MMT’s Key Concept: Debts vs Commitments
In my last post I tried exploring why mainstream economists, such as blogger Noah Smith, have objections to MMT. I argued that mainstream thinking has inconsistencies if not outright lies. These problems come from a failure to recognize bad assumptions being made.
Right now I want to explain what those bad assumptions are. Their faulty assumption is treating debts and commitments the same, not recognizing the importance of where enforcement comes from and who creates the rules.
The good news is you don’t need to understand complex economic principles to grasp MMT’s key concept. We won’t be discussing fiscal or monetary theories of the price level(which are both incompatible with MMT).
Once you get the key concept, having knowledge of complex economic ideas has great benefit. Without a good starting point, the most advanced ideas in the world can only take you so far.
The key prerequisite concept for understanding MMT is the difference between debts and commitments.
Debts and commitments are both forms of obligations, but a debt is enforced externally, by the party due or some authority, while a commitment is honored, or self-enforced, by the entity undertaking the obligation.
Commitments can be debts or vice versa. If I borrow money from you, ideally, I should try to pay it back even if it’s not legally enforceable. When things go as planned, the difference between debts and commitments is less important. Only when the obligation is neglected or renegotiated does the difference become important.
It is even possible for an obligation to escalate from a commitment to a debt. These kind of changes happen all the time. The precise meaning of our contracts can be ambiguous or get altered. Court precedents are established or changed, new regulations are passed, political relationships change, or unexpected consequences are imposed. Whenever the slighted party has some kind of leverage, they will use it to try to get what they perceive is due to them.
When the U.S. treasury sells bonds, the U.S. government undertakes 2 specific commitments. The first and primary commitment is to redeem those treasury bonds for federal reserve dollars. The second part of that commitment is to ensure those federal reserve dollars maintain stable value.
The U.S. government could obviously trivially fulfill the first commitment. It involves swapping one piece of paper(or electronic balance) for another. But the second commitment: stable asset value, is the source of great confusion and disagreement. Read the following post for my explanation of what MMT has to offer to this discussion.