MMT Economics

Great Debates
1

MMT stands for a few basic propositions.

  1. Savings (or monetary savings) = debt.

Money is always the liability of a bank; either a commercial bank (bank deposits) or the central bank/government (Federal reserves, currency).

Commercial banks lend money into existence. When a bank makes a loan, it creates a deposit. The deposit is (of course) in the exact amount of the loan. Bank deposits, which are credits to the nonbank public, are therefore always the same as the total amount banks have lent to the public. The public, in turn, owes banks the same amount (plus interest).

Considering the private sector alone, therefore, the total amount of savings minus the total amount of debt always nets to zero.

  1. The only way the private sector can net save, therefore, is if the government goes into debt. The net savings of the private sector is - “down to the penny,” - the same as Federal debt.

  2. Sovereign governments, that issue their own currency, can never run out of money. They can never go bankrupt, or become insolvent.

These are, so far as I can tell, self-evidently true. They’re “accounting identities”.

But when you consider them together, they transform some economic policies into literal nonsense. For example, encouraging Americans to save more, while attempting to pay down government debt. Or encouraging Americans to save more and while also paying down their debts.

They also shed some light on the current situation. If Americans are attempting to save more and to pay off debts, the result will be they can only do one or the other. If they pay off debts, they will have less savings; and if some save more, it can only be because others go deeper into debt. Meanwhile, if they’re spending less, they create an economic slowdown - and unemployment - which only compounds the problem.

In America the problem is also compounded by the status of the dollar as the world’s reserve currency. Foreigners who obtain dollar-denominated savings reduce the amount available for Americans to save.

If all this is true, it also means that the policy pushed by the Republicans - of reducing deficits through spending cuts - is economically counterproductive - at least until or unless unemployment falls substantially.

Am I missing anything?

2

This isn’t true. Banks must keep some money as a reserve, and thus bank deposits are greater than bank loans. Plus, there’s no requirement that I have to save at a bank. I can buyw stocks, commodities, or bury physical currency in my back yard.

3

You’re conflating economic logic with down-home logic. Unfortunately, people use down-home logic, and the economy is made of people. The government makes some attempt at using economic logic, but they are elected by and answerable to the people. Of course, this isn’t helped by the fact that macroeconomics is still an infant science, and even the big names in the macroeconomic world don’t put a lot of stock in their advice; otherwise, elected officials could hold out against public demands better.

4
  1. More typical is to write “total savings equals total investment (assuming equilibrium :cool: )”.

If you forgo a vacation to buy stock in an IPO, your stock purchase is considered “savings” but no debt is created.

  1. Sounds logical … but then why was the U.S. Treasury just downgraded? :dubious:

  2. Correct conclusion. Slightly flawed reasoning.

  3. I think so. You may want to rethink the relationship between savings and debt.

5

Monetary savings and net worth are not the same.

Net worth means that you assign some value to everything you own (by whatever method) and then subtract the value of your debts. When you calculate net worth, you include things like the equity in your home, the value of your stocks, and any and all other material possessions that you have.

The net worth of all Americans is somewhere in the neighborhood of $55 trillion dollars. (This is an estimate, of course, since market values change from day to day, aren’t always known precisely, and are themselves approximations.)

Monetary savings represent the exact dollar amount of money that you have.

Monetary savings are made up of bank deposits and currency.

The difference between “savings” and other assets is that savings can be used to buy things. Assets must be sold. Savings are subject to inflation, but their value otherwise doesn’t change. The value of savings is a known quantity. Their dollar value doesn’t change, because they are actual dollars.

Savings are demanded differently than other assets. People want stocks (for example) when they’re feeling optimistic. They want savings when they’re uncertain or afraid.

Savings are also supplied differently. Because they’re supplied by debt, the supply of savings tends to contract at the same time that demand for them expands. Left alone, this phenomenon leads to deflation and depression.

Finally, it’s important to understand that money is never transformed into something else. It can be created and destroyed, but it can’t be changed into houses, or stocks, or anything else. When you buy stocks, the money isn’t transformed into stocks - it simply changes hands. There’s no less - and no more - money in existence because stocks go up, or because they go down. The same is true for all other assets. The value of stocks is a psychological phenomenon. It’s not a measure of how much money has “gone into” stocks. That never happens.

So, no, foregoing a vacation to buy stocks has no effect on collective savings. It may change one person’s estimation of his net worth, but it does not - and cannot - have any effect on the amount of savings of people generally. Stock market valuations change people’s sense of wealth, but they have no effect on the amount of monetary savings.

S&P downgraded US debt because they either don’t understand that the US cannot (involuntarily) default on its debt, or because they believe the danger that the US will voluntarily default increased.

6

Alright. Explain Iceland.

Even the ability to issue money cannot save a sovereign from insolvency, for the simple reason that a country on the brink of insolvency that attempts to solve the problem will simply have its currency deflate so rapidly it’ll never catch up. This is what happened to Iceland; the krona became worthless. The ability to create more krona isn’t relevant because nobody wants krona. It’s not worth the electrons needed to transfer it.

There are lots of other examples of sovereign governments going bankrupt. Argentina went bankrupt in 2001. Germany went bankrupt after World War I. Zimbabwe is effectively bankrupt now. Newfoundland gained independence, went bankrupt, eventually was granted independence again, and was running out of credit again when it finally joined Canada.

7

Well, you’re more right than he is. In a super-strict technical sense, he’s right. But he’s right in such a pathetically limited way he’s wrong.

Let me explain: Because debts will be nominal currency (i.e., say I owe you 100 BanditBucks), I can always inflate away the problem. However, this is a terrrible slution and will liekly wind up hurting me much mroe than bankruptcy. And technically, a sovereign state doesn’t declare bankruptcy. It nullifies the debt using its sovereignty and/or uses that threat to negotiate with its creditors. But it does NOT want to completely wreck its credit rating which does give them some leverage, unless the state is a complete disaster like Zimbabwe, in which case creditors usually have a lot of warning.

8

“Savings” has a technical definition in economics totally different than the way you use it.

The technical term “Money” is closer to what you called “savings” but, I’m afraid, this substitution makes your remarks less sensical.

9

The reserve requirement applies to deposits, not to loans.

Banks must have more loans than deposits. Loans are assets to banks, liabilities to borrowers. Similarly deposits are liabilities to banks. If a bank has more liabilities than assets, it’s insolvent.

The difference between a bank’s assets (loans) and liabilities (deposits) is its capital. If a bank has no capital - or less than no capital - it’s bankrupt.

The non-bank private sector always owes more to banks than the amount the banks owe to the public (otherwise the banking sector would be insolvent). The only way the non-bank private sector can have a positive financial, monetary balance is if the government provides those balances by spending more than it taxes - in other words, by running deficits. Government debt = private sector savings.

10

Icelandic banks are insolvent (I believe, I haven’t really studied it). Iceland - the country - is not.

Icelandic money is not worthless. According to link it’s trading at 115 to the dollar. More importantly, it’s not worthless in Iceland. So long as Iceland has the ability to create krona by spending, and destroy it by taxing, it has the ability to maintain the krona at any rate of inflation that it wants. Whether outsiders want krona depends on how much they want Icelandic stuff. If they want Icelandic stuff, they need Icelandic krona. If they don’t want want Icelandic goods and services, then they don’t need Icelandic currency.

Any country that borrows in someone else’s currency - and has to pay the debt back in foreign currency - can become insolvent if it can’t obtain foreign currency. The idea that a sovereign nation can’t go bankrupt is predicated on the idea that it’s borrowing in its own currency, not someone else’s.

11

A sovereign nation can inflate or deflate its own currency at any rate it wants. MMTers advocate increasing the money supply (through deficit spending) when unemployment is high and inflation is low. They similarly advocate decreasing the money supply (by running government surpluses) when unemployment is low - or effectively 0 - and inflation is high.

The fact that the government can create runaway inflation doesn’t mean that it must, or that it should.

12

I’m not sure that that’s true. But if you may substitute “monetary savings” or “financial savings” or just “money” if you want to. So long as we’re clear about what we’re talking about, the label doesn’t matter. What we’re talking about is bank deposits - savings accounts, checking accounts, etc. - and currency. Savings is money not spent.

From my point of view, if you have a savings account, it’s savings. If you have money under your mattress, it’s savings. In fact, it doesn’t matter where you keep it, so long as you haven’t spent it yet, it represents your savings.

From my point of view (and I believe this is consistent with how the word is used in macro-economics generally, but if not, I’m happy to know if I’m wrong) stocks, houses, and baseball card collections are not “savings”. They may be investments. And they’re certainly part of a person’s net worth. But they’re not savings.

13

Now that we know you think “savings” does not include stocks, you seem to imply that those who “encourage Americans to save more” don’t want them to use those savings to buy stocks. This is counterfactual.

Here is an online Definition of Saving:

Or from another online economics primer:

It did not take me long to find these Googling; I hope it won’t seem condescending to say that I was struck by your presumption that your definition of “savings” was as likely to be correct as mine. :smiley:

I do recommend you learn basic terminology before espousing your economic theories. After that, Google again to find:

14

I realize it is popular to say banks create money out of thin air by loaning it,but it is not true. Loans are money transferred from a bank’s assets, which are (in a simplistic model) the deposited money.

There is no particular reason a bank “must” have more loans than deposits.

That isn’t what “insolvency” is. Insolvency is the inability to meet financial obligations. You can remain solvent with minimal assets. Heck, I’m doing it right now.

15

How can a bank loan out more money than it has in deposits? Where is it getting the extra money to loan?

16

Loans and deposits will typically be roughly equal, depending on how those terms are defined exactly. Loans can easily exceed deposits if the bank has high shareholder equity or high long-term debt.

It is true that “commercial banks create money” and that much of OP, however confused the rest was, is correct.

17

How do banks create money?

I think your definition of creating money and the OP’s are very far apart. There are a lot of people out there who think they when they get a loan ,the bank is literally creating the money out of thin air.

Banks do engage in fractional reserve banking which allows for greater velocity of money, so on and so forth, but banks do not literally just create the money for your mortgage out of thin air.

18

If you deposit ten $100 bills and the bank turns around and lends them out to another then, counting the $1000 in your checking account as “real money”, $1000 has turned into $2000 ! If it is a regulated bank, government auditors will attempt to assure that this “created” money is backed solvently, but otherwise whether this involves “thin air” is a semantic question I won’t get involved with.

And those $100 bills themselves (Fed Res greenbacks) are created “from air” (thin or otherwise) via a similar process! (These banknotes are not themselves “government fiat money” but rather obligations of the solvent FRB.)

The mechanics of money creation may be interesting in a fun way, but “a little knowledge is a dangerous thing” and it is usually misguided to draw far-reaching conclusions about national economic policy from the mechanics of money creation. When OP started equating “money” with “savings” I was whacking my head.

19

Yes, you’re describing fractional reserve banking, although you’re leaving out the fraction part. Whether this constitutes creating “money” is a semantic point.

Understand, what’s going around the Internet is that the bank doesn’t need the deposit first; they literally create the money, by typing it into their computer, the way you typed your post.

20

“Insolvency” has at least two meanings. One is inability to pay debts; the other is liabilities in excess of assets. In the case of banks, banks can always pay debts so long as the have access to Fed funds. The Fed does not allow banks to run out of funds, because that would lead to Depression-style bank runs. The Fed closes banks when the Fed decides they’re insolvent. The definition it uses - at least in theory - is that their liabilities exceed their assets.

When a bank makes a loan, it simply credits the amount of the loan to the account. In the ordinary course of business banks make loans first, and - if they need them - obtain reserves later. Deposits are one way to obtain reserves, but not the only way.