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Spending chains and Sankey diagrams — Alan Hutchison

Summary:
Understand spending chains and you understand a fair chunk of Modern Monetary Theory. When the government spends into the economy it initiates a sequence of financial flows in the non-government sector. The first recipient of the spending is likely to re-spend some or all of it and subsequent recipients will do the same, and so on. That’s a spending chain.At first glance it looks as if the money will bounce around the economy forever and if that were the case the government would have to stop spending or inflation would soon result. Fortunately, there are two things which stop the money being used indefinitely: tax and savings.The best way to understand this is with the aid of a Sankey diagram.…The Gower Initiative for Modern Money StudiesSpending chains and Sankey diagramsAlan

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Understand spending chains and you understand a fair chunk of Modern Monetary Theory. When the government spends into the economy it initiates a sequence of financial flows in the non-government sector. The first recipient of the spending is likely to re-spend some or all of it and subsequent recipients will do the same, and so on. That’s a spending chain.

At first glance it looks as if the money will bounce around the economy forever and if that were the case the government would have to stop spending or inflation would soon result. Fortunately, there are two things which stop the money being used indefinitely: tax and savings.

The best way to understand this is with the aid of a Sankey diagram.…

The Gower Initiative for Modern Money Studies
Spending chains and Sankey diagrams
Alan Hutchison
(Published on Matches in the dark 18th October 2018 · Updated 20th November 2020)
Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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