Think More Deeply About Modern Money Theory


I have come to think about a nuance of MMT that I don’t hear being discussed by the proponents of the theory. They talk about doing sector balances to come up with some basic truths of MMT. The sectors are Federal Government sector and other sectors that are not the Federal Government. They show that the only way the other sectors can get a surplus of USA money is for the Federal Government to have a net outflow of USA money.

The fly in this ointment concerns Treasury securities that the USA treasury sells to the other sectors. When you buy a Treasury security, you own something of value, but you are letting the Federal Government hold your money for you. Your money that the Federal Government gave you by spending money into the non-government sectors, is not available to you to spend as long as you hold Treasury Securities instead of the money. In fact, during WW II, one of the means of controlling inflation was to encourage you to lend your earnings back to the Federal Government by buying war bonds.

If you wanted to spend an equivalent sum of money to what the Federal Government was holding for you, you had to sell your bond to someone else in the non-Federal government sector. Now the Fed was holding onto someone else’s money instead of yours, but it still was not outside the Federal government sector.

The sector balances may still be true if you are measuring wealth ownership, but is not so true if you are talking about spendable wealth. It seems to me, if you are assessing the stimulative effect of what we traditionally call Federal Government deficit spending, this effect is largely diminished by selling treasury securities in the amount of the deficit. The stimulative effect can come from where the government spends the money that it does not leave to you to spend. The Federal Reserve bank undoes some of the damage of Treasury security sales, when the Fed buys these securities on the open market and pays the money into the non-Federal Government sectors. If the Fed were allowed to just give the money to the Treasury without the necessity of the Treasury selling securities, the stimulative effect would be even higher.

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