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Your MMT Critique

I really enjoyed your MMT critique. I had one question though. You said that MMT misunderstands the concept of "funding", but you seem to be using an unconventional definition of funding. Can you explain this section to me like I am a 5 year old?

Modern Monetary Theory (MMT) Critique

It's just endogenous money. Basically, anyone can create money and the trick is in getting other people to accept it. When you can get people to accept your liabilities you have funding. So, if I walk into a bank and they're willing to be my counterparty then I have funding. If I can sell Orcam stock to you as a shareholder I have funding. If the govt prints up cash and gives it to someone then they have funding.

Now, the part that MMT messes up is that they just assume that govt spending is self financing. Ie, they assume people will always want the liabilities they issue. This isn't always true. For instance, when inflation is raging out of control it is, in part, because the demand for money collapses. In other words, people are trading money for real resources or other assets. So it is very wrong to assume that govt spending is self financing. It is definitely not.

This is important to understand because the govt, while having exorbitant privileges, is not immune from needing counterparties in the non-govt sectors. This is why it's simply wrong to say that taxes don't fund spending. They absolutely do since income is a sign of credibility and demand for the currency in the exact same way that my bank will want me to have income to ensure that I am credible. MMT makes a circular argument in saying that taxes don't fund spending and resources constrain govt spending. Of course, if the govt doesn't have valuable resources to move then they don't have income and credibility and people won't want to hold their liabilities. Inflation will thus ensue. This is precisely what happens to me if I run out of income sources and resources. My credibility inflates away and I become insolvent.

Of course, govts go bankrupt in real terms and households go bankrupt in nominal AND real terms, but that's simply because the govt doesn't take itself to BK court and will always sell its assets to its own central bank even if that central bank is effectively a fake source of demand (as is evidenced during every hyperinflation).

Unfortunately, MMT creates confusion like this on many topics. They create a smart enough sounding narrative that it kind of makes sense. But a more nuanced and sophisticated understanding exposes MMT for what it is - a decent explanation of things with some pretty significant misunderstandings about important concepts.

I hope that clarifies.

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

It's just endogenous money. Basically, anyone can create money and the trick is in getting other people to accept it. When you can get people to accept your liabilities you have funding. So, if I walk into a bank and they're willing to be my counterparty then I have funding. If I can sell Orcam stock to you as a shareholder I have funding. If the govt prints up cash and gives it to someone then they have funding.

I have 2 questions. Let me ask the first one. Liability side in balance sheet comprises 2 parts: liability and equity. If the "money" (highest until lowest degree of moneyness) aka credit is always a liability, how can I differentiate money in my hands is liability itself or equity ?

Of course I know equity is simply the subtraction result between asset and liability. But I need more comprehensive answer what differentiates them.

The goal of the bank is to accumulate capital/equity through loan repayment (nett interest) which is in the form of money. But then, the money it issues is liability to someone else (deposits holder). Both of them are money and they confuse me. Hope you understand the point of my question.

If you hold money it's an asset for you. Whether it is equity on your balance sheet depends on the quantity of liabilities you have. Assets - liabilities = equity.

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

If the govt prints up cash and gives it to someone then they have funding.

This is second question. Are you saying that although govt prints up cash and give it for free to people, it is still liability for govt ?

Cash itself is already money with highest degree. Following your statement means cash is issued as liability and find someone who is willing to accept it in exchange for something.

If you issue stock and find someone to accept it in exchange for cash/deposit, then it's fine cause stock has less degree of moneyness than cash/deposit. If govt issue cash, and find someone as counterparty, then these cash is exchanged for what ? Is there any other form of money which have higher degree of moneyness than cash ?

The govt could buy anything with cash. It could also just give it away. It's still a liability for them in any case.

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