A Reply to Winterspeak

Hi WS,

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.



Expert in business development, product development, and direct marketing. Developed strategic sales plans, product innovations, and business plans for multiple companies. Conceived the patent pending Spot Equivalent Futures (SEF) mechanism, which allows true replication of spot and swap like products in the futures space.

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289 Comments on "A Reply to Winterspeak"

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Hi V, I see what you’re saying. Your example would examine the case where “I” was funded by a combination of S and a budget surplus, in a closed economy. And I think I understand why you might compare that more readily with the case of corporate leverage, since there seems to be a “funding mix”, somewhat analogous to the funding mix in the case of corporate leverage. Let me return to that at the end. First, two preliminary comments: 1. My notion of “leverage” is in part a direct response to the Mosler idea of leverage in the same vertical/horizontal context. In part, I’ve forced a countervailing conceptual structure as a response. I have no idea whether or not I would ever have come up with this particular leverage notion otherwise. Maybe yes, maybe no. 2. In forcing a counter-version of his leverage interpretation, I’ve attempted to draw a rough analogy with the traditional concept of leverage in corporate finance. It’s not a bad analogy, but it’s certainly not the same thing as corporate finance leverage – not at all. So think of this as a special version of the general idea of leverage, which has been in part forced by wanting to respond to the Mosler idea, which I think is misleading, and symptomatic of some of the basic differences we’ve all been drawing out in discussions over the past month or so. In particular, this idea verges closely to that of the general problem of S and (S – I), etc. that we’ve been discussing. So, with that: Consider first a corporation with debt and equity financing, D and E. The conventional interpretation is that D is leveraging E. The benefit is intended to show up in earnings. And various ratios can be calculated, basically relating D… Read more »
Joseph Laliberté

You said that in Vimothy’s example, “a government surplus appears to be the macro source of corporate finance”. This is actually often the case in reality. We tend to see the implication of a budget surplus exclusively in term of the private economy selling back assets (government bonds) to the government, but an alternative is for the government to accept IOUs from the private economy. Does this alternative option occurs in reality? Sure it does. During the surplus years, the Government of Canada decided to stop repurchasing its own debt and invest proceeds from the budget surplus in term deposits at private banks (in effect accepting IOUs from the private economy).

So to go back to the corporate finance example, with S insufficient to fund I, the private economy would raise funds from the government, and this government funding would precisely correspond to the budget surplus.

Ben Wolf

I’m not sure it’s fair to say the private sector kept things together while government was basically useless when that same government has been running the largest deficits since WWII. I understand your point, but if government had actually balanced its budgets we wouldn’t have much of an economy left.



So I’d say (S – I) leverages the amount of S required to fund I.

That’s how I interpret the NFA effect anyway.

Total fenance n00b here, so this might be either embarrassing, inconsequential and/or uninteresting.

Could you say a bit more about this? I’m having a bit of trouble working out what levers what.

When I’m thinking about leverage, I’m thinking about how assets = liabilities + equity, and relating assets to equity in proportionate terms.

When I’m thinking about your identity, I’m thinking about how the change in net assets equals the change in equity.

So that, given S > I, (S – I), part of the total change in net assets, seems like assets acquired rather than a source of finance for asset acquisition.

Alternatively, for instance, one could write,

S + (I – S) = I

Suggesting that I > S, and to denote,

dEquity + dLiabilities = dAssets

If we there also thinking of a closed economy, we could write,

I – S = T – G

Implying that T > G; so that,

S + (T – G) = I

Which then makes sense to me as explaining the change in a portfolio of assets (i.e., I) in terms of the change in equity plus the change in liabilities (here i.e. government saving).

And that,

I / S > 1

When I try to write that leverage ratio in terms of the saving flow identity, I get,

I / [I + (S – I)] < 1


Does that make any sense?

Mike, I’d agree with all that. The leverage thing with numerator and denominator is a bit nuanced. Mosler views horizontal as leveraging vertical. So vertical would be the denominator. At least, this is my own way of interpreting numerator and denominator in the context of leverage. The vertical piece is (S – I) in a closed economy. Easy enough to adjust for open afterwards. (And you can extend the flow symbolism to a cumulative stock interpretation easy enough). So I view it the opposite from Molser. So I’d say (S – I) leverages the amount of S required to fund I. That’s how I interpret the NFA effect anyway. (Interestingly, the core Chartalist currency acceptance effect may be separated from this NFA effect. I’ll leave that for now.) I think the difference between the Mosler intended interpretation and my own, corresponds roughly to his viewing private sector NFA as being zero without (S – I), and my viewing private sector S as being zero without both I and (S – I). So I would view the base for leverage either as I, or equivalently as the amount of S required to fund I, which is of the same magnitude, but different as in monetary versus real substance.) The analogous corporate sector capital structure concept (but only analogous) in my mind is that debt capital leverages from an equity base. In this broader concept of leverage here as I interpret it, the base is I, or the amount of S (private sector RHS equity in stock form) required to fund I, and leverage is the additional amount of S (equity) provided by government NFA injection. Those two amounts are respectively S and (S –I), in a closed economy. Easy enough to adjust for open economy from there. Wanted to get this… Read more »
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