Money is Equity, the shortcut to understanding MMT

 This post is an attempt to make it easier for people to understand MMT, because a lot of people miss the point entirely.  If you do not understand MMT, know that it is not your fault, it is not the dunning kruger effect, and it is not a reflection of anything else you may or may not know about finance.

 1) Money = Equity

 2) National Debt = Market Cap

 3) Deficit Spending = Capital Raise

 4) Interest Bearing Government Securities = Time Locked Staking Smart Contract

5)  Bonds are like call options, they allow government to pay workers without immediately increasing "shares outstanding"

1. Money is Equity

Your currency is not a claim to anything specific, and therefore government securities like bonds are not either.  They are simply shares.  One unit of currency is one share.

2. National Debt is a Market Cap

A government does not "owe money" in a fictitious unit of account they themselves created.  The job of the central banks is not to preserve some money abstraction, by refusing to convert between bonds and currency.  The fed creates a dynamic exchange rate between currency and bonds.

Fiat market caps

  • U.S. $30 trillion
  • China $13 trillion
  • UK $9.0 trillion
  • France $7.3 trillion
  • Germany $5.2 trillion

Assuming a central bank's interest rate target is not infinity, they will always buy bonds, and primary dealers will always launder them.

But bonds already are money, or better stated equity, specifically non-voting equity.

3. Deficit Spending is a Capital Raise

This gets hidden, because we use money to transact, so every product for sale denominated in a currency, is a bid to buy that currency.  When a government wants to "raise capital", they simply spend, 

4. Interest bearing government securities = Time locked staking smart contract

In the best case scenario, bonds would not be liquid, and thus reduce any bidding pressure.  But under current operations, bonds are completely liquid at a given exchange rate, dictated by the federal reserve.

5. Bonds are like call options, they allow government to  pay workers without immediately increasing shares outstanding.

Companies often offer workers stock options, instead of directly paying them in equity. 

Comments

  1. Roger SparksSeptember 25, 2022 at 5:18 PM

    "1. Money is Equity

    Your currency is not a claim to anything specific, and therefore government securities like bonds are not either. They are simply shares. One unit of currency is one share."

    I need to differ with you here, based on my 'money is a token' contention. "Government securities like bonds" are agreements to return tokens to the lender.

    Thanks for this and your Twitter posts. I enjoy the not-mainstream content.

    ReplyDelete
    Replies
    1. DerekSeptember 25, 2022 at 6:15 PM

      Thanks roger, comments are always appreciated. "Money is a token" is indeed one of the most neutral and accurate framings, but I don't think this is incompatible with an equity view.
      The equity comparison is to help people understand the logic of MMT, specifically that both fiat money and equity cannot create insolvency. Where the comparison breaks down is in terms of incentives. The incentive which applies to shareholder equity, is maximum share price, and actually not maximum market cap. Financial gains can either come from new issue(ie in exchange for work), or appreciation. Fiat money is unique, in that it expands horizontally like debt(people can earn more), but it falls vertically like equity(the unit value declines).
      Whereas equity mostly expands and contracts in a vertical fashion, that capital raises are relatively rare compared to appreciation. The goal of equity shares is appreciation, so money does not share that aspect.
      Ideally money serves public purpose. You could frame this as maximizing value of outstanding financial assets, ie the biggest debt which can be provided for private sector balance sheets without inflation. However, a more balanced approach is probably more reasonable, a healthy level of deficits to support price stability and full employment.

      It is very frustrating that the mechanics and incentives of private finance and equity issue are so clearly understood, especially the inherent flexibility, as dramatically portrayed in tv shows like "WeCrash" (based on WeWork), or Startup(martin freeman).

      It is highly disappointing that people have learned to use the term "market cap" to refer to the aggregate value of a cryptocurrency, but they still fail to recognize the wealth side of government issued securities like treasury bonds.

      Delete
    2. Roger SparksSeptember 26, 2022 at 5:10 PM

      Thanks for the reply.

      The equity approach you are using corresponds to the token approach in the important parallels of ownership and durability of the equity unit.

      Regarding "wealth side of government issued securities like treasury bonds", I also have observed what seems to be a void in understanding. My thought is that mainstream thinking has bank-money pegged as being an IOU because that's the way banks actually work. That approach fails to recognize that the fiat using public doesn't care how banks work---the public only cares that banks guard and store their hard earned money so that each owner can spend the money they earned.

      IOW, the public thinks money is more like a token or equity than IOU. So, the public can understand that government securities are wealth but mainstream economist think that money and GS are two offsetting sides of the same event so add to zero.

      I argue that when the CB creates money, it creates wealth. It then trades wealth-for-wealth or we might say money-for-bonds. Of course, the wealth created is actually a grant of access into the marketplace, a grant of privilege given by some entity with that kind of authority. (So money is really just evidence of a grant by an authority.)

      If we turn our attention to a CB holding the money supply steady while government continues to borrow, we see that gov is creating new wealth and then trading new wealth for existing money (or existing tokens or money=equity).

      My thoughts on the subject. Thanks again for the reply and have a good evening.

      Delete

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