why governments should run deficits’Lars Syll provides a mixture of political and economic arguments in favor of deficit spending. These arguments are based on his perception of how the monetary system works. Unfortunately, Lars Syll knows only one thing for sure, i.e. that Orthodoxy is false, but has not yet arrived at a valid heterodox economics. Because of this all his policy proposals lack sound scientific foundations.With regard to employment policy, he wholeheartedly propagates Keynesian deficit spending without realizing that Keynesianism is theoretically defective and deficit spending has some distributional secondary effects that are not compatible with his own normative ideas of the Good Society.As with Don Quixote, good intentions paired with incompetence produce tragic results.For details see:Macroeconomics ― dead since Keyneshttp://axecorg.blogspot.de/2016/12/macroeconomics-dead-since-keynes.htmlUnemployment is high because economics is false: period, full stop, end of storyhttp://axecorg.blogspot.de/2016/11/unemployment-is-high-because-economics.htmlRethinking deficit spendinghttp://axecorg.blogspot.de/2016/12/rethinking-deficit-spending.htmlEgmont Kakarot-Handtke
To summarize Egmont's post: sectoral balances
Blaming Hayek, who totally opposed “monetary policy” and fiat money, for the funny money regime of the Euro is just another of the endless and pathetic lies. Ever since the establishment of the modern nation-state in the late eighteenth and nineteenth centuries, the creation of the euro was perhaps the first significant experiment in modern times in which there was an attempt to separate money from the state, that is, to denationalize currency, as some right-wing ideologues and founders of modern neoliberalism, such as Friedrich von Hayek, had defended.By the way, I’ve understood MMT for years. Would someone please explain to me what Egmont Kakarot-Handtke is saying about MMT? It is clear that he does not understand Austrian analysis or concepts at all. Of course, none of you do.
Egmont Kakarot-Handtke central point seems to be that Keynes did not understand profit. Given that every convenience store owner understands what profit is, it is totally absurd to claim Keynes didn't understand it.Also I'm pleased to see Bob Roddis saying he doesn't understand what Egmont Kakarot-Handtke is saying about MMT. Not your fault Bob: Egmont Kakarot-Handtke is talking thru his rear end.
Ralph MusgraveYou say: “Egmont Kakarot-Handtke central point seems to be that Keynes did not understand profit. Given that every convenience store owner understands what profit is, it is totally absurd to claim Keynes didn’t understand it.”The idea that ‘every convenience store owner understands what profit is’ is itself of utmost absurdity for anyone who has grasped what science is all about. This is what J. S. Mill, the great methodologist among the founding fathers, had to say about commonsensers in general: “People fancied they saw the sun rise and set, the stars revolve in circles round the pole. We now know that they saw no such thing; what they really saw was a set of appearances, equally reconcileable with the theory they held and with a totally different one. It seems strange that such an instance as this, ... , should not have opened the eyes of the bigots of common sense, and inspired them with a more modest distrust of the competency of mere ignorance to judge the conclusions of cultivated thought.”So much for the understanding of convenience store owners.What most people who call themselves economists do not understand is that the very characteristic of science is that it goes BEYOND common sense: “... it is precisely the task of science to supersede crude common-sense notions by critical analysis, and further that it is the unsatisfactory state of the foundations beneath the common-sense surface which is the most serious and crippling deficiency of contemporary economic science.” (Hutchison)The ‘most serious and crippling deficiency of contemporary economic science’ is that the representative economist has NO idea of the pivotal economic concept of profit. Keynes was no exception: “His Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)Scientifically, Keynes never rose above the level of a convenience store owner.Every economist can know from the Palgrave Dictionary that the profit theory is false (Desai, 2008). Or, as Mirowski put it, “... one of the most convoluted and muddled areas in economic theory: the theory of profit.” In other words: the confused confusers of economics have NO idea what the pivot of their subject matter is. In still other words, because this bunch of scientific deplorables#1 does not know how the profit mechanism works it does not know how the market economy works. Economics is scientific rubbish and this goes from Adam Smith to Keynes and beyond.After- and Post-Keynesians and MMTers have not spotted Keynes’s foundational blunder until this very day.#2,#3 The scientific incompetence of economists ― Walrasians, Keynesians, Marxians, Austrians ― is beyond absurd.Egmont Kakarot-Handtke#1 See ‘How the intelligent non-economist can refute every economist hands downhttp://axecorg.blogspot.de/2015/12/how-intelligent-non-economist-can.html#2 See ‘How Keynes got macro wrong and Allais got it right’http://axecorg.blogspot.de/2016/09/how-keynes-got-macro-wrong-and-allais.html#3 See ‘Going beyond Wicksell, Keynes and MMT’http://axecorg.blogspot.de/2017/01/going-beyond-wicksell-keynes-and-mmt.html
Please clarify something about what Mike Norman is saying here in this youtube video. This is my take on what Mike is saying and how things actually work:A person has $100 and buys a treasury for $100 which he can redeem in five years for $100 plus some rate of interest. Meanwhile, the government spends the $100 buying drone missiles which are used against third world orphanages and wedding parties. Or to build freeways and bridges. The government no longer has the $100 because it has been spent. When the treasury matures after five years, the government, which can create “dollars” at will, credits the guy’s savings account with $100 plus the interest. The government need not seize assets from the populace to “pay back” the treasury because it can simply credit the guy's account. Am I getting this right?https://www.youtube.com/watch?v=aY0e4NHz3m0
Am I getting this right?More less.According to Mosler, the government neither has nor doesn't have money (scoreboard analogy). it issues the money "ex nihilo," that is, from nothing."Money" as in the money supply is held in non-government accounts, in financial institutions and foreign governments' deposit accounts at the Fed, or as cash in circulation. The credits in nongovernment deposit accounts at the Fed is the monetary base. Those accounts are created by the Fed crediting them. The credit don't come from anywhere.Similar but different when the Fed credits the Treasury general account (TGA). The TGA does not count toward the monetary base or any other of the monetary aggregates, which components of the money supply in nongovernment.Similarly, government securities held by nongovernment are credits added to nongovernment accounts by government just by crediting accounts.This is the same as banks extending loans that create deposits. The bank simply credits the deposit account of the borrower and adds a corresponding asset to it loan account. This add to a customer deposit account increases M1 money supply. The M1 money supply is chiefly checking accounts at banks and cash in circulation, but it also includes travelers' check and other checkable deposits.Everything that counts a money in the money supply come from the cb crediting accounts on its spreadsheet or from banks' crediting account on their spreadsheets. These credits don't come from anywhere when they are created by keystrokes and they don't go anywhere when they are canceled by keystrokes. Payments to government reduce the amount held in nongovernment institutions' account at the Fed and repayment of loans reduces bank liabilities on banks' spreadsheets.Marking up nongovernment accounts with credits adds to the money supply in nongovernment and marking them down reduces this.Government securities are credits that are issued by the Treasury. They don't come from anywhere either and they don't go anywhere when redeemed.All money & banking and finance is entries on spreadsheets.Say one buys a vehicle that is finance by the manufactures through its financial subsidiary. The customer gets the vehicle and the company books a loan. No "money" involved. However the customer must obtain "money" to meet the loan payments and that comes only from government spending or lending, or banks issuing loans. So the finance company can only create credit but not "money," "money" being credits financial institutions that have access to the central bank.The process by which banks create money is so simple that the mind is repelled.— John Kenneth Galbraith, Money: Whence It Came, Where It Went (1975), Chapter III, Banks, p. 18https://en.wikiquote.org/wiki/John_Kenneth_Galbraith#Money:_Whence_It_Came.2C_Where_It_Went_.281975.29Regardless of what thinks of this normatively, it is how happens operationally.Of course there is wide potential for abuse with this system as well mistakes, but arguably the Great Divergence between the West and the ROW around the time of the discovery of America and the age of exploration and colonization was as much influenced by the rise of modern finance in Italy during that initial period. So getting this right is important and it involves tradeoffs.The tradeoff between sound finance and functional finance is that between fiscal discipline and policy space. Money & banking and finance lays out operations in terms of options and their opportunities and consequences. The choice among options is politically determined.continued
continuationA person has $100 and buys a treasury for $100 which he can redeem in five years for $100 plus some rate of interest. Meanwhile, the government spends the $100 buying drone missiles which are used against third world orphanages and wedding parties. Or to build freeways and bridges. The government no longer has the $100 because it has been spent. When the treasury matures after five years, the government, which can create “dollars” at will, credits the guy’s savings account with $100 plus the interest. The government need not seize assets from the populace to “pay back” the treasury because it can simply credit the guy's account. Am I getting this right?This starts in the middle of the process. MMT would explain it sequentially from the beginning.The government issues credits in its unit of account into nongovernment by "spending," which includes transfer payments. In the US, Congress approves a budget and directs the executive branch to administer it. Various departments carry out their operations in the course of which they issue instructions to the Treasury to "pay the bills" as they come due. The Treasury then directs the Fed as the government's fiscal agent, that is, bank, to credit various accounts.The Fed does this by crediting banks' accounts at the Fed while directing the banks to credit customers' deposit accounts at the bank. This adds bank reserves to the monetary base that are bank assets. The banks' asset that has been added is offset by the credit that bank adds to a customer deposit account, which is a bank liability.continued
continuationWhen taxes are less then spending, the Treasury issues a security as a Treasury liability, which it directs the Fed to auction into nongovernment through the primary dealers that act as brokers. The PD's distribute the auctioned securities to auction subscribers. Payments are settled in the Fed's payment system in bank reserves. The Fed uses monetary operations to ensure that there is enough liquidity to clear.When the security is redeemed on maturity, the Fed credits account of the bank of the owner and the bank credits the owner's deposit account. The net financial assets of nongovernment remain the same in total, and only the terms change. The redemption amount is charged to the TGA is the security is being retired, or the Treasury issues another for auction if it is being rolled over.The upshot is that both the issuance of credits to banks' accounts at the Fed and issuance of securities as Treasury liabilities is a matter of issuance rather than government have to obtain the unit of account it issues from users of that unit of account. The test is bookkeeping wrt to exchanges between government and nongovernment and in the economy among units of nongovernment.It's all a matter of scorekeeping based on the government's constitutional prerogative as the sole monetary authority as established in US Constitution, Article 1, sections 8 and 10, as interpreted by the judiciary.So the Treasury security that was purchased either directly from government through a bank by Treasury Direct, or as an auction subscriber, or in the aftermarket, was purchased using bank reserves that were created by the Fed crediting banks' accounts at the Fed either through spending through the agency of the Treasury or Fed lending as a matter of monetary operations. The securities will be similarly redeemed by the Fed acting as the Treasury's fiscal agent (bank).When the Fed is not paying IOR and doesn't wish to set the oversight rate to zero or let it rise beyond the Fed's target, then the Fed uses OMO to target its desired rate. The Fed and Treasury also consult during the day to avoid a Treasury overdraft, since that is a political restraint in the US that was imposed by Congress, while also allowing the Fed to hit its target rate. This involves both TT&L accounts and securities issuance.So it is true, "The government need not seize assets from the populace to 'pay back' the treasury because it can simply credit the guy's account," and the Fed does this based on the operations described along with the conditions imposed politically by Congress, e.g., regarding no Treasury overdrafts and the debt ceiling. But these restraints that are imposed in interest of "fiscal discipline" are not operationally necessary. They are also ineffective for the purpose imposed.What is not quite correct is the statement, "The government no longer has the $100 because it has been spent." The government never "had" the $100, which only applies to a currency user and never to the issuer since the issuer doesn't either have or not have a fixed amount of the unit of account. The government can create as many or few units of account as it chooses, and it can withdraw (destroy) as many units of account as it chooses, but not without consequences. That is a political issue wrt to fiscal policy. Neither the Treasury nor the Fed are empowered to conduct fiscal policy for the government. That is the constitutional prerogative of the legislative branch. The payment of IOR is a quasi-fiscal power that the legislature has conferred on the Fed but that is assumed to be temporary. The Treasury also controls the maturity of the securities issued which affect the amount of interest paid out in a period.
What is not quite correct is the statement, "The government no longer has the $100 because it has been spent." The government never "had" the $100I really knew that and just wanted to see the response. I understand that when “money” is paid to the government it goes poof. So, where before the issuance of the bond there had been $100 in funny money injected into society, after the bond is "paid off" there is now $200 having been injected into society which is still floating around unless the government has taxed back some of it so that it disappears. Poof. Absent this horrible system, the guy with the $100 would have had to find an actual investment opportunity that appealed to people engaged in voluntary exchange. With the present system, his $100 goes to pay off military contractors, welfare recipients etc... followed by the SECOND issuance of $100 to the bond holder, thereby diluting the supply of "dollars" in society. All to solve problems that do not exist in the first place and only exist due to the system of funny money kleptocracy.The powers-that-be do not want the public to understand this corrupt and evil system of systematic theft and kleptocracy. It exists precisely because it facilitates the kleptocracy. The idea that it is necessary to or helpful in solving the social and economic problems of the masses is one of the biggest lies in history.
Next question: The government’s $20 trillion “debt” is completely different than the situation of private entities which have borrowed gazillions in new money loans from banks because they have to actually earn the money to pay back their loans. They just can’t “credit” the bank’s account when times get tough.Further, the government’s $20 trillion “debt’s is also different from the government’s spending pledges of unfunded $200 trillion upon which most people appear to be relying. Right?
So, where before the issuance of the bond there had been $100 in funny money injected into society, after the bond is "paid off" there is now $200 having been injected into society which is still floating around unless the government has taxed back some of it so that it disappears. Poof. Right, when the government spends in excess of taxation, then there is a fiscal deficit. According to rule of no Treasury overdrafts, a government security is issued that is settled in bank reserves. The end result is that bank reserves remain the same and the amount of the deficit is saved in tsys. While the money supply does not increase as a consequence since tsys are not counted toward it, the aggregate net financial assets of nongovernment increase by the amount of the deficit.The idea is that since the amount of the deficit is saved in interest-bearing securities, those funds will not be spent. This is true in aggregate but MMT economists point out that it is not true in practice, since tsys are highly liquid and can be switched into spendable funds easily and quickly, and tsys are also the highest grade collateral. So tsys issuance doesn't inhibit the ability to spend in any significant way. That is to say, if the bank reserves were not converted to tsys, there would be little to no increased propensity to spend rather than save. Providing interest-bearing securities serves two purposes. First, it is a reserve drain that facilitates the central bank in hitting it rate target when not paying IOR or setting the rate to zero. This is the chief function from the government POV.The second function is that tsys provide the safest type of financial assets and their issuance reduces risk in the system. Were there no tsys, the propensity to save in financial assets would still be present at approximately the same rate, but the saving opportunities would be higher risk than with tsy issuance.The amount of spendable funds in the system needs to balance with the amount of real goods available for sale along with the capacity to expand production to meet increasing demand.If government would overspend and create "too much money chasing too few goods," then inflation would result. Taxation serves to drain bank reserves, which are tax credits, from nongovernment, thereby making space for government spending for public purpose that transfers private real goods and services from the private to the public sector.
"So, where before the issuance of the bond there had been $100 in funny money injected into society, after the bond is "paid off" there is now $200 having been injected into society which is still floating around unless the government has taxed back some of it so that it disappears. Poof. "That's static thinking. It goes like this. Government orders drone missiles. The people working the create drone missiles are employed and get income which they spend elsewhere in the economy. The money bounces around creating wealth and prosperity and at each point a little is recovered via taxation until it all comes back to the Treasury. The government is purchasing these drone missiles because it has a democratic mandate to do so. That democratic mandate gives it first call over the resources of the nation - ahead of any private profiteer. The government uses taxation, or other measures such as banning things, planning regulations etc to prevent the private profiteer from joint bidding on the resources making the drones or supplying the supply chain that makes the drones. That's what taxation is really for. The bond only comes about if people decide not to spend the money to destruction. It is a gift to savers, because saving has essentially the same effect as taxation. So if there is a bond there is less need for taxation because the people have essentially taxed themselves by not spending. The bond is just a swap of assets. Money is destroy and bonds are issued. When it is repaid the reverse happens - bonds are destroyed and money is issue. That's because money is just a bond with a different maturity and interest rate. There is no second issuance of anything. The swap of asset alters the interest rate curves. It's always worth remembering that $100 is a stock and interest is a flow measured in $/month. Interest is paid with turnover - money in flow - not the stock of money. Turnover is the stock of money available for flow times the velocity. You can create a great deal of turnover with one $100 bill if it changes hands fast enough. That's how interest gets paid. Don't confuse the two or you get in a mess.
Next question: The government’s $20 trillion “debt” is completely different than the situation of private entities which have borrowed gazillions in new money loans from banks because they have to actually earn the money to pay back their loans. They just can’t “credit” the bank’s account when times get tough.Right. Being the currency issuer, neither the debt nor the interest limit the operationally ability of the government to service them. Governments can be limited politically to observe "fiscal responsibility" by making them act like currency users, but this just inhibits available policy space and doesn't necessarily accomplish the objectives aimed at. MMT discusses this but it's beyond the scope of this comment. In summary, what matters is real resources for the population in the future and what government spends or doesn't spend in the present has consequences for that.Further, the government’s $20 trillion “debt’s is also different from the government’s spending pledges of unfunded $200 trillion upon which most people appear to be relying.As Matt Franko has pointed out, the US government uses modified accrual accounting, so that the LHS is recorded on a cash basis where the RHS is recored on an accrual basis. So there is an illusion of "unfunded" obligations owing to the accounting. Moreover, it assumes that the government's life is limited and these obligations will have to be paid down at some point it time, which false. Governments rollover their public debt since it is the stock of nongovernment net financial assets in aggregate that counts toward nongovernment net worth and provides a stock of the safest assets in the financial system. Public debt plays a key role in the financial system by accommodating saving desire through provision of safe assets thereby reducing systemic risk.I am sympathetic to objections concerning the role of government but they are largely political issues.Perhaps the foremost issue is the political question of the extent to which government should be involved in the society and economy. This should be approached in terms of the question of "good" governance measured by objectives based on agreed upon needs and wants and who should best provide them. This comes down to the debate over public versus private goods. Once that is decided, there is no operational problem with the government meeting these objectives for lack of affordability. The challenge is to produce the real goods to meet all needs and reasonable wants while maintaining price stability and the security stability of the financial and economic system that supports the society materially. That is the macroeconomic challenge from the perspective of political economy.As I have been saying, since the tiny of the ancient Greeks his debate has been about living a good life as an individual and a citizen in a good society. The chief priorities of government are providing security and order and promoting the general welfare. These are questions of social and political philosophy that also intersect with ethics.There are different POVs on this and these give rise to the issues for political debate. For a nation that is sovereign in its currency, fiscal affordability is a non-issue. The financial issue is includes allocation of capital and funding. The economic issue includes distribution of real resources.The contribution of MMT is showing how to achieve growth at least commensurate with population growth, full employment less transitional, and relative price stability using monetary economics based on sectoral balance analysis, functional finance and a job guarantee that also functions as price anchor and provide a buffer stock of employed.
I appreciate your indulgence with my comments so that we might have this enlightening discussion and exchange of ideas.
Bob RoddisYour question of February 11 has to be put into a macroeconomic context or what Keynes called the ‘monetary theory of production’ and it has to be answered in GENERAL terms, that is, without the technicalities of the US banking system. In other words, the whole banking system is reduced to the central bank which has only deposits on the liability side of its balance sheet and overdrafts on the asset side. The deposits are money and they are created uno actu with overdrafts, that is, deposits = overdrafts or central bank liabilities = central bank assets.The most elementary configuration constitutes the analytical starting point: “There can be no doubt whatsoever that a problem which has not yet been solved in all its aspects under its simplest conditions will be still more difficult to tackle if other, ‘more realistic’ assumptions are being made.” (Morgenstern)Scenario_0#1: The economy starts with employment L. There is only wage income Yw = 100 monetary units [e.g. billion $]. Productivity R and output O remain constant. Consumption expenditures C are equal to wage income, i.e. C = Yw. By consequence, profit of the business sector is zero. Wage payments to the household sector consist of deposits (= overdrafts of the business sector). Through consumption expenditures the household sector’s deposits are again reduced to zero. The stock of money = deposits is zero at the beginning and at the end of the period.#2 During the period money is created and destroyed through the autonomous transactions of the business and the household sector.In the initial scenario, the household sector’s budget is balanced, i.e. C=Yw and the product market is cleared, that is, the quantity bought X is equal to the quantity produced O at the market clearing price P.Scenario_1: The government needs part of the current output in period 1. The need is legitimate and undisputed, e.g. war. The government taxes the wage income in period 1. Disposable income is reduced by 10 units from 100 to 90. Households reduce consumption expenditures in step from 100 to 90. Government fully spends the income tax of 10 units, that is, total consumption expenditures C remain unchanged and the market clearing price P remains constant. Both, private and public households fully consume their respective shares of output O. There is no real transfer of goods between periods. The war is fully paid for by taxes in period 1. In the following periods income tax is again zero and everything else is like in the initial scenario.See part 2
Part 2Scenario_2: NO income tax. Households reduce consumption expenditures C voluntarily from 100 to 90 in period 1. Through saving of 10 units the household sector’s current deposits at the central bank increase. At the same time government spends 10 units and takes up overdrafts at the central bank. Both sides of the central bank’s balance sheet are equal. Households’ deposits = government’s overdrafts. Total consumption expenditures C and market clearing price P remain unchanged.No changes happen in period 2, 3, 4. The households keep the deposits and the government keeps the overdrafts. Interest payments are left out of the picture.In period 5 the government is supposed to pay back the overdrafts. The wage income of 100 is taxed with 10 units. Disposable income is reduced to 90. The government uses the 10 units of income tax to reduce its overdrafts to zero. At the same time, the household sector dissaves 10 units, i.e. reduces its deposits to zero. Consumption expenditures C are then equal to disposable income 90 plus dissaving 10 = 100. The balance sheet of the central bank at the end of period 5 is again zero as in the initial period. Deposits = money and overdrafts are ‘destroyed’, the creation of period 1 is fully reversed.What happens in scenario_2 in comparison to scenario_1 is that the taxation for the war is shifted from period 1 to period 5. In real terms there is NO difference at all. Real consumption of the household sector is in both cases reduced in period 1. In other words, the taxes are paid in period 5 with the saving of 10 units in period 1. That’s all.Nothing changes in real terms when the government issues a bond with a volume of 10 units in period 2. The household sector’s deposits are reduced to zero and so are the governments overdrafts. The central bank’s balance sheet reduces to zero. The household sector holds bonds instead of deposits and the government switches overdrafts into bond liabilities. The central bank is out as an intermediary and there is a direct creditor-debtor relationship between the household and the government sector in the form of bonds or similar types of government securities.See part 3
Part 3In period 4 the whole securitisation transaction is exactly reversed. The government sector takes up 10 units overdrafts and redeems the bonds. Accordingly, the household sector’s stock of bonds is reduced from 10 to zero and the deposits go up from zero to 10.In period 5 the households are taxed, they dissave and the government fully repays the overdrafts. In period 6 everything is again as it was in the initial period.In real terms, the securitization over period 2, 3, 4 makes absolutely no difference. Only the form of assets and liabilities changes. The household sector hold bonds instead of deposits.Now it is assumed that the central bank buys the bonds in period 4 from the household sector. So the household sector’s stock of bonds goes down to zero and deposits go up to 10. The central bank has now 10 units of bonds on the asset side instead of government overdrafts. There is now a direct credit relationship between central bank and government that takes the form of bonds.If the government taxes the households in period 5 it can redeem the bonds which are held by the central bank. Everything else is as in the previous scenario.If, on the other hand, the central bank keeps the bonds and the government does not tax the households the repayment of the war debt is simply postponed indefinitely. The household sector keeps its saving of period 1 in the form of deposits = money instead of bonds. The households can buy and sell bonds from and to the central bank and thereby change their liquidity. The sum of bonds and deposits is always 10.The situation only changes if the households dissave. In this case, consumption expenditures increase from 100 to 110 and deposits reduce to zero. Because output remains unchanged the market clearing price P rises and the business sector now makes a profit of 10 units, i.e. equal to dissaving. Accordingly, the business sector’s deposits go up while those of the household sector go down by the same amount. The balance sheet of the central bank does not change, only the owners of the deposits change.In the next period consumption expenditures and the market clearing price fall back to their previous level.As long as the government does not tax the households everything remains unchanged for an indefinite time. The trouble comes when the net income falls due to taxation from 100 to 90 and consumption expenditures fall also to 90 because now there is no dissaving. In this case, the market clearing price falls and the business sector makes a loss of 10 units which reduces its deposits to zero.Now the government is in the possession of 10 units of deposits from taxation which can be used to redeem the bonds. After this action the stock of money and bonds is again zero.Again, in real terms NOTHING has changed. The households have paid for the war in terms of output in period 1. Everything else is basically a deferment of taxes. The central bank can extend the deferement in principle until eternity by buying the government securities and keeping them on the asset side.Egmont Kakarot-Handtke#1 (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.#2 The idealized transaction pattern looks like this:https://commons.wikimedia.org/wiki/File:AXEC86.pngThe wage rate and the market clearing price in period 2 is doubled. All real magnitudes remain unchanged.
Bob Roddis, continuedScenario_3: NO income tax and NO saving of the household sector in period 1. Households do NOT reduce consumption expenditures C = 100 and accordingly their deposits are zero at the beginning and the end of period 1. Government takes up overdrafts at the central bank and spends these 10 units IN ADDITION to the households, so total consumption expenditures are now 110. Since output remains unchanged the market clearing price now rises and the business sector makes a profit of 10 which is equal to the government’s budget deficit. At the central bank, the business sector’s deposits are 10 and government overdrafts are also 10 at the end of period 1. The redistribution of current output O between the household and the government sector does not happen via the income tax or saving but via the market clearing price.In real terms, there is again NO different between the scenarios. The difference compared to scenario_2 is that the business sector now has 10 units deposits instead of the household sector because the households do not save and the business sector makes a profit of 10 units. Business sector’s deposits = money = government’s overdrafts.In the next period, the market clearing price falls back to the initial level. The business sector can hold its deposits indefinitely and the government can keep its overdrafts indefinitely. Alternatively, the government sector can sell bonds to the business sector which takes the central bank out of the loop and establishes a DIRECT credit relationship between business sector and government. Deposits = money reduce again to zero.As long as the government does not tax the households everything remains unchanged for an indefinite time. The trouble comes when the net income falls due to taxation from 100 to 90 and consumption expenditures fall also to 90 because now there is no dissaving. In this case, the market clearing price falls and the business sector makes a loss of 10 units which reduces its deposits to zero. The one-period ‘inflation’ of period 1 is reversed by a one-period ‘deflation’ in period 5.The government is now in the possession of 10 units of deposits from taxation which can be used to redeem the bonds. After this action the stock of money and bonds is again zero. Everything is then again as in the initial period.In scenario_1 the households pay income tax in period 1 and NO credit relationships ensue. In scenario_2 the tax payment is deferred via saving in period 1 and dissaving in period 5. In scenario_3 we have instead of the saving/dissaving of the household sector profit in period 1 and loss in period 5. Over all periods profit and loss cancel out. In scenario_2 profit is zero over all periods.In REAL terms there is absolutely NO difference between the scenarios. The significant difference is between the saving/dissaving scenario and the profit/loss scenario. Because MMT lacks the proper macrofoundations (see footnote #1 above) these folks NEVER got this ALL-DECISIVE difference. It is pretty obvious that the problem of scenario_3 lies in its DISTRIBUTIONAL effect. This scenario in effect PRODUCES the overall profit of the business sector. In other words, Keynesian deficit spending is the biggest pro-one-percenter profit booster ever. How this is compatible with the Keynesian rhetoric for a more equal income distribution remains forever a mystery.Keynesians and MMTers simply do NOT understand what profit is and how the profit mechanism works. This is disqualifying for an economist, isn’t it?Egmont Kakarot-Handtke
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