Paying for public services, in a monetary sovereign state


EraBlog.com has the article Paying for public services, in a monetary sovereign state.

Every time our national Government spends, it creates some of its money for the purpose. I know commercial banks create a great deal of deposits for themselves, and a great deal of what is normally defined to be ‘the money supply’ by lending to their customers, but they can only do this because they have access to Government money, in the form of their reserves at the RBA. There are two ways for this money to be created. One is the Government spending this money (permanently) into existence, and the other is the RBA lending this money (temporarily) into existence.

This is a very good explanation which should be easy to accept if you don’t think really deeply about this.

Having thought a little more deeply about MMT (Modern Money Theory), I have some minor quibbles with some of the wording. The post does eventually get to mention that the Fed buys a lot of bonds. This explanation mitigates some of my quibbles about previous statements.

One of the things I have come to quibble with about MMT explanations is that MMT uses accounting balances in sectors to come to certain conclusions that are overstated. What is overblown is To say that fractional reserve banking in the private sector does not produce high powered money because for every dollar given out as a loan the books also carry a counterbalancing accounting entry of the borrowers promise to repay the loan. In a static accounting sense this balance is certainly true. However, the static accounting balance does seem to blind MMT to the dynamic impact of giving out spending money immediately and the counter balancing transaction is to repay that money later, sometimes much later.

That lent money has tremendous economic impact in the time between the giving out of the money and when it has to be paid back. The article’s statement that government bonds that pay interest are the equivalent of deposits at the Fed is one of those instance where the article ignores the time shift factor. To get cash for a bond that has not matured, the owner has to get someone to buy that bond back. If the Fed buys it, then the bond was no more than similar to a reserve account at the Fed. If someone in the private sector has to put up the money to buy the bond, then it has a different economic impact (the amount of money available to be spent in the private sector) than if the Fed buys it.

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