Wednesday, 25 October 2017

Is base money a liability of the state?

Eric Lonergan recently devoted about 4,000 words to considering whether base money is a liability of the state without coming to any clear simple conclusions far as I can see. (Title of his article: “MMT part III – conclusion, and a conversation with Ben Bernanke”).

Here is a simple clear answer in just thirty words.

The state has the power to grab any amount of base money off the private sector via tax whenever it wants, ergo base money is not a liability of the state.

If you want me to expand on the latter point, here are another hundred words or so.

If you lend me £X and we sign an agreement covering that loan, stipulating rates of interest, and so on, but I have the power to break into your house, and confiscate your copy of the agreement, and then tell you to whistle for your money, then that £X liability  of mine is a bit of a strange liability. In fact it’s not a liability at all.

Or as Warren Mosler, founder of MMT, put it, base money is like points awarded by an umpire in a tennis match: they are an asset of the players, but not a liability of the umpire.

Hope that’s sorted that out….:-)

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