>> I guess a larger question then is why is such an artificial fiscal constraint tolerated or even seen as useful? Is it to provide the investor class a risk-free parking spot for excess cash? A way of funneling tax dollars to the overclass?
> Because over the long term you just can't create money out of thin air and have it be effective. You need to shift real resources - out of Jaguars and third houses and into child care and high-speed rail. Money is a symbol of the real - a claim over resources and labor.
Well, creating money out of thin air is effective for some purposes, if not for others.
I this Steve's question is a good one and the answer isn't totally obvious. Let's imagine a dialogue between an MMT'er and some sane mainstream type ("MS") like Larry Summers or Ben Bernanke.
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MMT: If the govt wants to spend money it doesn't have, and the economy is at less than full employment, why not just spend the money? Why go through this circuitous process of pretending like you "need" to issue bonds to "obtain" the money?
MS: Well, we could do that. But eventually we'd reach a moment when the economy was at full employment and money needed to be drained from the economy. At that point the Fed would have to conduct open market policy by selling lots of Treasury bonds to the public. So in the end, sooner or later bonds have to be issued one way or another.
MMT: Not true. If you need to drain money in the future, you don't have to issue bonds. You could just impose a tax to soak up the excess money.
MS: But it's politically very difficult to impose taxes. What if there's an urgent need to head off inflation and we can't agree on taxes? It would be a disaster.
MMT: At that point, if it was really necessary, you could just do what we also do when we should raise taxes but don't have the political will: run up debt. I'm against this whole bond-fixation, but if you need to do it, you can just issue lots of bonds and hand over the cash to the Fed, which would promptly extinguish it.
MS: Look, this is crazy. You can't run a financial system like this! People will get the idea that the government can just commandeer real resources at will, that the Fed and the Treasury are mere accounting fictions, that money can be printed out of thin air!
MMT: But we both know that all those things are basically true.
MS: Yes, but you can't just do it all out in the open! People will get ideas.
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And, scene. So that's my answer, for what it's worth.
SA