Jim, a question: when a government spends in excess of its revenue, is the deficit funded by borrowing money in the bond market, or is it provided by the central bank with no obligation to repay
Thanks for your question Brian. Orthodox economists would say it is funded by government bonds but that’s nonsense: government bond sales aren’t a funding mechanism. Search out my recent article on the topic for the details. The truth is that the government decides to spend on something and the central bank carries out that instruction. The difference between that spending and tax ‘income’ is shown as a figure on a spreadsheet. That figure can appear on the spreadsheet for ever and have no effect on current or future spending. The ‘funding’ has already occurred; that happened when politicians decided to carry out the spending that resulted in the deficit. The accumulation of historic deficits tells us how much net currency (or more accurately, net financial assets) has been added to the non government sector. Funding the deficit in the orthodox sense of the word, i.e., as it is used by orthodox economists would require removing net currency from the non government sector. Orthodox economists have everything the wrong way round, that’s why none of it makes any sense. You don’t need to find money to fund a deficit after the fact, a deficit is the result of net spending into the non government sector. In layman’s terms the deficit exists because the government spent it into existence. And it didn’t have to ‘find the money’ because it’s the issuer of that money, the only net issuer of that country’s money.
Thanks for this. Your point under Myth 4, that MMT is fundamentally descriptive, is I think really important to stick with because that's what gives it credibility to the ordinary punter. I think the people who want to start "doing" MMT are fundamentally wrong. MMT describes how government money works. One can use that understanding to give bungs to one's mates or to make society work better. Maybe something like "MMT-informed progressive policies" would be the thing, but not "MMT Policies"!
You are right Hillary, The entire 'doing MMT' stuff is just misleading. Describing the mechanics of government spending is neither left-wing nor right-wing. However, arguably making public that which is hidden in order to pull the wool over the eyes of the public could be regarded as a political act.
A few notes from me that hopefully won't be too irritating:
- There is very little evidence to support the wage-price spiral hypothesis, the profit-price spiral is a much more credible explanation, especially for recent events.[1][2]
- Friedman's famous statement that "inflation is always and everywhere is a monetary phenomenon" was actually in reference to broad money (M2) rather than state-issued currency (M0).[3] This has been consistently misinterpreted and weaponised for use in support of austerity.
I'm not sure if you are saying that the actual idea that wages increases can be inflationary is incorrect or that (as the article you point to seems to suggest) there is just little evidence that wage are in fact increasing?
Re: Friedman's "inflation is always and everywhere is a monetary phenomenon" myth
My article clearly doesn't buy into Friedman's beliefs: on the contrary it debunks them.
Re: Broad money
I do refer to Broad money in my article - when debunking the Friedman myth. Here's a quote from my article, "Second, most broad money (commonly called the ‘money supply’) is created through commercial bank lending, not the central bank. "
I could be misinterpreting your comment: maybe you are not criticising but rather just re-enforcing what is in it?
Great piece, Jim. Very lucid - and your points are made very concisely, actually — despite the length of the article!
Thanks Fred. Your positive comment is much appreciated. :-)
Jim, a question: when a government spends in excess of its revenue, is the deficit funded by borrowing money in the bond market, or is it provided by the central bank with no obligation to repay
Thanks for your question Brian. Orthodox economists would say it is funded by government bonds but that’s nonsense: government bond sales aren’t a funding mechanism. Search out my recent article on the topic for the details. The truth is that the government decides to spend on something and the central bank carries out that instruction. The difference between that spending and tax ‘income’ is shown as a figure on a spreadsheet. That figure can appear on the spreadsheet for ever and have no effect on current or future spending. The ‘funding’ has already occurred; that happened when politicians decided to carry out the spending that resulted in the deficit. The accumulation of historic deficits tells us how much net currency (or more accurately, net financial assets) has been added to the non government sector. Funding the deficit in the orthodox sense of the word, i.e., as it is used by orthodox economists would require removing net currency from the non government sector. Orthodox economists have everything the wrong way round, that’s why none of it makes any sense. You don’t need to find money to fund a deficit after the fact, a deficit is the result of net spending into the non government sector. In layman’s terms the deficit exists because the government spent it into existence. And it didn’t have to ‘find the money’ because it’s the issuer of that money, the only net issuer of that country’s money.
Thanks for this. Your point under Myth 4, that MMT is fundamentally descriptive, is I think really important to stick with because that's what gives it credibility to the ordinary punter. I think the people who want to start "doing" MMT are fundamentally wrong. MMT describes how government money works. One can use that understanding to give bungs to one's mates or to make society work better. Maybe something like "MMT-informed progressive policies" would be the thing, but not "MMT Policies"!
You are right Hillary, The entire 'doing MMT' stuff is just misleading. Describing the mechanics of government spending is neither left-wing nor right-wing. However, arguably making public that which is hidden in order to pull the wool over the eyes of the public could be regarded as a political act.
Fantastic article, thanks for sharing.
A few notes from me that hopefully won't be too irritating:
- There is very little evidence to support the wage-price spiral hypothesis, the profit-price spiral is a much more credible explanation, especially for recent events.[1][2]
- Friedman's famous statement that "inflation is always and everywhere is a monetary phenomenon" was actually in reference to broad money (M2) rather than state-issued currency (M0).[3] This has been consistently misinterpreted and weaponised for use in support of austerity.
Thanks again for your work.
[1] https://www.neweconomybrief.net/the-digest/the-wage-price-spiral-myth
[2] https://www.unitetheunion.org/media/4757/unite-investigates-corporate-profiteering-and-the-col-crisis.pdf
[3] https://substack.com/@mmtmichael/p-193883210
Thanks for your comment Matthew,
I'm not sure if you are saying that the actual idea that wages increases can be inflationary is incorrect or that (as the article you point to seems to suggest) there is just little evidence that wage are in fact increasing?
Re: Friedman's "inflation is always and everywhere is a monetary phenomenon" myth
My article clearly doesn't buy into Friedman's beliefs: on the contrary it debunks them.
Re: Broad money
I do refer to Broad money in my article - when debunking the Friedman myth. Here's a quote from my article, "Second, most broad money (commonly called the ‘money supply’) is created through commercial bank lending, not the central bank. "
I could be misinterpreting your comment: maybe you are not criticising but rather just re-enforcing what is in it?
Thanks,
Jim
Re-enforcing. Sorry for being unclear.
:-)