April 24, 2019

Safe assets ― how the state pampers the Oligarchy

Comment on Dmitrieva/Liz McCormick on ‘America’s Big Deficits Are Solving a Big Problem for Markets’* and on Paul Jay (host) on ‘Modern Monetary Theory ― A Debate Between Randall Wray and Gerald Epstein’**


Dmitrieva and Liz McCormick explain: “At home, the economy’s expansion is about to set records for longevity ― a reminder that it won’t last forever. When that kind of foreboding takes hold, it translates into demand for safe assets. And Trump is supplying them ― at a pace of about $1 trillion a year, matching the projected shortfalls in the U.S. budget.”

How can it be that the free-market economy has problems and needs the state to solve them? Isn’t the free-market economy the best problem solver humanity has ever invented?

To begin with, what is the “big problem for markets” that President Trump’s deficits are supposed to solve? For an answer, one needs some elementary macroeconomics. The process of deficit-spending and safe-asset issuance goes schematically as follows:

(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 in a given period, i.e. D≡(G−T). Deficit-spending on current production causes a one-off price hike (NO inflation) and the business sector ends up with macroeconomic profit Q≡(G−T). With deficit-spending, the government creates a free lunch for the Oligarchy.

(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. Deposits at the CB are money.

(iv) The interest rates on both sides of the CB’s balance sheet are for a starter set to zero.

(v) If government deficit-spending continues period after period deposits grow continuously. Since deposits bear no interest the Oligarchy’s desire for a safe investment opportunity becomes more urgent over time.

(vi) Now, the government consolidates its overdrafts at the CB 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. After issuance, the bonds are traded on the secondary market which grows continuously.

(vii) In order to pay the interest on bonds, the government taxes the household sector and hands the money over to the bondholders, i.e. the Oligarchy. The disposable income of the taxpayers decreases and that of the bondholders increases. The IRS makes sure that the Oligarchy gets its interest on time and in full. This is the beauty of a safe asset.

(viii) The income redistribution from WeThePeople to the Oligarchy goes on as long as the public debt is rolled over.

So, the policy of permanent deficit-spending/money-creation entails some real benefits for the Oligarchy, i.e. (i) a free lunch because of Public Deficit = Private Profit,#1 (ii) a permanent safe interest income on a growing public debt which takes the form of safe assets = government bonds, (iii) a liquid secondary bond market.

All this works fine: “As and when the U.S. Treasury market explodes due to more issuance, you’ll be seeing a lot of investors simply dashing for safety and buying that debt,’’ said Milligan at Aberdeen Standard. “Supply often creates its own demand in the bond market,’’ he said. “It’s a peculiar phenomenon.”

Very peculiar, indeed. The state sees to it that the Oligarchy gets a free lunch by deficit-spending and then offers government bonds as a safe asset which produces a safe interest income courtesy of the IRS. In the limiting case, it holds Financial Wealth of the Oligarchy = Public Debt of WeThePeople.

Roughly speaking: The continuous creation of financial wealth and the supply of safe interest-bearing assets has become, in the free-market economy, the first and foremost economic task of the state. In other words, the Oligarchy is on the full life support of the state.

From this follows politically that MMTers are NOT the benefactors of WeThePeople but the useful idiots of the Oligarchy.

Egmont Kakarot-Handtke

* Bloomberg
** The real news network
#1 The complete macroeconomic Profit Law is given by Q≡Yd+(I−S)+(G−T)+(X−M).

Related 'Gosh! the One Percent have gotten $21 trillion richer: Links on Distribution'. For the full-spectrum refutation of MMT see cross-references MMT.

REPLY to Kaivey on Apr 25

You say: “I worked that one out, Egmont, Karl Marx was right, free-market capitalism forces wages down too much which drives down demand.”

Marx was a sociologist and political agenda pusher. He had no idea how the economy works and what profit is. It seems that you have not realized this.#1, #2, #3

#1 Dear idiots, Marx got profit and exploitation wrong
#2 Here is the long-overdue scientific death certificate for Marx and Marxists
#3 Profit for Marxists