Spending chains and Sankey diagrams — Alan Hutchison

Understand spending chains and you understand a fair chunk of Modern Monetary Theory. When the government spends into the economy it initiates a sequence of financial flows in the non-government sector. The first recipient of the spending is likely to re-spend some or all of it and subsequent recipients will do the same, and so on. That’s a spending chain.

At first glance it looks as if the money will bounce around the economy forever and if that were the case the government would have to stop spending or inflation would soon result. Fortunately, there are two things which stop the money being used indefinitely: tax and savings.

The best way to understand this is with the aid of a Sankey diagram.…

The Gower Initiative for Modern Money Studies

Spending chains and Sankey diagrams
Alan Hutchison

(Published on Matches in the dark 18th October 2018 · Updated 20th November 2020)