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Debunking MMT

Cullen, I found an interesting MMT blog which discusses the operational reality of the Fed to prove their currency sovereignty claim (govt spends first, then taxes).

Link: http://heteconomist.com/exercising-currency-sovereignty-under-self-imposed-constraints/

The author starts with simple points of logic, yet in a sense I think this is quite intriguing.

As a simple matter of logic, a currency-issuing government that imposes a tax denominated in its own money cannot receive tax payments until it has first issued that money. Likewise, it cannot borrow its money from the non-government without first having issued money. A currency-issuing government creates money when it spends or lends. Tax payments and purchases of government debt result in the destruction of money. This makes clear, as a matter of first principles, that government spending or lending must occur before tax payments or government borrowing can take place.

According to above paragraph, before you can pay tax, you need to receive the money which is spent by the govt prior to tax payment. After all, in order to pay the tax, reserve balances (which are the base money) are required to commit the transaction.

Now, MMT is aware of the limitation imposed by the US law which prohibits the Treasury to over-draft its account at the Fed and directly sell its bonds to the Fed. So, the author argues that in order to cope with these limitations, he claims prior to selling the govt bonds, the Fed lends the reserves to primary dealers so that they have money/liquidity to purchase the bonds from govt. If it is assumed to be true, then I would agree with MMT notions because when the Fed is lending, it means that the govt through the fed as its agent, spend the money into existence at the first place.

To debunk whether MMT claims are correct or not, I would like to ask the question.

Is the Fed allowed by law to lend the reserves to primary dealers for purchasing bonds ? (which is then cleared by finding reserves loan in interbank market).

The MMT people get this wrong. There’s absolutely no need for the govt to spend before taxing. For instance, most people pay their taxes with bank deposits. Bank deposits are created independent of government spending. So, as long as banks create money taxes can be paid.

The MMT people respond to this by saying that taxes settle in reserves. But the only reason reserves even exist is because there is a private credit system. Further, saying that reserves precede taxes is the logical equivalent of saying that reserve issuance IS govt spending. As a matter of logic, this makes no logical sense.

The MMT people really make a mess out of the reserve system. They pretend to be experts about reserve accounting, but their entire paradigm is a bunch of basic mistakes that misconstrue what the reserve system is, why it exists and how it works.

There’s plenty of good stuff in MMT, but this stuff about the govt not needing funding is nonsense. It’s just wrong in a very basic manner.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche