Sunday, 21 February 2021

MMT vindicated.

Brian Romanchuk makes the point that MMT is becoming more widely accepted in that the debate on the debt does not (as it use to) concentrate on what the maximum safe size of the debt is or whether the bond vigilantes will scupper a country if the debt gets too large. Instead, the debate is about how big the debt and deficit can get without sparking off excess inflation.

And the latter has for many years been one of the basic points made by MMT: i.e. that there is no maximum possible size for the debt as a proportion of GDP. Rather, the only important question is how large the debt and deficit can be before excess inflation kicks in.

But there’s another way in which the debate has shifted onto MMT ground, which is closely related to the above point. It’s to do with the MMT point that government and central bank have no option but to meet the private sector’s so called “savings desires”. Savings desires is MMT speak for the amount of government and central bank liability that the private sector wants to hold: that liability being government debt and base money (aka “reserves”).

I.e. if the private sector wants a bigger stock of base money, and the state does not provide it, then the private sector will save with a view to attaining its desired stock, and the result will be Keynes’s so called “paradox of thrift unemployment”.

Over the last ten years or so there has been a never ending, desperate and ultimately futile attempt by the Tory Party in the UK to cut the deficit and debt. Unfortunately they’ve been hit in the face by brute reality: the reality that the state just has to meet the private sectors “savings desires”, as shown in the image below.

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