Nirav's Personal Blog

  In the Chapter, the author introduces concepts about basic macroeconomic accounting. One person's financial asset is another person's financial liability This is a fundamental principle of accounting. The same transaction can be an asset for one party and liability for another party. Example, when you make a time deposit with a bank, from your perspective it is an asset but from the bank’s perspective, it is a liability. When you buy something from a store, the transaction is an expense for you but it is a revenue for the store. Inside wealth versus outside wealth The author divides the economy into two broad sectors, the public sector and the private sector. The public sector includes all levels of government, federal and state. The private sector includes households and firms. If we aggregate all the privately issued assets and liabilities, then they should net off to zero. So, the net financial wealth will be zero if only private sector IOU’s are considered. This is called...

Introduction: The Basics of Modern Money Theory (MMT) MMT derives its theoretical foundations from the works of John Maynard Keynes, Karl Marx, A. Mitchell Innes, Georg F. Knapp, Abba Lerner, Hyman Minsky, Wynne Godley, and many others.  As per the author, the most important original contribution of MMT has been the detailed study of the coordination of operations between the treasury and the central bank. It helps to answers the questions about how does the government "really spends". MMT assumes the existence of the State Money System, in which the state chooses the money of account. This is then used to impose obligations eg. taxes, denominated in that money unit. The state also issues currency which can then be accepted to discharge the obligations.   The government brings currency into existence by spending, which becomes an income for the households. The households then use this currency to make the payment of their obligations to the state. Thus, the government doe...

Monetization of Fiscal Deficit – A Primer Recently, there has been a lot talk around monetization of deficit by the Government of India. Many of economic experts and politicians are advocating for it in order to counter the effects of the economic slump caused by the Covid-19 induced shutdown. At the same time a number of experts have warned against it because it may lead to disastrous consequences in future in form of inflation. The opinions are conflicting and there is not a lot of literature that one can find which systematically deals with the subject. Workings of modern financial system are not well understood by an average person and monetization of deficit is a difficult concept to comprehend even for most financially savvy and astute professionals. Hence, the purpose of this primer to make it easier for everyone to understand what is monetization of deficit. In this primer, I try to answer the following questions 1.       What is a fiscal deficit a...

Economics in One Lesson: Do Price Controls really work? This is the transcript of my video Economics in One Lesson: Do Price Controls really work? You can see the video here .  Hello Guys, Introduction We are living in unprecedented times where we are staring at a global recession and even a depression in the worst-case scenario. Once the shutdowns are lifted the focus of all the governments will be to take unprecedented measures to reverse the economic damage caused by the shutdowns. These measures will be touted as temporary and would be purported to relieve the pain of the worst affected classes. On the face of it, they may look necessary and even seem to work but once you dig deeper you will discover the disastrous consequences of these measures which are influenced by economic fallacies on the society as a whole. These consequences have an impact on each an everyone one of us. Some of us will be affected very badly by it and some of us will do okay...