Whether you are a devout follower of Modern Monetary Theory (MMT), or have never heard of it, I highly recommend 'Understanding Government Finance' by Brian Romanchuk, who is a Quebec-based fixed income quant analyst and publishes the website Bond Economics. Mr. Romanchuk’s expertise on the subject matter of government finance is evident, he has a B.Eng. in electrical engineering from McGill University, a Ph.D. from the University of Cambridge in control systems engineering, and is a CFA Charterholder. In May 2015, Brian Romanchuk was named by the Fixed Income Database newsletter as one of the ‘Top 10 Fixed Income Experts Worth Following’.
As per Mr. Romanchuk, the study of economic models, just like the study of mathematical models, includes understanding the rules, called constraints, that govern the behavior of variables in any highly complex system. These constraints affect the interrelationships of variables with all other entities within an economy, and understanding of these constraints (or the lack of constraints like a currency peg / gold fix) helps determine economic outcomes.
Mr. Romanchuk correctly takes aim at the pre-financial-crisis US money market system, saying that its "negligible capital requirements exacerbated the crisis", and generally "dragged US banks into the mess". This is true. In 'Stress Test', written by former Treasury Secretary Timothy Geithner, US money markets were part of the tri-party repo market which seized when Lehman went bankrupt on September 15, 2008, magnifying the crisis. As a result of this consequential interconnection and heavy reliance on the repo market for intra-day credit, the US Federal Reserve Bank’s macro-prudential policy today is to reduce the role of US money markets, broker-dealers, and clearing banks in the tri-party repo market.
In another clever observation, Mr. Romanchuk writes that US Treasury debt management officials have “painted themselves into an elaborate corner” by continuing to stick to the narrative that Treasury debt issuance is still needed to finance federal deficit spending, and that pure market forces alone determine the interest rates set at Treasury bond auctions ('monetizing debts' of gold-backed dollars was replaced by 'monetizing deficits' in fiat dollars, and the federal gov't manipulates interest rates to levels that it sees fit).
In 'Understanding Government Finance', Mr. Romanchuk wastes no time pointing out many of the common misconceptions by citizens regarding central government financing and the nonsensical tools used worldwide by monetary policymakers such as “counter-productive” US reserve requirements, “crazy” European negative interest rates, “meaningless” central government budget constraints, and “silly” Japanese quantitative easing. QE was first deployed in Japan in the 1990s and now practiced globally because central bankers "yearn to remain relevant after lowering policy rates to zero”, Mr. Romanchuk quips in yet another hits-it-on-the-head passage.
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Top reviews from other countries
SP
Great primer on Canadian & US Gov't Finance... Much of it was over my head though
Reviewed in Canada on March 9, 2021
Martin F.
If you want to understand government finance this is a must read
Reviewed in the United Kingdom on May 1, 2018