Public Debt and Financial Accumulation: The fascist implications of the MMT two sector model

by Jehu

NOTE FOR THE READER: I want to reiterate that fascism, in the sense I use the term, only describes a state managed economy. I need to clarify again that my argument is not that modern money theory (MMT) is wrong, but that it correctly describes how fascism works. Nor do I wish to suggest that fascism means MMT is Nazism — many people who could never be described as Nazis embrace MMT insights. A fascist state, as I use the term, must be contrasted with a commune of the social producers, not with ‘democracy’ or a bourgeois republic. In fascism the bourgeois state manages the economic activity of the whole society, while a commune of social producers is self-managed. If the reader fails to keep these critical ideas in mind when reading this post, nothing much of my argument will make sense to you.

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Continuing with my critique of Tymoigne’s and Wray’s defense of modern money theory, which can be found here. In my last post, I argued that MMT has no explanation for how the state became monetarily sovereign and thus avoids PICTURE: MMTexamining the implications of this development. The very way the paper is organized leads to the conclusion that consumption must come before production and buying must come before selling.

This is explains why Tymoigne and Wray begin their discussion with an examination of the monetarily sovereign state and then proceed to introduce the so-called private sector into their analysis. This method of presentation of their argument makes it appear as if the state’s activities precede that of society. In fact, the premise of the state’s activities is the overproduction of real capital — a mass of excess capital in the form of money, means and labor power. We can trace this excess not to some distant historical event, surrounded by the mists of time, but to the Great Depression. In the paper, however, the writers never discuss this ‘prehistory’ of the fascist state because they begin with the assumption the fascist state already exists.

The simple two-sector model in MMT

The premise of the fascist state is only taken up in section 2, “ADDING THE DOMESTIC PRIVATE SECTOR”. In a simplified model of the domestic sector the writers assume the economy is made up of two parts: a government and a nongovernment sector. In this model, the real assets of society, that is the machines, factories, labor power, etc. constitute its real wealth. On the other the financial wealth of society, insofar as this is a closed system, is zero, with all financial assets offset by liabilities.

Here is my problem with the ledger book approach the writers use: When they break out the model for the two sectors, the state and the private domestic sector, they do not appear to realize the state does not produce commodities. Since the state does not produce commodities, it has no real assets; all of the assets in the hands of the state consists of real wealth appropriated from the domestic private economy by one means or another. The so-called financial assets of the state are actually, obligations imposed on the domestic private economy by the state. And the source of all liabilities owed by the state to the domestic private sector are merely the future obligations imposed on the domestic private sector. The total value of all of assets and liabilities of the state and the total value of all of its ‘real’ wealth in the hands of the state equals zero. Thus the total real wealth of society consists entirely of the real wealth in the hands of the so-called domestic private sector.

By wealth, of course, I mean the total means available to society for production of surplus value. In the capitalist mode of production all wealth takes the form of commodities. But capital itself is the production of surplus value and nothing else. By and large, the state does not produce value nor surplus value. To clarify the point here: The situation in a fascist state regime is markedly different from, e.g., the Soviet mode of production, where all the wealth of the society is in the hands of the state. Fascism is also different than the case of the commune, where the total wealth of society is in the hands of the social producers and is managed by them directly.

On the balance sheet example provided by Tymoigne and Wray, the total financial assets of society equals its total financial liabilities. Thus the net value of assets and liabilities within a single sector is zero. However, we also learn this is not necessarily true: the financial assets of one sector of the economy may also include claims on the future production of the other sector, while the financial liabilities of one sector of the economy may also be claims the other sector makes on the future production of the sector.

The state does not add to the real wealth of society

Another complication follows from the above: in the simplified model Tymoigne and Wray provide of a two sector economy only the domestic private sector of the economy produces commodities. The claims of the state sector must be satisfied by the future production of private domestic sector; but the liabilities of the state sector can only be satisfied by the future production of the private domestic sector as well. Thus both assets and liabilities of the state are expropriated from the so-called private domestic sector. On first glance, Tymoigne and Wray’s model makes it appears as if both sectors contribute to the total wealth of society. In fact, the state contributes nothing and only represents a reduction of total wealth — a net drain on the capacity of society to produce real wealth.

According to Tymoigne and Wray, “the sum of all net worth equals the sum of real assets, that is, only real assets are a source of wealth for the whole economy.” However since, in this mode of production wealth takes the form of capital, only assets that take the form of capital are a source of wealth, while the production of wealth is nothing more than the production of new capital.

Since, “only real assets are a source of wealth for the whole economy”, what are financial assets? In the model, Tymoigne and Wray call the difference between financial assets and financial liabilities ‘net financial accumulation’. But they never tell us exactly what financial assets are, since they are not ‘real assets’ and, as such, are not a source of wealth.

The net financial accumulation of each sector of the economy are not ‘real’; they are nothing more than fictitious claims on the future production of the other sector. However, only in one sector of this simplified two sector model does the production of real wealth actually take place. Thus the financial assets of both sectors are nothing more than claims to the future production of the domestic private sector alone. It follows that the liabilities of both sectors is nothing more than claims on the future production of the domestic private sector as well.

To summarize: All of the financial assets of both sectors and all of the financial liabilities of both sectors consists of claims on the future production of real wealth of the domestic private sector.

The state cannot be a net lender

The only real assets in the simplified model presented in section two of the writers paper are the real assets of the so-called private domestic sector. Since the fascist state produces no commodities, the product of its activities are not values. The real wealth of society is only the wealth that takes the form of commodities and the production of wealth is the production of capital. On the other hand, the so-called financial assets of both sectors and the financial liabilities of both sectors are simply claims on the future production of real wealth.

As the writers explain, financial assets are not real assets; they are fictitious claims on future production.

“If an economic sector accumulates more claims on the other sectors than the other sectors accumulate claims on an economic sector, the economic sector is a net lender:”

Thus, if the domestic private sector accumulates more claims on the state sector than the state sector accumulates on the domestic private sector, the domestic private sector is a net lender to the state sector. But here is the problem: As far as the mode of production is concerned, the state sector produces nothing. There can be no claims to the future production of the state sector by the domestic private sector, because the state produces no value to which the domestic private sector can lay claim. If any claims can be made in the simplified two sector model, it consists solely of claims made by the state on the future production of the domestic private sector.

(As I will show, this not only mean the state can never be a net lender, it can never even run a budget surplus necessary to repay its debts. For reasons I will explain, all accumulation of debt by the fascist state are permanent.)

State deficit spending can only increase inequality

Tymoigne and Wray must object that the state in fact has something to which the domestic private sector can lay claim: its currency. The domestic private sector can lay claim to the future production of valueless pieces of paper scrip. And why must the domestic private sector lay claim to this valueless scrip? The writers explain to us, it must because otherwise it cannot pay its taxes to the state. This explanation alone is sufficient cause for the domestic private sector to hold currency.

So, the state has no need for gold or silver? Those barbaric relics of a bygone era? If the domestic private sector offered these metals in place of paper currency, the state would turn the owners away and demand that its paper be returned to it instead? Okay, whatever.

In any case, per Tyomoigne and Wray currency is not real wealth; it is a mere financial asset; nor is it a means to create real wealth — real wealth are commodities and capital in the form of commodities. When considered separately, all the claims within the domestic private sector are claims to its own future production of values. When the state sector is considered separately, however, all of its claims are claims to the future production of the domestic private sector as well. The net lending position of either sector thus consist wholly of claims to the future production real wealth by the domestic private sector.

Thus even when the domestic private sector is a net lender to the state sector, this position only adds to its burden on the real wealth produced by the domestic private sector. As a net borrower from the domestic private sector, the state must increase its expropriation of the domestic private sector. This expropriation may take the form of currency counterfeiting, tax or borrowing, but this has no impact on my analysis of the problem. In any case, the expropriation of real wealth must take place to satisfy the debt service.

According to Tymoigne and Wray,

“It is quite straightforward to notice that not all sectors can be net lenders at the same time. That is, if one sector accumulates a net amount of financial claims, another must be accumulating a net amount of financial debts.”

If I am correct in my argument, only the state can accumulate financial liabilities to the domestic private sector. Since the state does not produce commodities, the domestic private sector cannot lay claim to the future production of the state sector. Thus, as Tyomoigne and Wray argue,

“Usually, the domestic private sector is a net lender (i.e. it records a net accumulation of financial claims) and the government sector is a net borrower (i.e. it issues more debt than it accumulates financial assets).”

The qualifier, “usually” is meaningless in their statement, because this must always be true. The state does not produce values; so it can only redistribute the values produced by the domestic private sector from one class to another.

On the other hand, in labor theory, value is solely produce by living labor — not by capital; while lending to the state is solely an advance of money capital. Thus, in servicing its debts, the state can only redistribute value from wages to profits. Most folks on the progressive political spectrum and even most Marxists never realize all state debt does is redistribute wages to profits — deficit spending of the fascist state can never address inequality, because it necessarily exacerbates inequality.

Critical comments on the MMT policy framework

Although the writers claim MMT only provides a policy framework to set up a theory, the framework itself is premised on assumptions that, once examined, reveal defects in the approach to the economic management options suggested by the framework that must be subjected to critical theory. My hope is that the above criticism can provide me with a basis to critique the policy framework of MMT.

“First, MMT argues the fiscal position of the government sector is ultimately driven by the desired net financial accumulation of the non-government sectors.”

Translated into labor theory, this simply means that deficit spending is being determined not by the state per se, but is imposed on the state by the overproduction of surplus value. The accumulation of surplus value beyond the limits of the expansion of the total capital (‘real asset’), forces the state to emit fictitious debt instruments (treasuries) to absorb the excess capital, labor and means of production.

“Second, … one can conclude that, as long as the domestic private sector desires to have a net accumulation of government currency, there is no need to retire all of the emitted currency through taxation, i.e. there is no need to have a balanced budget.”

Which is to say, insofar as there is an overproduction of surplus value, i.e., an overproduction of capital that cannot function as capital, the state must deficit spend. Since the fascist state’s budget can never be balanced so long as excess capital is being generated by the mode of production, there is no limit on the expansion of the state sector. The expansion of the state sector is not being driven by the needs of society for increased state expenditures, but by the needs of superfluous capital for self-expansion.

“Third, the previous discussion does not mean that MMT is for a fiscal deficit, nor is it for a fiscal surplus or a balanced budget.”

This is absolutely correct. The budget deficit of the fascist state is not an arbitrarily determined policy, but is determined solely by the accumulation of excess capital in the so-called ‘real economy’.

“A fourth conclusion is that for the stability of the economic system, it is usually important that the domestic private sector not be a net borrower.”

This statement is not well formulated, since we already know the state produces nothing for the domestic private sector to ‘borrow’. The significance, rather, is that, so long as there is overproduction of capital, the state cannot run a budget surplus. When the Clinton administration attempted to do this in its last years, in line with the Clinton-Gingrich deficit reduction agreement, the resulting surplus was the proximate cause that plunged the world market into the present depression.

“A fifth conclusion, is that … MMT does not believe that the only reason for holding the government currency is because of taxes.”

Again, this point is poorly stated: the question is not why a citizen of the United States would hold fiat dollars, but why would China or Japan hold Washington’s debt. Holding fascist state debt has nothing to do with paying Washington’s taxes; instead it solely rests on the overaccumulation of capital within the world market. So long as excess capital is being accumulated within the world market, this excess capital must take the form of dollars, which are the most widely accepted currency within the world market. The necessary condition for state deficit spending is the capital lent to the fascist state can find no profitable outlet for investment and thus must be handed over to the fascist state as lent money capital.

“Sixth, … A central point here is that government deficits add to the saving and net saving of the private domestic sector.”

Which is to say, exports aside, the growth of the state sector is the absolutely necessary condition for continuation of the overproduction within the domestic private sector. Conversely, the constant expansion of the state in relation to the ‘real’ economy, is determined not by politics, but by overproduction. The problem of ever increasing fascist state deficit spending (public debt) cannot be fixed simply by efforts to reduce the deficits.

For countries like Greece or Spain, the deficit spending of the public sector is not the cause of the crisis, but the effect of overproduction of capital. No amount of austerity, of efforts to produce a primary surplus, will ever solve Greece’s severe economic problems. By the same token, no increase in deficit spending will ever resolve it for the same reason. The problem is not state spending — no matter high or low — but the overproduction of capital.

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