MMT’s Key Insight: Debt Induces an Opposing, Complementary Force — Savings
MMT proponents often emphasize a simple principle of accounting: one person’s asset is another’s liability.
This relationship only applies to assets representing contractual obligations between parties. If I own a car, or a house, or a pikachu, that doesn’t cost you directly in any way.
But contractual obligations involve a cost to one party and a benefit to another.
For this reason, you’ll often hear MMT people broadcasting “Public debt is private sector savings”. Yet people who understand finance are not usually surprised or persuaded by this statement. It’s basically how all financial relationships work.
What we fail to clarify is the feedback process whereby contractual debts create value, and value induces people to save.
The most important debt in the modern world is the debt to pay taxes. This obligation is universal and never gets cleared. You can pay off your mortgage, but your taxes never get paid off. Every year we somehow get more of them.
The only thing close to rivaling the scale and scope of tax debts is property rents. But even in this case, land ownership is defined and enforced by government. Private parties compete with each other for strategic financial advantage by controlling land.
The third most important debt is what we actually call debt, consumer, household, and business loans. Like property rents, it is government that implements or permits enforcement, but private entities enjoy the reward. When government fails to regulate these financial relationships within a proper framework, there is great potential for abuse and exploitation.
All three of these debt classes represent large amounts of financial value. The stronger, more iron clad the contract, the greater the value to the debt holder. The greater the value, the more people try to save these assets.
Are you starting to see the feedback process here?
The final step closing the feedback loop is the fact that saving an asset makes it harder for others to pay back a debt denominated in that asset. This increases the value of the debt; debtors must work harder to convince savers to hand over their assets so they can repay their obligation.
1. Debts create value.
2. Value induces people to save.
3. Savings make debts harder to pay off, increasing value of debt.
This dangerous feedback loop only happens when you create ineffective financial relationships. Central to this process is the role of government. Government policy is not an afterthought in the process, it is a central part of what creates inequality and imbalance in the first place.
In physics forces always create equal and opposite forces. In economics there are similar effects, but they are realized through complex and sometimes inconsistent human behaviors. When you take a hard stance on debts, you increase the tendency of people to save, which can have unintended consequences.