Monday, 13 May 2019

Article in the Frankfurter Allgemeine by Dirk Ehnts on MMT.


The article title is “Die Lösung liegt in höheren Staatsausgaben.”

I only read part of the article (the part highlighted by Lars Syll). So I won’t pass judgement on the article as a whole. But there’s a mistake in it, as follows.

Incidentally, I don’t speak German very well: I just used on of those instant online translation services to translate the article into English.

Anyway, the paragraph starting “Solange Geld auf dem…” claims deficits (i.e. private sector surpluses) are needed because people want to save for retirement and businesses want a positive cash flow. The flaw in that idea is as follows.

In the simple case of where the number of pensioners is constant as a proportion of the population and there is zero economic growth and zero inflation, clearly it is true that people want to save cash plus government debt/bonds among other things for their retirement. But they run down that stock of assets during retirement: i.e. money and other assets flow from pensioners to younger people who themselves are saving for retirement. So in that scenario, there is no need for a government deficit.

As for businesses, it is reasonable to assume they want a stock of cash, but again, in the above “zero growth and zero inflation” scenario, there is no reason for that desired stock to expand every year.

I suggest the actual reason for more or less non-stop deficits is that the private sector (including those saving for pensions and businesses) want a more or less constant stock of cash and government debt. (The sum of those two is sometimes referred to by MMTers as “Private Sector Net Financial Assets” (PSNFA)).

However, inflation constantly eats away at the real value of that  stock. Ergo the stock has to be constantly replenished, and that can only be done via a deficit.

Thus (and reverting to pensioners) pensioners’ desire to save does explain the need for deficits, but it’s not the desire to save as such which is the explanation. It’s the “inflation eating away at the real value of PSNFA” which is the explanation.

Indeed, on the subject of PSNFA, note that when I referred to “cash” above, I should really have said “base money” (i.e. state issued money as opposed to commercial bank issued money). Reason for that is that base money is a net asset far as the private sector is concerned (i.e. it is PSNFA), whereas commercial bank issued cash is not: that is, for every dollar of commercial bank created cash, there is a dollar of debt owed to a commercial bank, thus commercial bank issued money nets to nothing.

Incidentally, I’ve been pointing to that “inflation explains deficits” point for several years now. I’ve never seen any other economist grasp or appreciate the point.


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