Why MMT is like an autostereogram

And it all rests on one key fact (at least as far as we can tell!) . Rather than treating money as an object of wealth or somebody else’s debt, a means to trade … MMT treats money as a claim on wealth, a product of trade.

This one view makes all the difference. Unlike the first viewpoint, which assumes that debt and money came out of trade, MMT believes debt, or more specifically monetary credit, pre-dates trade. Coinage and all forms of monetary token are thus just a physical representation of what is actually an innate credit system. In and of itself, money — the token — has no value. And this is largely why a fiat monetary system can work. The monetary unit doesn’t need to be a ‘valuable’ piece of metal. It’s who guarantees the token that matters. In modern times, that means the state.

What’s more, suppress the credit system (which in the case of the United States is represented by the government’s debt) and inevitably you suppress an economy’s ability to trade. And this, by the way, is why MMTers believe government debt can never really constrain an economy whose government controls the official currency. Furthermore, this is also why in a time of crisis they believe you need more government guarantees, not less — hence their support of higher debt limits.

If one chart sums up the theory best we think it’s this one from Stephanie Kelton:

What the chart demonstrates beautifully is the symmetry that applies to the balances of a centrally controlled credit system.

That’s to say, for the US domestic private sector to carry a positive balance, the government must in effect carry a negative balance.

This makes a lot of sense if you think of the United States as representing a completely self-contained credit system, where only one official government controlled currency is allowed (and no foreigners can buy US debt). If the economy is to be kept well lubricated and functioning, the government must be willing to take on more debt on behalf of its citizens when the situation calls for it. Think of it as the private sector positve balances (or savings) representing claims on goods and services which haven’t as yet been redeemed. If not for the government’s negative balance, these claims would be represented by billions of private negative balances instead — representations of debts/credits between individuals. Money earned, and taxed, but not yet redeemed. Everything from your right to redeem a dozen baked rolls from your baker one day in the future, to your right to claim 10 days worth of medical services from your local doctor.

Allowing the government to take on those debts/credits (and really we’re talking more about credits) in place of your counterparties allows for claim standardisation. This not only ensures claims can be redeemed more quickly, having a greater wealth effect on the economy, they can also penetrate the system more completely. Furthermore, they are given a state guarantee in place of a private guarantee.

via ftalphaville.ft.com