Charles Adams has a post under the above title on Progressive Pulse which explores important aspects of money creation, and cancellation, as well as the chance that monetary policy might work. I strongly recommend it.
Figure 1: The government spend and tax circuit. The difference between spend and tax equals private sector saving and is known as the deficit.
This is precisely what Graeber does in his video. And the conclusion is simple – private sector net saving (S-I) is a function of the size of the government’s deficit which leads one to think that the private sector cannot save unless the government is in deficit. Except that (S-I) is not “net saving” in any traditional economic perspective. (S-I) is saving net of investment. It’s extremely misleading to define private sector “net saving” as (S-I) because Saving cannot identically equal (S-I) unless I is equal to zero. Given that investment is the most important piece of Keynesian economics and the economy, it’s preposterous to present the economy in this manner because investment adds to private sector saving.
To be clear about this, the private sector’s strength does not come from the size of the government’s deficit. It comes from the productive output of its own INTRA-SECTOR claims. For instance, pull up the Fed’s Flow of Funds report. You’ll notice that households have a large financial and non-financial asset claim against other sectors (primarily the corporate sector). The fact that the financial asset claims net to zero inside the private sector is meaningless. It’s like saying that balance sheets balance (well, duh). The key point is, private sector net saving is comprised of a huge component of non-financial assets (like houses) as well as financial claims against the corporate sector (as well as other sectors). These assets only net to zero if you ignore non-financial assets (pretty sure no one ignores non-financial assets like houses after the housing crisis) or view shareholder’s equity as being a net negative for the economy (which is utterly ridiculous given that shareholder’s equity reflects the strength and quality of the private sector’s output). After all, if I walked into a bank for a loan the bank wouldn’t turn me away saying “sorry pal, but your assets are netted against a corporation so we can’t make a new loan to you”. That’s just not how the economy works in any realistic sense.
The MMT definition of “net saving” gives the reader an unbalanced and unrealistic understanding of private sector saving. To be blunt, it is a useless definition and it should not be used. But MMT does not care about that. MMT wants to emphasize the importance of the budget deficit at all times. They want you to think that the private sector cannot flourish unless the government is constantly feeding it and supporting it with what they call “net financial assets”. As if it is impossible for the private sector to be stable without a large and sustained budget deficit. Yes, that theory works great except in the case of every hyperinflation or socialist run regime where these “net financial assets” significantly contribute to private sector instability.