On Empty Purses and MMT Rhetoric

A couple posts ago, I criticized in general terms Modern Monetary TheoristStephanie Kelton ’s suggestion that the expense of the proposed Green New Deal need not make it “a drag on the economy” since the Fed could always foot the bill.That post steered clear of the technical subtleties of Modern Monetary Theory, focusing rather on some of the bolder lessons its proponents like to draw from it. Today I ’ll instead consider one of those subtleties, as found in the following passage from Professor Kelton’s article:As a monopoly supplier of U.S. currency with full financial sovereignty, the federal government is not like a household or even a business. When Congress authorizes spending, it sets off a sequence of actions. Federal agencies, such as the Department of Defense or Department of Energy, enter into contracts and begin spending. As the checks go out, the government ’s bank — the Federal Reserve — clears the payments by crediting the seller’s bank account with digital dollars. In other words, Congress can pass any budget it chooses, and our government already pays for everything by creating new money.What ’s so subtle about that? Actually the subtlety consists, not of any detail Professor Kelton supplies, but of one she chooses to omit. For while she scrupulously has the Fed “crediting the seller’s bank account with digital dollars,” she unaccountably forgets to mention that, to complete the clearing transaction in question, the Fed must alsodebit...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs