MMT: The accounting of government budget deficits

Edward Harrison here with a Modern Monetary Theory-inspired post.

Econ 101

Imagine you and I are the only two people in an economy. For the sake of argument, say we use sea shells as a currency and we trade with no one else but each other. So when we do trade, we exchange goods and services with each other for the amount of sea shells these goods and services are worth. From an accounting perspective, it’s a wash; if you buy my goods, I get the sea shells and lose the goods of equivalent value and if I buy from you, you get the shells and I get the goods of equivalent value. So far, so good.

Now, let’s bring a third person into the mix, Harry. Harry is a foreigner with whom who we agree to do business. Where he’s from, he uses silver as his currency. No matter; in trading with Harry, we agree to an exchange rate between our sea shells and his silver and we are ready to go. Now, we can trade with each other and with Harry. If Harry buys from either of us, we get silver and he gets an equivalent value of goods. If we buy from Harry, he gets sea shells and we get the goods, also equivalent in value to the shells.

Notice that in both examples there is no value ‘leakage’ in the system. Everyone gets a fair deal, goods for a currency amount equivalent in value to those goods. So, from an accounting perspective, we can trade as much as we want with each other and with Harry and all that is being done is a transfer of goods, services and currency between us. That’s Econ 101.


Now, let’s introduce some deficits and debt into the scenario. For the sake of argument, let’s say that year in, year out we produce the same amount, the same value of stuff. However, in one particular year, you produce a lot of stuff – and I want to buy it.  The problem is that I produce less stuff that you want to buy.  What do we do?  I could issue you an I.O.U. and tell you I will pay you back sometime later. You accept the deal and now I have received the goods and services and you have received an equivalent value from the two sources, currency and the I.O.U.  Again, it is a wash from an accounting perspective. I have a deficit in this particular year and you have a surplus.

Now, even if we add Harry and his silver and foreign goods into the mix, it’s pretty much the same.  For example, if you bought some of Harry’s services but didn’t have enough sea shells to pay for it, you could issue an I.O.U. to him for the shortfall. You would have a deficit with Harry for the year and Harry would have a surplus with you for the year. So, even when we introduce debt and deficits into an economy, the accounting is the same; there is no value leakage.

The government, the private sector and the foreign sector

What holds in my little example for three people also holds for three groups of people too.  You could have 100 million people in a group that you represent that does trade with my group and Harry’s group and the accounting would be identical. So, let’s give our groups names. I am the government, you are the non-government sector and Harry is the foreign sector. The sea shells are the domestic currency and the silver represents foreign currencies.

  • Me – government
  • You – non-government sector
  • Harry – foreign sector
  • Sea Shells – domestic currency
  • Silver – foreign currency

What should be clear from my example is that when the government has a deficit in any period, by definition the non-government sector (foreign plus private) must have a surplus of exactly the same amount. I have shown this to you in the past.

Real world examples of the financial sector balances

For example, I used Martin Wolf’s charts to show how Japan’s government and non-government sectors have balanced in my January post "Revisiting the sectoral balances model in Japan." The charts are below.



However you present the information, you get a balance. Here are two charts I used from Scott Fullwiler in a November post Barack Obama: “if we keep on adding to the debt… that could actually lead to a double-dip” showing the same phenomenon in the U.S.




And finally there is the European example from Spain’s debt woes and Germany’s intransigence lead to double dip. In that March post using another great chart from the FT’s Martin Wolf, I said:

The first thing to realize is that government deficits are balanced by imports and private savings. I’m talking here about the financial sector balances, of course.


The chart to the left from the FT shows you that the collective financial balances in each individual Eurozone country must sum to zero.  Where there is a government surplus it is matched by either the capital account or private balances. The same is true for deficits.  Take Spain, for example. There, the government’s budget was in surplus in 2006 and it had a very large capital account surplus (the financial sector equivalent of a current account/trade deficit). This was matched by a substantial private sector deficit. By 2009, due in large part to an unprecedented housing bust, the government’s finances were in tatters. Look at the chart. This is matched by net private sector savings and a capital account surplus.  The financial sectors must balance.

Conclusion: the financial sectors must balance

Notice I haven’t talked about government as the creator of currency and the private sector as the user of currency. I haven’t focused on any misallocation of resource or malinvestment issues. I haven’t raised the spectre of inflation or currency depreciation. I have simply presented the economics and accounting of budget deficits. 

The other stuff is where the politics and the ideology come into play but the accounting of federal government deficits is clear. When the government sector runs a deficit, the non-government sector runs a surplus of equivalent size. Draw your own conclusions about what this means in an era of government fiscal austerity.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. fresno dan

    I am really, really going to be interested in reading the comments!!!

    its funny though – even with the government debt going higher and higher, and therefore me getting richer and richer, I can’t afford to go downtown and see the strippers nearly as much as I used to.

  2. Dushyant Desai

    This is not a complete picture. The private sector and foreign surplus needs to come from real savings, profits and productivity andnot from additional debt and IOUs created by private sector and foreign governments.

    For the entire global economy, there is no foreign sector unless we have investors from Mars! Thus, on a global net basis either govt debt and private sector match in the long run or at least be able to service all the govt debt or we have a bust. I think we are now staring at the latter when the capacity to keep creating debt runs out or is questioned.

    It will be interesting to see the end game, to say the least.


  3. Jamisia

    Does this suggest that MMT is slowly gaining ground? Finally! I hope that people who want to spread knowledge of MMT target ordinary people first. Not through more posts, but in social / serious games. If a lot of MMT is described as counterintuitive, thinking different to win the game (or just to advance it) will ensure you ‘get it’ a lot faster.

    Anyway, thank you Edward Harrison!

    The three sectors of the economy can also be put in a formula: (G-T) + (I-S) + (X-M) = 0. In words: (government spending minus taxes) + (investment minus savings) + (export minus import) should add up to zero. The first part is the government sector (the budget deficit), the second represents the private sector and the third represents the foreign sector (the current account deficit). The formula is neither leftist nor rightist, it can be explained either way. But one does not / can not ignore that there is more to *the economy* than government finances.

  4. Emma Zahn

    I am new to MMT but since I spent several decades counting beans at various levels, I get the accounting part. The problem I have with simplistic explanations (note the qualifier) is how they basically negate the value of money.

    Sure money may have no intrinsic value but to have any exchange value people must believe in it and accept that it represents something else of value, especially people for whom the qualifier hard-earned is meaningful.

    You are going to have a hard time selling MMT until you incorporate a simple explanation for what makes money worth something in the first place.


    1. Edward Harrison Post author

      Emma, I am not ‘selling’ anything. Remember I am from the Austrian School. So I am presenting MMT in as neutral a cast as I can (without going into a tirade about malinvestment, the value of currency, inflation etc, etc. All of that will come later I suspect).

      But, as you say, the accounting makes sense.

      1. Emma Zahn

        As I said, I am new to MMT but my understanding is that government has to spend before it can tax. The thing is that in order for government to spend initially, people must be willing to accept that its money has exchange value beyond taxes. What is that value? I have my own ideas but have not read enough MMT to know what others think.

        1. stf

          Actually, the government’s money is accepted because it is necessary to settle tax liabilities. That is what enables govt to spend. In the US, “govt’s money” is reserve balances, since that is what gets credited to the Tsy’s account at the Fed to settle tax liabilities. As such, these reserve balances are always accepted by banks when the Tsy spends, and the account of the recipient of the spending is thereby credited.

        2. Edward Harrison Post author

          stf is right, Emma. In a fiat regime, the currency would quickly lose any value without the ability of the government to tax.

          MMT sees taxation as central to money’s value. While I differ on some points in this regard, I agree that the taxation issue is central to a fiat currency’s having value.

          1. Emma Zahn

            stf says:
            May 13, 2010 at 3:56 pm
            Actually, the government’s money is accepted because it is necessary to settle tax liabilities. That is what enables govt to spend. In the US, “govt’s money” is reserve balances, since that is what gets credited to the Tsy’s account at the Fed to settle tax liabilities. As such, these reserve balances are always accepted by banks when the Tsy spends, and the account of the recipient of the spending is thereby credited.

            ■ Edward Harrison says:
            May 13, 2010 at 4:05 pm
            stf is right, Emma. In a fiat regime, the currency would quickly lose any value without the ability of the government to tax.

            MMT sees taxation as central to money’s value. While I differ on some points in this regard, I agree that the taxation issue is central to a fiat currency’s having value.

            This does not agree with what I have read about MMT. Taxes are not necessary for the government to spend. They are instead a means to control the money supply and maintain exchange value. What I am looking for is what creates the value of fiat money in the first place. It makes no sense to say the government spends so it can tax.

            My own sense is that the government creates fiat money to facilitate the exchange of resources, goods, services abilities, talents, knowledge, etc. within its sovereign realm but it has to start with a reasonable, mutually-agreeable estimate of what these are worth. It cannot just print money and say, “here, use this to pay me back”. It must spend on things with some perceived value – preferably of value to a vast majority of people.

          2. Tom Hickey

            Emma, the government issues currency through expenditure to acquire real resources for use in meeting public purpose, which is government’s role in society. Government expenditure creates financial assets in the economy (public expenditure shows up in nongovernment deposit accounts).

            The Treasury’s expenditure must be settled in the interbank system, so the Fed adds reserves to the Treasury’s account, and these reserves are transferred to the banks holding the deposits created by the expenditure in the process of clearing. Now those newly created deposits can be consumed, invested, or saved by nongovernment as desired.

            Government expenditure increases nongovernment financial assets, and both consumer and capital spending resulting from this increase nominal aggregate demand. If NAD would exceed real output capacity, then inflation would result. So government withdraws some of the financial assets it injected by taxing in order to balance nominal aggregate demand with real output capacity.

            Expenditure increases nongovernment net financial assets and taxation decreases nongovernment financial assets. The deficit equals the nongovernment net financial assets created by government expenditure minus taxes.

            This is significant, because the financial assets that banks create by extending credit (loans create deposits) nets to zero. Banks cannot affect net financial assets. Therefore, as a macro effect, national savings must be provided by government deficits that create net financial assets.

          3. Thomasina Jefferson

            stf is right, Emma. In a fiat regime, the currency would quickly lose any value without the ability of the government to tax.
            The currency/money does not lose value, because its intrinsic value is (close to) zero. It loses ‘value’ only in the sense that being issued as debt that needs to be repaid with interest, it needs to be repaid by creating even more money. Which leads to the curreny supply and/or the money supply being inflated. This inflation can be small or large, depending on the interest rates being charged. Thus, because more currency is in circulation, you will need more of said currency for exchanging anything that you needed before. Why? Because currency is not only used as a means of exchange, but a store of value (which is the real problem).

            Besides, all government budgets I have seen so far don’t work by printing money. The have an income side (mainly taxes and tariffs) and an expenses side (which includes debt servicing). If there is a shortfall, which is always the case in the US, the difference is made up by ‘borrowing’ i.e. going into (more) debt, not by creating currency. Currency is created only when the Fed decides to buy the government debt, i.e. the treasuries, on the open market from private holders of that debt. However, that newly created currency does go not to the government, but to the private holder selling the treasury bill/note/bond.

            The problem with these budget deficits is that the add-up over the years and increase the debt servicing charges as compared to the total size of the expenses side of the budget. If not stopped, the debt service charges will outgrow the income side, and the ability the ability of the government is gone.
            The taxing power is not what gives currency it’s ‘value’, it only keeps it in circulation. It is the fact that it needs to be accepted as legal tender for both public and private debt by all parties that makes it useful as a means of exchange for goods and services. The determination of how much currency you need to procure a certain good or service is subject to change due to other factors than the taxing power of governments, namely the cost of commodities and labour that make up the good or service.

        3. Edward Harrison Post author

          Emma, again stf is correct about MMT. He was not saying taxes are necessary for the government to spend. Rather he was saying that the ability to tax confers value to fiat money. I believe it was Warren Mosler who held up a sheet of white paper in a conference i attended, saying in effect that the government could make it money and confer value on it if the government accepted that sheet of paper as payment for taxes. That goes to the core of MMT’s view about fiat money and how it is different than the gold standard.

          1. Emma Zahn

            Looks like we have circled back to the beginning of my objection to how MMT represents money.

            Certainly the government can declare a white piece of paper legal tender if it wants, although counterfeiting would be problematic, but it has to symbolize something else (full faith and credit?) of value or it is just a white piece of paper, not money.

            Money isn’t the paper or the digits. Those are just (more or less) concrete manifestations of its abstract value.

            MMT’s tragic flaws are how easily it can be misinterpreted to mean that 1) money is just paper or digits and 2) accounts summing to zero means deficits don’t matter.

            I have much more reading to do. Thanks for the conversation.

    2. Rogue


      This is my take on your question. The state/government provides the initial value to the economy, by injecting money to the economy via various government expenditures (without which there is no circulating fiat that can be used by its citizens to settle transactions in a growing economy). But if the correct conditions are present, i.e., the right businessmen are starting the right businesses, a stable business environment is engendered, people are employed and adequately earning, eventually the economy creates its own value, by generating a healthy growing demand for goods and services.

  5. Yearning to Learn

    when you explain it like this it makes a lot of sense.

    however, where I get tripped up is when we talk about the idea that governments MUST run a deficit if the private sector is to run a surplus (if no change in foreign trade happens).

    how does default play into this? can you expand your analogy?

    So there’s me and you and Foreigner. I buy from you and foreigner. I buy too much, so I go into too much debt. This is balanced exactly by the surplus that Foreigner has.

    now I’m in a bad space so I stop spending. In the past I think you’ve argued for the case that now “you” need to spend to keep things in balance… if you reduce your spending, then it will force me to spend (if overall accounting remains stable).

    but what if I just renege on my debt?

    seems to me that MMT would advocate either increased govt spending OR debt default. am I wrong?

    thanks in advance.

    1. Gerhard

      as I understand MMT, this is exactly the current problem. The Gov. is spending to little (otherwise no unemployment) und you are forced to spend, which you cant indefinitly. In contrary the Gov which can spend unrestricted because it has the monopoly in creating his own (fiat) money. No debt problem at all.

  6. Emma Zahn

    I forgot to add that using sea shells as an example of money will perpetuate the notion that collecting a material like gold, silver, etc, is monetarily meaningful.

  7. MyLessThanPrimeBeef

    Let say the squirrel gathers 50 nuts in a year and gives 10 nuts to the squirrel government.

    The squirrel now has 40 nuts and eats 30 and save 10.

    The squirrel government takes 10 nuts and squanders 5 nuts sprucing up the forest or feeding the squirrel leader. It has 5 nuts left.

    In this case, both the private sector and the public sector run a surplus.

    1. /L

      If the squirrel government needs 10 nuts to feed its nutty administration it issue some money, lets say 10 squirrel dollars of a value of a nut per dollar. It then buys 10 nuts from the squirrel gather. The squirrel gov now have 10 nuts to consume, the squirrel gather after eating 30 have 10 nuts and 10 squirrel dollars. This make the squirrel gather liquid and may cause inflation and decline in squirrel dollar value, the squirrel gov issue a tax on the squirrel gather to suck up some of his buying power to stop inflation.

    2. craazyman

      that’s right. And you might think that the “nut maker” is running a deficit by providing 50 nuts but taking nothing in as revenue, but the nut producer is Nature, which cannot run a deficit or a surplus.

      And we know from Contemporary Analysis that GNP = capital + labor + Nature + Imagination, or more formally, mathematically GNP = f(C, L, N, I). The function itself is a discontinuous probability function that can jumps around like your thoughts when you’re walking down the street. If you aggregate that over 6 billion people it really jumps around.

      We also know that money = property like wave = particle and since Nature is communal property it is also communal money, when brought into existence through observation and measurement.

      Since nature and Imagination each produce infinitely, without requiring any form of input, they violate any accounting identity. They are also stores of value, and therefore wealth, but only through the process of observation and measurement, less formally put, through the process of using the imagination to convert nature into capital. This is what Picasso did with a pencil and what Shakespeare did with ink.

      DT Tremens on an less than average day

      1. CS

        effin’ artists create value out of nuffin’ widout workin. watta fraud. an Picasso was a commie.

      2. Toby

        Excellent craazyman! When we compare our perpetual motion machine (the economy) with the one we really live in, we ought to be embarrassed at what a crap job we’ve done of it so far.

    3. Greg

      Problem with your story.

      We dont just go out and gather nuts to give to the govt. The nuts are actually created first by the govt. There are no nuts without the govt. Changes the whole dynamic when you think of it that way.

  8. Dave of Maryland

    I haven’t a lot of patience with theorizing. It’s too easy. It avoids too much.

    This is not theory:

    I work & work & work & work & have done so for decades. My neighbors work & work & work. But nobody has any money.

    How can this be? The rule is, work is exchanged for money. Work generates money. That’s where money comes from. Hasn’t anything to do with trading sea shells or coconuts. Or foreigners with pieces of silver.

    We need a system where work = money. We don’t have that system any more. We have a system where a lot of people work but have only debt, not money. A lot of people have money, but don’t seem to do anything. A casual observation says that such a system is not stable. Why are foreigners part of this?

    And that’s as far as I got in Mr. Harrison’s essay.

    1. chartalist

      When the government is consistently running low deficits it creates a slack in the economy. Low government deficit is one of the reasons why people keep working but don’t really see their living standard improve.

      Just a simple example: The US current account deficit was around 4% in 2009. If the budget deficit is anything below 4% than the private sector will be running a deficit. Suppose the budget deficit is 3%. Then the private sector surplus equals the budget deficit, 3% + current account surplus (-4%) and equals -1%. This is double entry bookkeeping, no theory involved.

      Thinking of it in a different manner, savings always equals investment domestically. If you want to increase saving beyond that there are two sources to finance your increased savings, budget deficit (injection of income from the government) or current account surplus (injection of income from abroad). That’s why the budget deficit enters into the equation with a positive sign while a current account deficit with a negative sign. One is an injection into private incomes and savings and the other is a leakage.

      Hope this helps.

    2. Fair Economist

      You’re falling for the money illusion. Work creates goods and services. They are not money. Money is an accounting fiction we use to exchange goods and services. In a complex society, almost everything gets done with money so people forget its fictitious nature and start thinking of it as the real thing create by work and investment. On an individual level, that’s actually fine; but on a societal level, when you’re talking about what governments should be doing, it’s profoundly misleading.

      Harrison is pointing out how meaningless the calls to have society “live within its means” and “save rather than spend” are. Those calls are always framed within the money illusion and so are nonsensical directed at society as a whole.

      1. sgt_doom

        Righto, and classical monetary theory completely ignores the prevailing idiom of our age: DEBT!

      2. run75441

        Fair Economist:

        Quite a bit has changed since Labor producing products and service was the measure for producing something of value. Wages paid to Labor for service and product was what was taxed. Unfortunately, the equation has changed. We now have asset appreciation creating value without labor, something in which banks (real banks) and the GS, Merrils, etc deal in today. Since the take down of Usury Laws by SCOTUS, it has become more profitable for profits to be gained from asset appreciation rather than value created by labor. It has been such since the early eighties as shown here: and what of profitability?

        “If you really want to raise a stink you could look at this as a great example of the Marxist immiseration of labor that Marx believed was one of the internal contradictions of capitalism that would eventually lead to its self destruction.” Spencer at Angry Bear

        The problem is we have gone away from the classical Labor input equals value to appreciation equals value. If this is to be our future, than tax it the same as labor.

    3. sgt_doom

      “Work generates money.”

      Sorry, Dave, but you’ve missed the entire scam we exist in today. DEBT generates money, which is why we have had a massive transfer of wealth upwards and the creation of those thieving debt-financed billionaires.

      This is why you’ve kept hearing about credit derivatives (CDOs, CBOs, CLOs, CMOs, CFOs, MBS, ABS, ABCP, CPDOs, ABS CDS, MBS CDS, and those pesky CDS or credit default swaps — which should be categorized as simple insurance scams), securitizations, hedge funds, private equity leveraged buyouts, and public-private partnerships: all basically the SAME EXACT financial construct.

      Work just generates old age today. Debt is the end-all and be-all — and that is what’s been screwing the rest of us…

      1. joebhed

        What you are saying is exactly correct.
        The debt-money system is the root cause of the unsustainability of our monetary-economic system, and at the same time the very real cause of our currently evolving monetary insolvency.
        However, nothing in that truth contradicts either what Ed has laid out on how MMT works, nor on this validity of the accounting for sectoral financial balances.
        While one of the shortfalls of MMT is that it does not address the impossibility of debt-money, many of the MMT proponents are aware of its difficulties and, including Prof Bill Mitchell state clearly that governments should NOT borrow their deficit shortfall, what I identify as “balances formerly known as deficits”.
        Eliminating debt-money “creation” from all finance is the next chore after the acceptance of MMTs bottom line, which is that “deficits do matter, and they are essential to our well-being”.

    4. craazyman

      Obviously you guys don’t have any talent. If you did, you be making millions of people miserable like me, making millions of dollars a day by pumping and dumping with a few mouse clicks. Too bad for you. Glad I’m a talented sort of human god. Or is that dog? Sometimes I wonder. But I can’t spell so what difference does it make. I don’t need to spell. Just pump the mouse and watch the numbers.

      -Jolly T. Trader, PhD, CFA, MBA, LLC, LLD, LP, offshore, onshore, up river, down south, up north, AA, BYOB

  9. /L

    Well it doesn’t account for how the financial wealth is allocated. Germany is touted as the responsible in the common euro situation getting rich by being thrifty and accumulating surplus sea shells. Greece was among the top growth in eurozone as euro member but the real wages of workers have grown at a much lower rate than the growth of productivity. The share of wages in GDP has been declining. Despite declining unit labour costs Greece, among other European countries, lost out to Germany in relative nominal labour costs. While unit labour costs in Germany rose only by 5 percent between 2000 and 2010, it increased by 30 percent in Greece.

    Ill guess that German engineering nation as usual didn’t lack in productivity growth or was less thrifty on that than the Greeks. When labor wages doesn’t grow with productivity it usually have made a bad deal and lost out to capitalists. Labor in Germany did a worse deal than the labor in Greece and EU and the Euro is in tatters.

  10. itad?

    there is what you see in the light, and what you do not see in the dark. at quantum intervals (recursive, resistive capacitive circuits), the looking glass migrates, and, suddenly, all accounts must balance. economies are driven by larger environments, all of which are self-correcting over time, which is relative.

    in your 8 hour day, how much time is spent efficiently doing what you are told to do, and how much time do you invest in preparing for what you believe will be necessary to do in the future? how much of each is measured?

    capital, money beyond circulatory requirements, numbers in computers and physical property, is supposed to reflect a storehouse of labor. therein lies the short. the numbers in the computer and the prices on the property are counterfeit. intelligent labor has been systematically devalued, and exploited resources have been sytematically inflated. trading requires trust.

    the best way to rob a bank is to own one. the best way to rob an economy is to place the unborn in debt.

    1. /L

      the best way to rob an economy is to place the unborn in debt.

      The best way to rob the unborn, coming pensioners and future generation is to let them inherit a society whit unemployment and a productive capacity way below its efficient potential. It’s what determinate their wealth, how easy they can produce to full fill human needs and wants. That is the only real way that we can save for our grandchildren and future pensioners. As a society we can’t save by not producing something today, if we don’t produce that bypass operation today it won’t be saved for the future.

      It’s remarkable that the present EU bosses and it’s bankster can without any serious protest engage in it’s proposed robbery of future generation.

      1. sgt_doom

        I would strongly rephrase that to: The best way to rob an economy is NOT to practise economic democracy, but instead have either the State, or the Corporation, monopolize land, capital and knowledge.

  11. /L

    The theories on money are interesting issue, considering the importance it’s remarkable that we don’t have more certain and irrefutable knowledge of how it works. Can it have something to do with those European princes always have been in dependence of banksters to rule and make war? Why haven’t the European princes freed them self from this dependence? Already the emperors of China at the time of Marco Polo, I believe it was, did have fiat money that the empire controlled by what did resembled CB open market operations – that is to be a real sovereign.

    Europe do have a monetary problem, its lives beyond its means, there is plenty of unemployment and surplus people, Europe is in the problematic situation that there isn’t enough money to buy what all these unemployed and surplus people could produce if they worked and produced stuff. It’s no way to run a society, there must be a solution, a final solution, Europe must get rid of its surplus population and get its “ratio of money to citizens” in due order.

    A Modest Proposal
    By Marshall Auerback

    1. joebhed

      Your excellent modest proposal should be part of the essential reading for every student of financial economics.
      But that would be secondary to two of the master’s attempts to turn-around monetary economics from blind-faith towards a scientific basis for understanding what money IS, and how it works.
      Those would be by Nobel Laureate Frederick Soddy’s: “Wealth, Virtual Wealth and Debt”, and the most succinct and direct writing on the subject, his “The Role of Money”.

  12. flow5

    The Keynesian system is farcical in the first place. For example savings does not equal investment, & in the national income accounts, [S=I + (G-T)] doesn’t balance either. There are many up-front “leakages” which have nothing to do with their “value”. Debits just don’t always equal equal credits.

    You may also define the distinctions away, but the consequences of government spending vs. private citizens spending are virtually diametrically opposed. MMT is has nothing to do with the real world.

    1. Emma Zahn

      Debits just don’t always equal equal credits.

      In accounting they do. They may not add up the way you want them to but the whole point of double-entry bookkeeping is that for every debit there is an equal credit and vice versa.

      1. fresno dan

        If this is basically accounting, than I am interested in accounting (pun intended) for default. If someone defaults, than total income(could this be termed wealth?) is decreased – correct?

        Now, if we go back to the shells, if the IOU is ripped up, or simply not repaid, the number of shells, silver, and coconuts in existence remains the same.
        But somehow that seems kind of screwy.

        If no one defaults (would some call this “extend and pretend”) than no wealth is lost. But if that is true, than why does everybody say we are in a financial crisis?

        1. Emma Zahn

          While it is true that in double-entry bookkeeping the sum of all accounts equals zero, what is much more meaningfull is which accounts have debit balances and which have credits.

          Equity/Net Worth with credit balance good; debit, bad.

          Summing to zero is a kind of proof but not otherwise meaningful.

    2. zeke

      You are so completely lost. No wonder you are almost always ignored whenever you post about MMT.

  13. Ed

    Does it matter that the government can tax you but can’t tax Harry?

    Also doesn’t this example depend on the person with the surplus believing that the person with the debt will repay it at some point in the future?

  14. Gary Anderson

    I am not the sharpest tool in the shed, but this can’t be right. There are a couple of problems. First, there is interest paid on the national debt. Second, US dollars are everywhere. So, this is not a cozy picture even if it is correct. It is possible for the US consumer and government to be in massive debt, both of them. I guess where this would then even up is that foreigners are the ones will all of the US wealth. That can’t last forever. It seems to distort the nice picture that the charts make. Is that the price for being the reserve currency? I’m confused.

    1. sgt_doom

      You’ve gotten the gist of it correct, Gary, it can’t last forever and it is truly a unique circumstance in human existence, which is why we should all be highly skeptical of any and all predictions today.

      We’ve (that is, humanity) has never before experienced a scam of such epic proportions. What happens next is anyone’s guess, but the fellow I knew who predicted all of this back in 1978, predicted the End of Capitalism As We Know It, by the end of 2012.

      And since he predicted the EXACT collapse of the Soviet Union (as well as several other complex and dated predictions), I suspect he may be right once again!

      1. Gary Anderson

        From Wikipedia: From the perspective of debt, the Keynesian prescription of government deficit spending in the face of an economic crisis consists of the government net dis-saving (increasing its debt) to compensate for the shortfall in private debt: it replaces private debt with public debt. Other alternatives include seeking to restart the growth of private debt (“reflate the bubble”), or slow or stop its fall; and debt relief, which by lowering or eliminating debt stops credit from contracting (as it cannot fall below zero) and allow debt to either stabilize or grow – this has as further effect a redistribution of wealth from creditors (who write off debts) to debtors (whose debts are relieved).

        Gary here: I have thought that the sovereign debt issue becomes a factor, because of interest on the debt, that messes with this stuff. As we cannot reflate the private sector very well now, we are trying to create massive government debt. But the wild card is the rating on the debt, the willingness of investors to buy the bonds, etc. At some point, aggregate demand must fall in what Pimco says is a New Normal. Or worse.

    2. Marshall Auerback

      Interest is paid on the government debt. To whom is it paid? As Randy Wray has argued several times, there are about 13 trillion dollars in Treasury securities at the Fed. Collectively, these savings accounts are known as the national debt. The national debt represents a portion of the combined savings of US residents, corporations, banks, and foreign governments. Tens of billions of dollars of these Treasury securities come due every week. When that happens, the Fed pays off that “debt” simply by transferring the dollars, plus interest, out of these savings accounts and back to the holders’ checking accounts.

      In the future when our grandkids make payments on Treasury securities, they will simply credit accounts at the Fed—just as we do today, and as our grandparents did before us. It is a simple matter of data entry, and not a financial burden.

      If the government spends and taxes wisely today, our grandchildren inherit roads, dams, parks, public buildings, and, most importantly, an educated and healthier workforce. These things are admittedly hard to value precisely—but there can be no doubt that our grandkids will be much better off having been born into a society that has modern infrastructure and services that our government policies can help to provide.

  15. MyLessThanPrimeBeef

    Let say the squirrel gathers 50 nuts in a year and gives 10 nuts to the squirrel government.

    The squirrel now has 40 nuts and eats 30 and saves 10.

    The squirrel government takes 10 nuts and squanders 5 nuts sprucing up the forest or feeding the squirrel leader. It has 5 nuts left.

    In this case, both the private sector and the public sector run a surplus.

    Then the squirrel leader eats his remaining 5 nuts, so now, he has none.

    But he’s still hungry.

    What does he do?

    What can he do? The squirrel leader ponders for a while and comes up with a brilliant idea.

    He picks up a pine needle and tells the squirrel that he would exchange the pine needle for a nut.

    ‘Why would I want to do that?’ asks the squirrel. ‘I can’t eat that pine needle.’

    The squirrel leader explains to the squirrel that the pine needle has writing on it that says, next year, the squirrel can exchange the pine needle for a nut. To impress on the squirrel this promisory note, the squirrel leader invites the fox, the snake and the rat as his witnesses. They all tell the squirrel that the promissory needle represents deficit on the part of the squirrel leader and, at the same time, savings by the squirrel.

    So, the squirrel meekly hands over one nut, accepting the squirrel-leader-autographed pine needle in return.

    Soon, the squirrel leader is hungry again and so, he scrunges up 9 more autographed pine needles for the squirrel’s remaining 9 nuts.

    ‘I am not so sure about this new scheme,’ says the squirrel.

    ‘Didn’t the fox, the snake and the rat tell you these autographed pine needles represented savings?’ says the squirrel leader. ‘The more autographed pine needles I give, the more savings you and the only way you can save is for me to borrow from you, by giving you these autographed pine needles.’

    ‘But, but, but’ stutters the squirrel, unable to comprehend the wisdom of the squirrel leader, looking at his empty store wishing he still has those 10 nuts instead of 10 pine needles.

    ‘Trust me,’ says the squirrel leader, ‘a modern squirrel, check that, a modern, thinking and intelligent squirrel knows the objective in life is to collect as many autographed pine needles as possbile.’

    ‘Forget about the nuts and focus on the autographed pine needles,’ as the squirrel leader conitunes with his educational lesson for the squirrel. ‘Before you didn’t have any autogtraphed pine needles. You were poor. Thanks to me, now you are rich with 10 autographed pine needles. That’s progress! That’s prosperity! And you will be richer still. Just remember though, the only way for you to get richer is for me to issue more autographed pine needles to yo and trust me, I want you to be very rich – the richest squirrel in all forests, I can help you achieve it.’

    All the while, the squirrel sits quietly thinking if he could just get his ten nuts back.

    1. Gary Anderson

      But the squirrel government has to pay interest on the nuts he lends out. That is where the problem with sovereign debt really eats at this model somehow.

          1. Tom Hickey

            A monetarily sovereign government that is the monopoly issuer of a nonconvertible floating rate (fiat) currency creates its currency by issuing it. Government issues currency by crediting bank accounts. When interest is paid on Treasury securities, the Treasury just credits bank accounts. No problem.

      1. ginger tosser

        … and the following year the weather is poor and the nut harvest is a disaster. The squirrel leader isn’t able to get enough nuts from the squirrel population to cover his debt of autographed pine needles.
        The hungry squirrel population with their abundance of autographed pine needles from last year and lack of useful edible nuts from this year start to get a bit p1ssed off at the slightly-more-rotund-than-last-year squirrel leader and rise up against the greedy leader and kill him. They are still hungry and still have a pile of worthless pine needles autographed by a dead leader.
        The squirrels that survive the winter then experience a bumper crop the following year with an abundance of nuts. They also held onto their pine needles just in case and luckily the new squirrel leader says he will honour the debt obligation. One pine needle for one nut – oh, and by the way, the nut tax has gone up this year you each owe us 25 nuts (we’ve got a lot of debt to repay!).

        The following year the squirrels gather up all the autographed pine needles, sit light to them and stick their leaders on top of the pyre.

  16. edward lowe

    “When the government sector runs a deficit, the non-government sector runs a surplus of equivalent size. Draw your own conclusions about what this means in an era of government fiscal austerity.”

    Edward … thanks for the post. Always interesting.

    My immediate response is, “who cares?” Only someone who eats digits and notions in ledger books would find this a very useful perspective. This point of view is certainly a terribly narrow (and trivial) frame for anyone who is serious about the health and well-being of the citizens of the nation.

    The real-world questions are, what can people do with those digits and notions that actually translate to economic value in their everyday lives? What sort of food, sheler, and clothing will they buy and in what amounts? How are those digits and notions related to labor, or to the division of labor? How do the competing claims between labor and capital over these digits and notions get settled? etc. etc.

    Yes, the government and the banks can print, print, print … and on graphs like those you have offered above, the digits and notions will certainly balance. People will still be eating tree bark or boiling old shoe leather. But boy will they have a lot of digits and notions to help ease the hunger pangs.

    ECON 101, huh …. How bout we just dump that textbook into the crapper where it belongs.

    1. Jeff65

      edward lowe,

      This is why Ed Harrison began with the hyper-inflation article last week. Your concern was spoken to in that article.

  17. ray l love

    Here is a hint at what I think the problem is:

    A producer pays a worker $1 to produce a melon. A consumer pays the producer $3 for the melon. The producer has a total of $2 in total inputs which of course leaves a profit of $1 and a simple GDP of $3.

    But if the producer pays the worker $2 and then charges the consumer $4… the simple GDP is $4.

    So, the problem is that profits have taken precedence over growth. This because the producers and their investors have far more political influence than the workers, and, as this imbalance exacerbates there is increasing downward pressure on human capital and on the value of the melon. But the melon and the work required to produce the melon are the true wealth and mediums of exchange are limited by this true wealth. But by devaluing this wealth the profits ‘seem’ to increase because a larger share of the melon’s value goes to the producer/investors.

    Competition between producers has an inherent paradox. We need competition as a motivator but when human capital and its influence on all values fall below a certain balance point ‘actual’ wealth creation wanes. What occurs instead is ‘leveraged’ wealth and that would be fine except for the difficulties in keeping incomes tied to asset values. But if wages and incomes were tied to real growth the economy would stay synchronized and then borrowing against the future would be far less risky. But the economics is easy compared to the politics. The bigger problem might best be described as many millions of proverbial monkeys with their hands stuck in many millions of jars.

  18. William R Neil

    Although he is not coming from the Austrian school, economist James Galbraith gave us a full chapter on the connection between trade deficits, public budget deficits, and private sector deficits (or surpluses, as the case sometimes is) in his book “The Predator State.” He devoted a full chapter to it under the title “The Impossible Dream of Budget Balance.” He says it’s a basic premise of macro-economics, but not widely quoted or understood by elected officials, that these three aspects of macro flows have to balance.

    He illustrates the point by explaining the debt run up by the private sector (business and households) in the late 1990’s as the US public deficit (government) was eliminated and we started to run surpluses: the private sector did the opposite because we at the same time had the huge trade deficits. He has also had a post with Ezra Klein at the WaPo on May 12th and an article in The Nation in March further expounding on the view.

    Not willing to take Galbraith’s assertions without some independent confirmation from a source which might not share his ideological orientation, I read Martin Wolf’s book “Fixing Global Finance” partly with an eye to seeking confirmation. I found it in a number of places, none of which reference Galbraith but basically confirm the flows he was talking about, and Mr. Harrison’s. They are at pages 7, 101, 104, 109 and 154.

    Readers who are interested in my views on “Debt, Deficits and Balanced Budget Bull” are invited to visit an essay of that title online at Our and you can get there by just Googling that title and William Neil; Part II is called “Austerity,Courtesy of the Best Men.” They are current, posted in late April.

    My argument in this essay is that the bond vigilante’s and the rating agencies and what’s left of “The STreet,” are attempting to control the debate on the political economy by moving the “sovereign debt crisis” to the center of the economic discussion. I argue that they are essentially trying to impose the “sound money” arguments of the 19th century without the formal gold standard, just as governments did in the 1920’s and 1930’s with disastrous deflationary impacts. Anyone who would like an electronic copy of the essay, just shoot me an Email at

    And thanks, Mr. Harrison for getting folks to look at these important interactions.

  19. RueTheDay

    WTF does any of this have to do with MMT?

    What Mr. Harrison laid out here are just the standard national income identities that every freshman econ major learns at every university in the world.

    1. Tom Hickey

      Yeah, someone who has taken Econ 101 needs to explain this to Larry Summers, so he can explain it to the president correctly and get him to stop making a fool of himself by claiming that “the government is running out money.”

    2. Thomasina Jefferson

      Yes, but the standard econ101 of neo-classical economics is the reason why we are in this mess.
      So why bother with a theory that has been utterly discredited over and over again?

  20. Edward Harrison Post author

    A lot of people don’t understand that deficit reduction is negative for growth in the short-term because they don’t understand the financial sector accounting that I have presented. They think that decreasing deficits increases savings when in fact it decreases private sector savings, while simultaneously reducing GDP. Over the SHORT-TERM, deficit reduction is negative for growth. The question is the LONGER-TERM benefit. That’s where the disputes(and the ideology) lie.

    Carmen Reinhart, the deficit hawk who everyone is quoting, makes exactly this point about deficits and austerity:

    “Carmen M. Reinhart: It may not be inevitable, but it certainly seems probable. The need for fiscal austerity in Greece is not an artificial imposition by the I.M.F. and big governments of the European Union. It is an arithmetic reality once investors have woken up to the dubious prospects for repayment by a government living well beyond its means. This lesson might be news to governments in advanced economies since World War II, but it has been a fact of life for emerging market countries.

    But fiscal austerity does not often have an immediate payoff. Such restraint, especially when significant in size and sudden in its enactment, almost surely contracts economic activity. This trims tax collection and increases unemployment and welfare benefits, working to scale back any progress in reducing the deficit. Even if new borrowing is reduced or eliminated, it takes time to whittle down a large outstanding stock of debt relative to income. Investors do not always have the patience to look past the immediate to that brighter future.”

    What she is saying is that fiscal austerity reduces taxes, reduces employment and INCREASES deficits in the short-term. It doesn’t have an immediate payoff. That means that austerity cannot work in the short run to reduce deficits massively, but only in the long run.

    The problem for Greece is that it is the user of currency and not the creator. Therefore, while it is undergoing austerity, it must worry about liquidity constraints like any other user of currency. This is not a constraint which the US or the UK face, for example. So, Greece must demonstrate it can meet its obligations or it loses the faith of investors and defaults. The HOPE is that it can show enough austerity commitment and resume enough growth after having implemented austerity to offset the initial downward shock that austerity creates. Otherwise its goose is cooked.

  21. Jay

    These aggregates are not very useful in thinking about a dynamic economy. If the public sector cuts its deficit, in aggregate the private sector will save less, but some of its savings will be allocated to other private sector entities, which will hopefully mean more productive investment. The savings of the private sector won’t be drained away to the public sector. One could imagine a purely private economy without a taxing state.

    1. Edward Harrison Post author

      Actually Jay they are useful. As I have said to Marshall I am also concerned about misallocation of resources but that’s beyond the scope of this post.

      What this post DOES point out is that reducing deficit spending makes a double dip more likely. And at this particular juncture in the economic cycle that is a very important point. Leaving the longer-term issue of industrial organization aside, the natural question is whether over the short-to-medium term, not the long-term, a collective reduction in government spending across a wide swathe of national and state governments could induce a global double dip recession.

      For me, the answer is clearly yes it could. Moreover, the currency fluctuations and trade flows are liable to increase political tensions, particularly between the US and the EU and between EMEA Emerging Markets and the Eurozone.

      My eye is very much attuned to the fallout of slow growth in the Eurozone for Eastern Europe. EMEA currencies are falling and with limited export growth coming from their major trading partners in the Eurozone and already stressed budget deficits, this will be a negative scenario there.

      Here’s what I see happening:

      1. Austerity in the Eurozone right across the board.
      2. Aggregate, yes, aggregate demand weakness and slow GDP growth in the Eurozone.
      3. Inability of EMEA countries to increase exports and gain economic traction.
      4. Increased credit losses for Austrian, German, French and Swiss banks operating in those areas.
      5. Simultaneous increased credit losses for Greek, Irish, Spanish and Portuguese banks undergoing austerity.

      And there are many other pieces to this that lead directly to the US. The point is that aggregates DO matter.They ARE a useful way of thinking about dynamic economies, particularly when you are concerned about fragile banking systems that cannot withstand another round of credit losses.

      1. Jay

        Thanks for your response, I understand where you are coming from but I don’t think you can separate the misallocation of resources from the prescription when you’re thinking about the economy. When people talk about aggregate demand they act as if public sector demand is a 1 for 1 substitute for private demand. It’s not, and going down that path leads us to both an more inefficient economy as well as a more corrupt society. Where Fannie and Freddie were meant to “make housing more affordable” their mission is now to prop up home prices, making housing less affordable.

        Also, GDP can increase through simple additions to the labor force, increase in the capital stock or an increase in productivity. Demographics have been at our back for the last number of years so taking on more debt seemed to make sense because we had the numbers to support it. Aggregate GDP was increasing simply because of huge additions to the labor force. Unlevered returns were higher than the interest burden, so we kept piling on debt. Now we’re facing the opposite, which if you were analyzing a company, would appear as a secular–not cyclical–revenue decline. The grand assumption is that this is cyclical and we will return to growth soon, but it isn’t and we won’t.

        The other issue is that the short run never ends or the long run never comes. The result is that the short-termism dominates until a massive crisis results, no matter what.

        I’m not advocating anarchy or anything of the sort. Government has a role to play, in my view a limited one. Our banks are dead in the water regardless of what we do at this point–as we said to Japan, the best way to get through this is to take the proper write down and start over. Deflation is the enemy of debtors, and unfortunately our society is drowning in debt. There’s really no way out other than to get rid of most of this debt. And looking at aggregates, I believe, leads one to the wrong solutions.

    2. Tom Hickey

      “One could imagine a purely private economy without a taxing state.”

      Right. It’s called anarchy.

  22. mezcal

    Thanks for the ongoing series, Edward.

    Unfortunately, at least to my mind, attempting to show how the accounting works is pointless. The books are garbage across the board and bear zero resemblance to reality.

    Mark to model, 23A exemption letters, massive off-balance sheet exposure spread across both the private and public sectors.

    Social Security, wars, JPM or WFCs SPV derivative books, etc.
    Just look at the loss ratios Sheila is taking week after week.

    No matter how you cut it, somebody’s going to have to take all the built up pain that’s lurking out there NOW.

    1. Greg

      I totally agree that someone will have to take the pain, the question is WHO?

      MMT suggests that this can de done by a one time currency “devaluation”( I dont like that term but I’ll use it) which SHARES the pain amongst all users of the currency. Current ideas are to force austerity only on certain segments of the population (govt workers) while sparing the titans of finance.

      There is no doubt there have been some poor financial decisions made but one group of people should not take the brunt of the hit, especially for ideological reasons.

  23. Tor

    But one key assumption here is that the production and consumption of goods and services stays constant. Then it must be true that extra surpluses in one sector equal extra debts in another.

    But if on the contrary you change the rate of production and consumption then this need not hold. For example the you and I on the island may collect a bunch of coconuts and not eat them, and in the process both increasing our net wealth.

    And government policy is not only about transfering from one sector to another, it also affects production and consumption. If Greece or California could reduce government waste, then public debt may be reduced without necessarily increasing private debt by the same amount.

  24. Event Horizon

    The key issue here is imbalance. The right way to look at the formula (G-T) + (I-S) + (X-M) = 0 is to put all the internal variables on one side, and the external ones on the other side. What this will tell us is that we cannot run large trade deficits long term without the entire country getting poorer. It doesn’t really matter if the government or the private sector is running a surplus if the other more than compensate for it. In short, importing more than we export makes us poorer. Period. What we need to do is stop buying stuff we don’t need from oversees or Harry will come one day and take our pants.

    Aside from wealth, quality of life can be improved by looking how wealth is redistributed internally. In the last 30 years the imbalance became greater… which coupled with less overall wealth to begin with (see above) makes most Americans poorer year after year. We took debt to keep our quality of life comfortable, but this is coming to an end soon. Buckle up, buy American, demand the government to address the external trade and internal income imbalances and watch your quality of life improving. If not, happy serving your (mostly) external masters.

  25. Hugh

    I came late to this thread. I should say that there is quite a bit I like about MMT but I find some of its explanations facile. Ed’s last paragraphs point to where some of the problems are. Another way of looking at it is that the core problem with MMT is that it looks at economics as a closed system. The elements are fixed and the end picture we get is a static shot. But in the real world, tangential players can have enormous impacts on the system. We can have misallocations and malinvestment. We can have fraud. So even if we accept that the books in MMT add up, how does this help us? As current events have shown us, books can add up, even or especially when they are cooked.

    1. selise

      “Another way of looking at it is that the core problem with MMT is that it looks at economics as a closed system.”

      Hugh, that’s just not so. you’ve been making claims about MMT, but you have yet to provide any link their material or even shown any sign that you’ve read the central material.

      i’d love to see an actual critique of their work — not invented strawmen.

      1. Hugh

        This is just a repetition of “To know MMT is to love MMT.” I don’t think you will win many converts to it with such appeals.

        I really am not responsible for the failure of MMT practitioners to articulate their theory in a coherent or persuasive way. I’m really not. I don’t need to read Fisher to know what debt deflation is or Keynes to understand aggregate demand. The ideas stand on their own. Apparently this is not the case with MMT.

        I have said before that I have problems with all monetary theories because there is so much of the real economy and how it functions which they fail to capture. I think MMT is particularly guilty of this. Emma Zahn zeroed in on the central focus that a discussion of MMT or any other monetary theory does, and that is the question it raises about what money really is and means. I do not think I am alone in thinking that MMT is fairly glib in how it plays with the digits. Well, to a certain extent you can play around with them, but at a certain point these manipulations have real world consequences, especially with regard to the nature of money itself. No amount of reading and massaging is going to change weaknesses which are intrinsic to the theory, and much as I like certain aspects of MMT, I see several of these in it. Sorry if that offends.

        1. selise

          “This is just a repetition of “To know MMT is to love MMT.”

          nonsense. it also requires knowing a bit about a subject to critique it. in other words, it may be “to know mmt is to hate mmt” — but knowing is the prerequisite.

          it’s not your criticisms i object to, it’s the continued disconnect from the actual material that irks.

          1. stf

            Selise is right. Please FINALLY provide a specific link where MMT says or at least in your opinion argues (1) the economy is a closed system (yes, accounting is a closed system, but the economy is not), (2) there is no fraud (hint: Bill Black is an MMT’er), (3) we can’t have misallocations and malinvestments (another hint: Jamie Galbraith is an MMT’er). To know MMT is obviously not to love MMT, but to understand MMT or at least try to understand MMT is to be taken seriously. You obviously don’t care about the latter. So why should we care about you?

          2. stf

            Another quick add on. “To know MMT is to love MMT” critique is just your way of avoiding actually addressing Selise’s point. There are many people I can think of just off the top of my head that comment on MMT blogs who are not MMT’ers but do understand MMT, and their criticisms are serious and we respect them. Also, consider Ed here doing the post. He’s an Austrian, not MMT. He clearly “knows” MMT quite well, and doesn’t agree with all of it. But we pay attention to his criticisms precisely because he knows what he’s talking about when he talks of MMT.

    2. Jeff65


      What other way of arranging or looking at monetary systems addresses misallocations, malinvestment and fraud without the need to legislate against specific bad behaviors? IMO, expecting this is a fantasy. Such a system simply does not exist.

      1. Hugh

        The point is that we have just seen how theory did not remotely correspond to reality. So looking for a theory that addresses these issues among the current crop is a non-starter. That is the fault of the theorists, not those of us who criticize such theories. What we need are theories that cut the crap and look at markets actually operate, how they are controlled, and by whom.

        As for the defensiveness without supporting argument or evidence put forward by MMT partisans, that is a mark of a weak theory. If they have arguments they should make them. As it is, they do not take up the onus of proving their theory for us. It is we who are supposed to accept it apparently no matter what. I find this extraordinarily doctrinaire. I mean look at them engaging in ad hominems. I am taken to task because I said they are pushing this line of “To know MMT is to love MMT” and then what do they do? They tell me that if I knew MMT better I would love it too. How can I or anyone argue or engage in discussion with such cultishness? As I keep saying there are aspects of MMT that I agree with. But this demand for rigid acceptance, well, I can think of no better way for a theory to discredit itself.

        1. Jeff65


          You aren’t making a specific enough criticism of MMT for anyone to attempt a defense. If you were to do so, your characterization “to know MMT is to love MMT” would quickly and easily be demonstrated as false.

  26. Septeus7

    I find this theory totally wrong because it assumes that all the values that are in deficit or surplus are fixed with respect to time whereas the values of the goods are constantly changing based on real time physical needs thus any accounting method assumes a fixed relationship between the value of the goods traded and the tokens (currency or IOUs) is wrong.

    You can have paper deficits and surpluses all you wanted but unless the value of goods is constant the model doesn’t work.

    1. Greg

      Not true septeus

      You’re talking about “prices” of assets like stocks or gold or housing. These are not measures of saving these are goods that have been purchased and hoping to be resold. The balances are between govt debt and private sector money assets in money markets, saving accounts, checking accounts bonds.

  27. Thomasina Jefferson

    So when we do trade, we exchange goods and services with each other for the amount of sea shells these goods and services are worth
    Worth can mean several things, but the pertinent definitions would be:
    1. The quality that renders something desirable, useful, or valuable;
    2. Material or market value;

    The same can be said about ‘value’:
    1. An amount, as of goods, services, or money, considered to be a fair and suitable equivalent for something else;
    2. Monetary or material worth:

    And then price,of course:
    1. The amount as of money or goods, asked for or given in exchange for something else.
    2. The cost at which something is obtained:

    And let’s not forget cost:
    1. An amount paid or required in payment for a purchase; a price.
    2. The expenditure of something, such as time or labor, necessary for the attainment of a goal:

    I gather that the author uses ‘worth’ and ‘value’ interchangeably, so I assume what is meant by worth/value is simple the price a good or service fetches on the this two/three-people market.

    It is notable that there is no price/cost to the parties for procuring the sea-shells or silver mentioned. We assume that they are sufficiently abundant, so that everyone can procure them at no cost and in sufficient quantity as to make them having no intrinsic value/worth? They are then just used as a means of exchange, not as a store of value, but that would be another assumption about this two/three-people economy.

    I would seem that even two/three people economies are a tad more complex than that and what might be found to be a valid conclusion in this environment is not necessarily applicable to a large fully developed Capitalistic economy.

  28. joebhed

    Thanks, Ed for your effort at Chapter II of explaining the mechanics behind MMT.
    A lot of folks are having a hard time getting outside their boxes, but hey, give ’em time.
    This is only the “accounting” side of the structural flows of money workings.
    Since it is based essentially on money’s quality as a “unit of account”, it can only answer questions related to that aspect of how money works.
    I think of the MMTers as standing behind a transparent, interconnected balance sheet, the end result being that they see the very real shrinkage of the bottom line, and its substantive real-world effects as being the unnecessary result of our failure to understand these mechanical accounting principles.
    Thanks to you and the MMTers for these efforts.

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