First, I need to say I never imagined I’d be talking with you about MMT. I remember your occasional posts over at an asymetrical place and my battles with you there as mickslam. You were not a such a big fan of the government sector.
First, the S = I + (S-I) equation is about this:
“It’s the most important (sorry Tom H!) because this is where sovereign nations control the money in the system. It’s the most important because this is where Godley’s Theorem about the necessity of Deficit Spending hits domestic citizens.”
This equation is where the private sector world of I = S hits the nominal world through actions of the government. Mosler is right – the government has a massive impact on the value of the currency through it’s purchases of real world assets via tax tokens.
What happens is private sector savings is provided with a reference for nominal value through this equation. This is straight up core MMT.
But here is where MMR starts to deviate a bit from MMT. There is a private sector demand for savings which isn’t an investment. This equation is where MMT and MMR step onto slightly different paths.
This equation makes it clear the horse driving real world progress is the private sector AND that there are two sides to the balance sheet.
Savings is not Investment, Savings only = Investment. When someone creates value out of initiative, where does this show up in the sector balances? It does not until they issue a claim against that value.
Ramanan and JKH both points out the investment is independent of the savings. The choice to buy a house with Savings is Investment. But the house isn’t Savings. It’s the other side of the balance sheet from the Savings.
By showing S = I plus some difference between S and I, it makes it 100% clear S and I are related but not exactly the same.
Personally, I think the (S-I) is necessary to give S and I long lasting nominal meaning. This difference allows the private sector to issue meaningful and measurable claims against value created. If I own 50% of a company, what exactly does that mean to the rest of the world? S-I gives that 50% a widely agreed upon unit of account to measure value. It’s a massive benefit the government provides the private sector.
Then, this difference gives the private sector the opportunity for a null vote and a place to stretch decisions across time. Investing is risky. There may not be attractive investments today.
The common MMT way of thinking about (S-I) is that it drives the private sector. But this just isn’t true, and it’s not what most people want to be true about government action.
Even during the worst depression of modern history when the government failed to do even 50% of its responsibility to keep demand topped off, 80% of the people who want jobs have jobs. Yes, the government should have done more, but this isn’t the point at all. Somehow the private sector kept a huge portion of our economy chugging along while our government didn’t even know it could do anything.
Steve W points out most savings is private savings. This is a factual observation of the real world as it exists right now, today. Most of what turns up in S comes from the private sector. Yes, the government issues NFA, and I am totally happy this is the case. Still, as Minksy points out, anyone can issue money. The problem is getting people to accept it.
Well, what is common stock issued by a company? We know Savings is not Investment. Does the real world value of Apple computer really net out to zero? Of course not. We are happy as hell the company Apple computer issued claims on equity worth many billions of dollars out in the world. People accept those financial assets as being valuable. Fortunately, we have a nominal amount of (S-I) to help make the nominal valuation of those claims more accurately reflect the real world value relative to other items.
But having (S-I ) help us value Apple computer or a house or a days labor or a Mounds bar doesn’t mean we want (S-I) to dominate the total S. Most people don’t want (S-I) to dominate. Most people want government to make help a bit sometimes, but then stay the hell out of the way for about 90% of real life. Make transactions easier, make my job safer, keep the streets repaired, and after that, don’t bother me.
So the S = I + (S-I) puts all of this into a perspective which matches the view of the world for most people.
Then, this equation addresses Godley’s Theorem, which states the fiscal balance must increase for growth to happen. We can increase credit or government deficits, or the CA deficit, but usually the least disruptive of these to increase is the government deficit.
JKH points out (S-I) is like the denominator in leverage. When (S-I) gets too small compared to S or I, then the private sector steps in with private creation of S. But these claims aren’t always as credible as government NFA. Plus, private sector S can sometimes be marked to market in ways which makes valuation difficult.
If (S-I) gets too large, it outstrips demand for null votes and liquidity, driving the nominal value of S and I in ways which make can make long term contract formation more difficult.
I won’t slam the main MMT people today because I am standing on the shoulders of giants when writing about all of this. I would have never even started down this path without reading Mosler at 2am and geeking out over it. However, I will say the emphasis on the government sector doesn’t accurately reflect the desires of most people in the democratic United States, and I think it mis-represents the real world relationship between the private and government sectors.
Additionally, MMT makes an enemy/dictator out of government. As Cullen points out, the government is our partner.
Of course, there is a ton more on this topic. I hope this rant helps to make it clear why I think this equation is so darn important.