February 18, 2019

Some nasty MMT surprises behind the time horizon

Comment on Eric Tymoigne on ‘“What You Need To Know About The $22 Trillion National Debt”: The Alternative Interview’*

Blog-Reference and Blog-Reference

To the question, how are you going to pay for it? MMTers have a simple answer: deficit-spending/money-creation.

To the question, how are you going to repay the public debt? MMTers have a simple answer: “In terms of tax rates, the public debt will never be repaid. We have not been burdened with higher tax rates to repay the public debt created at the time of our grandparents; our children and grandchildren won’t be burdened by higher tax rates to repay the public debt created today. We may raise tax rates in the future but not with the goal of repaying the public debt. There is no reason to do so, and doing so would be harmful to the finances of households, banks, firms and other for the reasons I just provided. The public debt will keep piling up to accommodate the needs of our growing economy and the US government will keep paying it on time. The US government does not, has never, and ought not to, manage the public debt in the same way you and I manage our private debts.”

MMTers simply shove the answer beyond the time horizon. The public-debt rabbit is put into the cylinder and then is gone out of sight. Everybody is well aware that this is a trick. The question is how does it work?

The process goes schematically as follows:#1, #2

(i) The initial economic configuration is the elementary production-consumption economy. The initial state is characterized by budget-balancing of the household sector C=Yw, i.e. consumption expenditures C are equal to wage income Yw, and zero profit of the business sector Q≡C−Yw=0.

(ii) 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 production causes a one-off price hike (NO inflation) and the business sector ends up with macroeconomic profit Q=G.†

(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.

(iv) The government normally consolidates overdrafts by selling interest-bearing bonds. The bonds are bought by the Oligarchy and paid for with the deposits. The CB’s balance sheet shrinks again. The Oligarchy’s portfolio consists of bonds and money = deposits at the CB.

(v) Here, we ignore step (iv) and assume that zero-interest deposits/overdrafts are simply accumulated. Suffice it to note that interest on public debt has redistributive effects.

(vi) Steps (i) to (iii) are repeated for an indefinite time. Accordingly, public debt in the form of overdrafts grows. On the other side of the CB’s balance sheet, the Oligarchy’s deposits grow in lockstep.

(vii) As a matter of pure logic, this process can go on to infinity. Thus far, MMTers are right.

(viii) The concept of debt, though, logically entails repayment in finite time. So, in some period t the question arises of how to reverse the process of debt build-up. Simple answer: the stock of deposits is revalued to zero uno actu with the government’s debt. Subsequently, things go on with a new currency.

(ix) Step (viii) is a bad surprise for the Oligarchy’s grandchildren. The alternative is taxing away the deposits. In this case, there is tax T but no government spending G, i.e. a budget surplus, and both sides of the CB’s balance sheet go to zero.

(x) Step (ix) is also a bad surprise for the Oligarchy’s grandchildren. So, let us tax WeThePeople instead. Accordingly, consumption expenditures are reduced to C=Yw−T. Government spending G is zero, so there is a budget surplus and the government’s overdrafts are reduced. However, the business sector now makes a loss Q=−T and its overdrafts increase by the same amount. On the CB’s balance sheet only the composition of overdrafts on the asset side changes.

(xi) The logical end of (x) is a complete replacement of public debt by business sector’s debt. However, before this happens the economy breaks down because of the continuous losses of the business sector. Step (x) is a bad surprise for ALL grandchildren.

MMTers tell everyone that all is fine for “our” grandchildren because, after all, they owe the public debt to themselves. True, all is fine for someone who falls from a skyscraper until they pass the first floor.

MMTers are fraudsters. They deceive WeThePeople first about the profit-effect of deficit-spending/money-creation#3, then about the redistributive effect of interest on public debt, and finally about the nasty surprises behind the time horizon. The rest of the economists either understands nothing or is complicit.#4

Egmont Kakarot-Handtke


* New Economic Perspectives
#1 The new macroeconomic Paradigm
#2 From MMT misunderstandings to the true Theory of Money
#3 Why the MMT benefactors of humanity never talk about profit
#4 There is NO such thing as “smart, honest, honorable economists”

† Deficit-spending on current output and deficit-spending on long-lived investment goods are different things. The latter has been dealt with elsewhere.

Related 'MMT is ALWAYS a bad deal for the 99-percenters' and  'Austerity and the political games Progressives play' and 'Links on Austerity' and 'On the saying “We owe the debt to ourselves”' and 'Stephanie Kelton sells children into debt slavery' and 'Just one more day: How deficit-spending delays the breakdown of Capitalism' and 'Q: How are you going to pay for it? MMT: By stealth taxation!' and 'How to pay for the war and to be bamboozled by economists' and 'MMT: The art of shooting oneself in the head' and 'From the debt economy to the gift economy: how America is brainwashed to love budget deficits'.

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Worthwhile Canadian Initiative Dec 26, Mathematical idiocy at work: Nick Rowe and infinity