Modern Monetary Theory: The Right Compass for Decision-Making

Intereconomics has the article Modern Monetary Theory: The Right Compass for Decision-Making.

MMT is, first and foremost, a balance sheet approach to macroeconomics.

This is a limitation of MMT. A balance sheet is a snapshot of the economy in time. A succession of balance sheets may seem like a dynamic description, but physicists call this a “quasi static” approximation. It may or may not be a good model of a dynamic system. A bank lending money has a borrower’s IOU to balance out the transaction. However, the time between taking out a mortgage and the 30 years before it has been paid back, there are a lot of economic consequences that occurred from a transaction that balanced out to zero all that time.

Surely, the Greek government, surpassing 200% of public debt to GDP in 2021, would be in for a repeat of the euro crisis. It did not happen. As we all know by now, a government cannot run out of its own money for technical reasons.

Greece is not sovereign in its own money. Greece uses the Euro which it cannot create in the way the USA Fed creates the dollar. Putting the above excerpt in this article, does not give me great confidence.

MMT sees the purchase of government bonds by the central bank as an asset swap.

This is how Sophocles got himself in trouble by abusing syllogisms. Every purchase of something is an asset swap, money for the item purchased. There are other kinds of asset swaps that are not like money for items. when someone jumps to another conclusion by asserting that buying bonds is “just” an asset swap, then you should wonder to yourself how this transaction may differ from other asset swaps.

Can you take a USA Treasury security to the grocery store to buy a loaf of bread? If not, there must be something different between money and a USA Treasury security.

In fact, a bank loan is “just” an asset swap. The bank gives you money and you give them a promise to pay it back. Unlike the USA Fed, you cannot redeem your IOU with another IOU. The bank expects monthly payments in real USA money, not promises of money.

In general, I believe that MMT is a good, but not perfect, description of the economy. As someone who made a living from writing software that modeled integrated circuits, I was a firm believer in understanding the limitations of your model. A model is not real life, or you wouldn’t call it a model. Some day, I will read the rest of the referenced article because I have other quibbles with MMT that could stand some examination.

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