As you know, to me this is the MOST important part of MMT, which I would characterize as managing the monetary system to deliver full employment at 2% interest rates, but when it’s doing well tax away excess capital and run a surplus to reduce inflation rather than raise interest rates and have people lose their jobs, companies and homes.
“governments should focus on real-world outcomes such as full employment and the absence of inflation, rather than, abstract goals such as balanced budgets or deficit targets.”
Amen!
“1. The government should spend to ensure sufficient levels of demand to achieve full employment and respond to inflation by spending less or using taxes to reduce private sector demand.”
Yes!
“2. The government should ‘borrow’ (i.e. sell government debt/bonds), when it wishes to raise the interest rate, or buy back government debt/bonds when it wishes to lower the interest rate.”
This part is confused, more below.
“3. Balancing the budget should not be the basis on which government policy decisions are made”
Yes!
If we observe the bond market, selling bonds to the public does not change the supply if reserves or deposits, no change to the money supply. However, it does result in an increase in public equity and wealth.
Public buys bonds as an asset swap:
-A (Deposits) +A (Bond)
Banking system payment then Gov spending:
-D (buyer) -R (buyer’s bank) + bond (buyer).
Gov spends:
+R (gov payee’s bank) +D (payee)
Together sells bond to deficit spend:
-D -R +Bond +R + D = 0 + Bond
The Gov selling bonds to the public results in No net change to reserves, No net change to Depodits, No net change to the Money supply.
If banks buy:
-R + Bond asset swap.
Gov spends
+R +D
Together
-R +Bond +R +D = +Bond +D
Selling bonds to banks increases Deposits, and not result in an increase in public equity. Nothing deflationary about it.
Fed buys and Gov spends = +R +D so Increases total reserves, not decreases.
The Gov selling bonds and having the gov spend the proceeds does not decrease the supply of reserves
See also Richard Murphy "Fourth, as a banker the government is also able to make good the deficiencies in the commercial financial services market, including the fact that very few banking or other savings relationships provide a link between a person’s savings and the use of money to fund investment. As a broker between savers and investors (a role long ago abandoned by banking as it is not required within fiat currency banking) the government could, for example, offer hypothecated savings accounts to lure savers into saving for a purpose. This is not strictly necessary since the government can always fund any investment it wishes to make by asking its central bank to create new funds for it, but it may nonetheless wish to use this option because:
• It reduces the amount of tax it might need to withdraw from the economy as a result of that new spending, effectively matching savings and investment in the fiscal cycle rather than matching investment to a revenue cycle."
Fantastic post Jim! One of your best ever!
As you know, to me this is the MOST important part of MMT, which I would characterize as managing the monetary system to deliver full employment at 2% interest rates, but when it’s doing well tax away excess capital and run a surplus to reduce inflation rather than raise interest rates and have people lose their jobs, companies and homes.
“governments should focus on real-world outcomes such as full employment and the absence of inflation, rather than, abstract goals such as balanced budgets or deficit targets.”
Amen!
“1. The government should spend to ensure sufficient levels of demand to achieve full employment and respond to inflation by spending less or using taxes to reduce private sector demand.”
Yes!
“2. The government should ‘borrow’ (i.e. sell government debt/bonds), when it wishes to raise the interest rate, or buy back government debt/bonds when it wishes to lower the interest rate.”
This part is confused, more below.
“3. Balancing the budget should not be the basis on which government policy decisions are made”
Yes!
If we observe the bond market, selling bonds to the public does not change the supply if reserves or deposits, no change to the money supply. However, it does result in an increase in public equity and wealth.
Public buys bonds as an asset swap:
-A (Deposits) +A (Bond)
Banking system payment then Gov spending:
-D (buyer) -R (buyer’s bank) + bond (buyer).
Gov spends:
+R (gov payee’s bank) +D (payee)
Together sells bond to deficit spend:
-D -R +Bond +R + D = 0 + Bond
The Gov selling bonds to the public results in No net change to reserves, No net change to Depodits, No net change to the Money supply.
If banks buy:
-R + Bond asset swap.
Gov spends
+R +D
Together
-R +Bond +R +D = +Bond +D
Selling bonds to banks increases Deposits, and not result in an increase in public equity. Nothing deflationary about it.
Fed buys and Gov spends = +R +D so Increases total reserves, not decreases.
The Gov selling bonds and having the gov spend the proceeds does not decrease the supply of reserves
You may like to explore David Colander’s suggested fourth rule of functional finance. 😀
See also Richard Murphy "Fourth, as a banker the government is also able to make good the deficiencies in the commercial financial services market, including the fact that very few banking or other savings relationships provide a link between a person’s savings and the use of money to fund investment. As a broker between savers and investors (a role long ago abandoned by banking as it is not required within fiat currency banking) the government could, for example, offer hypothecated savings accounts to lure savers into saving for a purpose. This is not strictly necessary since the government can always fund any investment it wishes to make by asking its central bank to create new funds for it, but it may nonetheless wish to use this option because:
• It reduces the amount of tax it might need to withdraw from the economy as a result of that new spending, effectively matching savings and investment in the fiscal cycle rather than matching investment to a revenue cycle."
https://www.taxresearch.org.uk/Blog/2023/04/18/modern-monetary-theory-an-explanation/
I don't know what the UK equivalent is but that's essentially what Superannuation is in Australia and the 401k and Roth IRAs are in the US.
Thanks for the ‘heads up’ Darren, Post a link please so I and others can check it out. :-)
You should be able to find it inside this: https://community.middlebury.edu/~colander/articles/Functional%20Finance,%20New%20Classical%20Economics%20and%20Great%20Great%20Grandsons.pdf
Thanks Darren.