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Renée Menéndez's avatar

I find it very regrettable that you are reproducing the blind spot of MMT. The government's demand for money through taxes and tariffs is only a small part of the total economic demand for money. The vast majority of money demand arises from businesses, whose goods and services represent a far more dominant demand for money, resulting from supply chains and interconnected production processes.

If you look at the figures, you'll see that when the Federal Reserve was founded, the government's share of total economic demand was around 5%. This increased to approximately 25% during World Wars I and II, before falling back to 22%. After the end of Bretton Woods and the abolition of gold convertibility, the share rose to about 27% to 30%. Conversely, this means that over 70% of the demand for money comes from private businesses, because their supply of goods and services are based on the fact that they have to generate revenue to cover their costs and loans. This means that the state operates in parallel to supply chains and production interconnections, but does not create them. While the state's demand potential can occasionally lead to higher capacity utilization, it does not create the underlying production structure.

(BTW the posession of dollars do not grant you the right to buy something. The fundamental reason for using money is the existence of a purchase contract with a seller, where a payment obligation is contained. Without a purchase contract there is no use for money, just like you can find in the movie "An indecent proposal".)

Therefore, it is poorly justified to base economic arguments on such a one-sided foundation. Moreover, the statements of MMT are largely fictitious, as there is no unified "government" comprised of the Federal Reserve and the Treasury. This is because the Fed is legally prohibited from directly lending to the Treasury or directly purchasing USTs. For this reason, the instructions the Treasury gives to the Fed are structurally identical to the instructions banks give the Fed when they need to transfer funds to another bank. There is no difference, because all these instructions refer to existing balances held at the Fed. And no one would suggest that this creates money—it is all a reallocation of existing reserves.

It's actually the case that the Fed can buy any securities from banks, but not from the Treasury. Why this is the case is a separate issue, but it shows that the Treasury only acquires reserves indirectly through banks by selling USTs. And only when the banks sell these USTs to the Fed new central bank money is created.

I'm very much looking forward to part 3 of your little series. I hope that these half-truths of MMT, and the confusion they create, will only make up a small part of the forthcoming analysis.

Tim Niemand's avatar

thank you for that explanation and the many questions you raised and answerd

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