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Accounting Identity Errors and MMT

Just a quick bit of evidence for my claim that many people who adopt the MMT mindset quickly lapse into error.

Here's an excerpt from a post at Asymptosis:

...suppose someone says:

1. We should reduce government debt.

2. There’s not much we can do about net imports, the trade imbalance.

(Exports are determined largely by international demand, and we don’t want to use trade policy to deny our people the benefits of cheap imported goods.)

3. People should save more.

This is impossible, by accounting identity.

No. It. Isn't.

The government can definitely reduce its debt while people save more and the trade imbalance remains. Because there is no necessity for the government or the foreign sector to run a deficit for people to save.

When someone says, "people should save more," they are almost never saying that the entire private sector should "net save." They are saying that working people should consume less than their income, so that they will have some money to spend when their income shrinks because of unemployment or retirement. People can do this by putting money in savings and money market accounts, or by buying stocks and bonds.

This type of savings doesn't create new net financial assets for the private sector, since every purchase of this kind of asset is someone else's liability. But that doesn't mean people aren't saving.

Any time someone tells you an accounting identity means that something you see going on all the time is impossible, you can be sure that guy has the accounting wrong.

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