February 15, 2019

Dear idiots, government deficits do NOT cause inflation

Comment on Michael Lebowitz on ‘Modern Monetary Theory and its Fictional Discipline’*

Blog-Reference and Blog-Reference

It’s a Pavlovian Reflex among economists and laypersons alike: when they hear an MMTer talking about deficit-spending/money-creation, some cretin shouts Weimar or Zimbabwe. This reflex is as old as the Quantity Theory of Money.#1

The problem is, of course, that economists and laypersons alike have no idea how the monetary economy works. This is excusable for laypersons but not for economists. The fact is, in methodological terms, economists lack the true theory. The fact is that economists do not know after 200+ years what profit is.

Because the Profit Theory is false, the whole analytical superstructure is false including, of course, Money Theory, Distribution Theory, and Employment Theory. This prevents to this day the understanding of the effects of public deficit-spending/money-creation.

The process goes schematically as follows#2, #3

(i) The initial economic configuration is the elementary production-consumption economy. The initial state is characterized by market clearing and budget-balancing of the household sector C=Yw, i.e. the households fully spend their wage income Yw on consumption goods, and zero profit of the business sector Q≡C−Yw=0.

(ii) Now, the government deficit spends. Deficit D is defined as public spending G minus taxes T, i.e. D≡G−T. T is set to 0. Deficit spending on current output causes a price hike and the business sector ends up with macroeconomic profit Q=G. Note well, a one-off price hike is NOT inflation.

(iii) The business sector fully distributes profit. The distributed profit Yd goes to the Oligarchy and takes initially the form of deposits at the central bank. The CB’s balance sheet shows government overdrafts on the asset side and the Oligarchy’s deposits on the liability side. Both sides are equal to the penny. In a fiat money regime, deposits at the CB are money. Government deficit-spending increases the quantity of money.

(iv) The government consolidates overdrafts by selling interest-bearing bonds. The bonds are bought by the Oligarchy and paid for with deposits. The CB’s balance sheet shrinks. The Oligarchy’s portfolio consists of bonds and money. In the limiting case, both overdrafts and deposits reduce to zero, that is, the quantity of money is back at its initial level.

(v) This process can be identically repeated again and again. There is no further price hike and NO inflation. What happens is that the financial wealth of the Oligarchy grows in lockstep with the public debt ($22 trillion and counting) with the quantity of money remaining roughly at the same level. And this is an observable fact.* All relevant economic magnitudes are measurable with the precision of two decimal places.

Dear Quantity Theory retards, get it: The lethal effect of MMT deficit-spending/money-creation policy is NOT on inflation but on distribution.

Egmont Kakarot-Handtke


* SEE IT market
#1 Wikipedia Quantity theory of money
#2 From MMT misunderstandings to the true Theory of Money
#3 Deficit-spending, public debt, and macroeconomic profit/loss

Related 'MMT: Distribution is the drawback NOT Inflation' and 'Economics as tireless production of proto-scientific garbage: inflation theory as an example' and 'Links on Inflation' and 'Money and time' and 'MMT was right all along: Gov-Deficits do NOT cause inflation' and 'Settling the MMT―Inflation issue for good'.

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*  Twitter Mar2

Source: Twitter

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REPLY to Noah Way on Feb 16

You say: “Sectoral balances assume that money is a limited physical resource and as such are complexity irrelevent.”

Sectoral balances “assume” nothing about money. Q+S=0, for instance, says that the balance of the business sector Q and the balance of the household sector S always add up to zero. This simple fact, though, is beyond the comprehension of people who call themselves economists.

You can assume that I have demonstrated the relationship between balances and money somewhere and I assume that you know how to google it.