Taking again the risk of discussing an MMT proposition, and fully expecting to be told that I have not understood….
One of the propositions of MMT is that, in contrast to standard mainstream arguments, government spending is automatically financed by money creation.
One of the propositions of MMT is that, in contrast to standard mainstream arguments, government spending is automatically financed by money creation.
(This typically comes with statements that one must carefully look at the flows, but that once one has looked, the proposition is obvious)
I believe the proposition is both right, and utterly irrelevant.
I believe the proposition is both right, and utterly irrelevant.
It is right: When the government buys something or pays somebody, it draws on its Treasury account at the Fed (so long as there are funds on the account, as the account cannot go negative). This indeed automatically increases central bank money in circulation.
So, in this sense, the spending is automatically financed by money.
It is however utterly irrelevant, because of what happens next.
It is however utterly irrelevant, because of what happens next.
In the olden days (i.e before bank reserves paid interest), the Fed targeted the funds rate. When the additional funds were deposited at the banks, and, as a result, the amount of central bank money in circulation was too high, it would intervene through an open market operation.
It would decrease central bank money by selling bonds. So, at the end of the day (literally the day), the money supply was unchanged. The amount of government bonds in the hands of the public was higher. Higher spending led to higher interest-paying debt of the government.
Nowadays, bank reserves pay interest. As banks are willing to hold interest-paying reserves, the Fed does not need to intervene. So, after the initial increase in central bank money, the additional funds are held by banks as interest-paying reserves.
From a fiscal viewpoint however, the increase in interest paying bank reserves is like an increase in gvt bonds: : Both pay roughly the same rate. As in the olden days, higher spending leads to higher interest-paying debt of the consolidated gvt (central gvt and central bank).
In short, what happens initially is irrelevant for what happens later.
