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There’s been a lot of keyboard punches thrown recently over the concepts of Savings and Investment. To sum up, Modern Monetary Realism (MMR) has accused Modern Monetary Theory (MMT) of overlooking the importance of business investment as a driver of global savings. While I might agree with this critique to a point, I think it in turns overlooks an important MMT point which MMR would be well-served to poach.

As a quick background–because I haven’t said much about Savings (S) or Investment (I) on this site yet–the idea is that Investment (no matter what it’s original source, public or private sector) becomes Savings as a “leakage” in demand. As a simple example, when you receive your paycheck from your employer, it is immediately kept in your accounts as “savings,” until you on-spend it at the grocery store as consumption, at which point it becomes savings, or “retained earnings” of the store. Any income you don’t spend over the long term remains your savings.

Now, it is not well understood that both the private business sector and the public Government sector work, essentially, from negative equity positions to act as the source of net worth for the private household sector. This is the point that MMR is making. But likewise, the business sector needs revenues as a source of cash flow to feed their original investment. As investment becomes savings, an increase in new investment is necessary to provide those revenues.

The point that MMT makes is that the Government sector has a special position as the issuer of the Monetary Base (currency and bank reserves) in the economy. They can, essentially, create new investment whenever necessary while their needs for revenue to fund that new investment is, in a very real sense, relaxed. A business which is short of revenue will not make new investment until revenues pick up. A Government has no such restriction, and, in times of a shortage of new business investment, must step in to fill the gap. It’s failure to do so on a sufficient scale results in recession. In this way Government becomes the Investor of last resort.

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