by This article explains the ISLM view of MMT in some detail without being overly wonkish for general accessibility. While it is sympathetic to MMT, it is still wrong, but instructively so. Assumptions die hard.Notice the assumptions about the effect of changes in "money supply" based on money supply being settlement balances in the payments system ("bank reserves balances", abbreviated as "rb").The effect of such changes in conventional economics is based upon assuming that changes in the amount of rb in the payments system (base money) are determinative of changes in the amount of "money" available for spending in the economy that affects "purchasing power" and therefore price level (inflation). This assumes a "money multiplier" that controls bank lending through the amount of bank
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This article explains the ISLM view of MMT in some detail without being overly wonkish for general accessibility. While it is sympathetic to MMT, it is still wrong, but instructively so. Assumptions die hard.
Notice the assumptions about the effect of changes in "money supply" based on money supply being settlement balances in the payments system ("bank reserves balances", abbreviated as "rb").
The effect of such changes in conventional economics is based upon assuming that changes in the amount of rb in the payments system (base money) are determinative of changes in the amount of "money" available for spending in the economy that affects "purchasing power" and therefore price level (inflation). This assumes a "money multiplier" that controls bank lending through the amount of bank reserves. The notion of the money multiplier has been debunked, but many conventional economists have not yet picked up on this.
The concept of "crowding out" of investment assumes that government borrowing competes with private sector borrowing for investment. This assumes a fixed amount of "loanable funds" available for borrowing. This, too, has been debunked. In the first place, loans create deposits rather than deposits being necessary to extend credit. Secondly, government spending adds the precise amount that government injects into the economy after netting for taxes, which withdraw "money" from the economy (reduce deposits). The balance of the funds injected get transferred in the payments system from government liabilities of zero maturity (rb) to government liabilities of non-zero maturity (government securities usually lumped together as "bonds"). This drains the fiscal deficit from the payments system (monetary base) into government securities.
Conventional economics assumes that issuance of government securities "neutralizes" the purchasing power of the net government injection from deficit spending, that is assumed to be otherwise potentially inflationary. But government securities do not prevent spending other their basis since they are highly negotiable and also prime collateral. So there is essentially no difference between issuing government securities to drain the monetary base and not doing so, other than the interest. It is done operationally in order to facilitate the central bank hitting its target rate when setting the interest rate and not setting to zero, or not paying interest on reserves. In short, issuance of government securities does not neutralize deficit spending as conventional economists assume it does.
Conventional economists have monetary and fiscal operations and their effects wrong, so their analysis is without basis. But it is interesting to see how their analysis goes and this article may be useful in doing so.
Hopefully, one of the MMT economists will pick up on this article and "fisk" it point by point.
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