Occasionally, I've been asked about Steve Keen
, and what I think about him from an MMT perspective. Keen surprises me because, while he seems to understand (more or less) that loans create deposits, and that the private sector generates gross assets by expanding both sides of its balance sheet, he does not extend this insight to the public sector and see how the Government, a currency issuer, creates net financial assets for the private sector.
So he can see how the private sector can become over-levered, but does not see how the public sector can step in to manage this and support aggregate demand through a deleveraging.
Anyway, JKH goes into detail about how Keen is trying to re-create double entry bookkeeping
but getting it wrong. Worth reading in full, but here is a key graph:
Third, we turn to what must now be noted as an accounting error of
extreme proportions – which is that it is certainly not the case that
the Fed draws on its equity account when it acquires assets. The Fed
creates reserve liabilities as a result of the payments process that is
used in the acquisition of assets. The phrase “loans create deposits”,
which has become popularized in the endogenous money view of commercial
banks, applies equally to the Fed in its own case of asset acquisition
and reserve creation. The equity account is not touched in such a
transaction, just as it is not touched when a commercial bank makes a
loan and credits a deposit to the borrower’s account.
An accounting error of extreme proportions indeed. Steve lost me at the start of his article
when he says:
Double-entry bookkeeping (DEB for short) enforces this equation in two ways. Firstly, it records any Asset as a positive amount, and Liabilities and Equity
as negative amounts. Secondly, it ensures that any transaction between
accounts sums to zero. So, for example, if a rich aunt died and left you
$1 million in her will, your accountant would show that as your Assets
changing by plus $1 million and your Equity changing by minus
$1 million. It sounds counter-intuitive when you first learn it, but it
works to make sure you don’t make mistakes when tracking financial
Really? This may be a strange artifact of how Steve chooses to model the asset and liability side of the balance sheet, but in standard accounting, a $1M windfall would be booked as an asset ($1M in your bank account) plus an increase in equity to balance that (assets = liability + equity). Maybe it's a "credits/debits" nomenclature thing.
That said, I think the point Steve was trying to make is that all Quantitative Easing does is have the Fed alter the compositional mix (and therefore term structure) of extant assets but not the total absolute quantity of those assets themselves. They are changing $1 for $10, but the amount of money in circulation is the same (bad analogy, it gets the technical elements totally wrong by conveys my intent). I'm also exaggerating, as interest rates on Government bonds are an income channel for the private sector and therefore have a fiscal effect. Nevertheless, the core point still holds.