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vimothy, you are merging nominal and real here. The distinction lies in whether bonds are perceived as an addition to one's financial wealth or, as in the Ricardian story, they are perceived solely as future tax liabilities. The multiplier effect that transforms financial into real wealth is a separate issue. In that sense, deficit spending is at first just that - the household sector lending itself money to make itself feel more wealthy although it has no real wealth to back that feeling - yet. It is in a further step that this perception of wealth is then believed to induce consumption followed by investment, but they are separable and also very much dependent on the distribution of said wealth. Since private credit is demand led, the same can not be said for bank lending, at least during recessions. During booms, demand for credit boosts investment and asset prices, which leads to the perception of rising wealth, which in turn increases demand for loans etc. But this is pro-cyclical and thus not stable. And, during recessions, this mechanism does not work at all. There is no (or never enough, let alone quick enough) bootstrapping with demand led monetary aggregates according to MMT. Of course you are right that it makes no sense to imagine both effects as functionally separable. One must follow the other! In fact, such separability would render MMT and all of Keynesianism with it, null and void instantly. But it does make sense to think them through separately. Oliver
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Apr 19, 2011