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.

 

Comments

  1. 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 in as a slight qualification on leverage. Fairly quick, may not be perfectly stated the way I want.

    Hope that isn’t too mind numbing or indigestion inducing for a Saturday morning.

    P.S.

    Extracting from a comment I made at PragC., something general about this ongoing discussion that I wanted to repeat here:

    “The entire global financial system consists of double entry bookkeeping. All the accounts and financial instruments linked to those accounts have specific names. It’s better to stick to the language of specifics in discussion. People tend to make up their own flowery definitions of financial stuff. I’d say 97 per cent of blogosphere financial discussion is muted by the impracticality of people understanding each other’s made up dictionary of terms. This is catastrophically compounded by people deliberately ignoring those groundwork definitions that have been honed over the years by the requirement for internal consistency in pervasive use. The definition of saving is a perfect example, where even seasoned economists want to change the definition without understanding the fundamental importance of internal accounting consistency.”

    • Thanks JKH,

      I had misunderstood that distinction and bulled my way through it in the piece. At some point, we’re going to have to address how this formulation is interpreted differently from crowding out. Because the equation as it stands is really close to how freshwater views crowding out.

      MMR views government as a partner, MMT as something like a really nice daddy who can turn evil at any time, and freshwater government as an thief.

      MMT has the advantage in that it recognizes the usefulness of the public sector, but then just takes the ball and runs off to lala land. I thank my lucky stars I ran across MMT. But as S = I + (S-I) points out, the private sector is still primary in our lives and we should keep this in mind as we leverage the government sector to make our lives better.

      “The entire global financial system consists of double entry bookkeeping. All the accounts and financial instruments linked to those accounts have specific names. It’s better to stick to the language of specifics in discussion. People tend to make up their own flowery definitions of financial stuff. I’d say 97 per cent of blogosphere financial discussion is muted by the impracticality of people understanding each other’s made up dictionary of terms. This is catastrophically compounded by people deliberately ignoring those groundwork definitions that have been honed over the years by the requirement for internal consistency in pervasive use. The definition of saving is a perfect example, where even seasoned economists want to change the definition without understanding the fundamental importance of internal accounting consistency”

      I fully agree on this. It’s hard to make progress when people are talking past each other. And as you just showed, there are still insights buried inside of simple algebra of the sector balances.

      Something else tangentially related to this idea of consistent meaning is the idea of usefulness. That Dedrie McClosky PDF I linked to a few days ago was eye opening. I’d rather work on useful relationships than dot every i and cross every t.

      Using the correct terminology is hugely helpful in this because it’s easier to build on prior useful work. I know the TC rule isnt’ anything special in construction, but it’s useful. I think your formulation of S = I + (S-I) has the same usefulness property. Can you pull it apart and make more out of the different relationships? Of course. But that formulation is so dang useful for approaching the real world in a savvy manner. It’s like a first step double-check on being smart about macro.

      Also, I am about to release something I should probably keep hidden because it is valuable. It’s a valuation equation for sovereign treasuries. I keep thinking back to how Fischer Black systematically built a system which supported his world view through financial mathematics.

      I strongly suspect MMR would be well served by creating financial valuation models based on the relationships we use. I had done something like this for currencies and also for corporate profits. I think I have something more complex for sovereign debt. The world is ruled by financial maths right now and I don’t see that genie going back into the bottle. I personally would be very skeptical of any world view which wasn’t able to give me a set of reasonable valuation tools for finance.

      • I don’t quite see the direct crowding out connection, and I’ve done a fair bit of reflecting on that fallacy. But I’ll ponder that here, because it’s a good nexus to expand on at some point.

        In general, I’m unconcerned about certain shrill pockets of misinterpretation (e.g. all MMTers) of what this equation is intended to illustrate. The purpose will prove itself over time. The truth will rise.

        One can think of it as the sector balances anti-equation, because it adds back in the “I” that was purposefully stripped out.

        Maybe “anti-” is misleading there. But the fact is that sector balances is fine and good and powerful and useful – unless it gets abused – as has been the case when people literally start to forget (or deliberately obfuscate) the definition and meaning of saving – from which sector balances itself is derived. Not good to binge on sector balances.

        Sector balances that strip out I is part of a big portfolio of broader understanding. But it’s not the whole thing. In the corporate capital leverage analogy, that would be akin to remembering debt but totally forgetting about equity.

        • It’s not a direct connection with crowding, but the equation “rhymes” enough that freshwater guys will bring it up. Crowding out is a horrible fallacy, but this hasn’t stopped a long line of wrong headed ideas from gaining prominence and fans. Rochon pointed out the Cambridge Capital Controversy was ceeded by Freidman, but it had zero impact on economics.

          I was just trying to foresee any roadbumps, and it’s something I could see Larry Kudlow blindsiding me or Cullen with on a CNBC shouting match.

  2. JKH,

    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

  3. 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.

  4. 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 to E, or relating D to (D + E), etc. I won’t go into details. The general concept is well known.

    Now consider the case of a government deficit as the provider of NFA to the private sector in a closed economy.

    We know that government finances itself with taxes and deficit financing. Let’s be generous to ourselves and just drop all the usual MMT stuff about causality for purposes of this discussion. Furthermore, let’s assume deficit financing manifests itself in some combination of reserves, CB notes, and Treasury bonds. And let’s drop any concern about perfect classification here, and just refer to all of that stuff as debt D.

    So the capital funding structure of the government consists of D alone.

    Again, assume a closed economy for simplification.

    Then we know that private sector NFA = D = (S – I), in stock form (i.e. cumulating flow).

    Assume private sector outstanding investment = I in stock form.

    Then private sector S = I + D, all in stock form, and as usual in amount in the case of I, not substance

    Private sector S in stock form is its net worth, or RHS equity, or E

    So the consolidated private sector balance sheet has assets of D and I, and funding of E (where “funding” is interpreted something like a consolidated version of retained earnings for both business and households).

    (BTW, all private sector wealth can be value telescoped into the household sector via the latter’s direct holdings of real assets plus its financial claims on the corporate sector and on government. In that case, the household sector will also show that RHS value of E, although its unconsolidated assets will be a mixture that includes horizontal financial claims on the corporate sector and directly held NFA, as indicated.)

    So I characterized leverage in that context as:

    In the consolidated private sector case, total net worth is leveraged up from E1 = I to E2 = I + D, as a result of government NFA injections of D.

    That is very roughly analogous to conventional corporate capital structure leverage, in which the total assets of the firm are leveraged up from E to E + D.

    The corporate case though is not a leveraging of net worth. It is leveraging of assets.

    So that’s the rough analogy, with the object of leverage in the corporate case being an initial asset base funded entirely by E, and the object of leverage in the consolidated private sector case being initial net worth of E1.

    Again, bear in mind this is partly a conceptualization designed to respond to the Mosler version, with which I disagree (or at least don’t favor).

    Returning to your example, “I” is funded by a combination of S and a budget surplus, in a closed economy. There is a “funding mix” of S and (T – G).

    In this case, the equity of the private sector is only S < I.

    And yes, (T – G) seems to leverage S such that “I” is funded as a result funded.

    I’m not sure about this. Your example does seem to resemble a macro case of corporate finance, where a government surplus appears to be the macro source of corporate finance, in effect. But it makes me uncomfortable, because we know surpluses tend to be contractionary. I think there’s a residual aspect to this structure as opposed to an active leveraging effect. I’ll have to think about it to work it through some more. Maybe later.

    My structure is on a different equity plane. It focuses on the case of NFA injections considered as leverage for private sector saving and equity. This occurs as per MMT/MMR when the government seeks to satisfy NFA demand from the private sector.

    Thanks very much – must think now about the comparison of those two very different cases and categories.

    Thanks!

    • Joseph Laliberté says:

      JKH:
      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.

  5. JohnfrmCleveland says:

    I’m still fuzzy on the whole S/I revelation here. Can somebody put this in dumbed-down, real-world terms for me?

  6. Not sure if this is related – would imagine there’s a parallel.

    the S = I + (S-I) is a bit like Michal Kalecki’s profit equation which (in a simplified setting) says

    FU = I_f + DEF – SAV_h

    i.e., firms’ undistributed profits is the sum of investment + the budget deficit minus the household saving.

    Of course Kalecki was no MMTer and the equation says how both investment and government’s budget are important rather than being highly tilted to the latter.

    It’s the innate urge to do something which makes the wheels go round as Keynes put it.

  7. Another run at it with a quasi-real world example, focusing on the deficit/surplus difference:

    Using approximate numbers from earlier, but pretending the US economy is closed, and leaving the central bank out of it:

    Suppose the starting point is private sector net worth of $ 50 trillion, with no government debt outstanding.

    As an add-on to that, examine the difference between the two cases of $ 10 trillion in cumulative deficit and $ 10 trillion in cumulative surplus.

    The $ 10 trillion cumulative deficit manifests as the same amount of outstanding debt (leaving the central bank entirely out of this) and the same amount again as private sector NFA. Therefore it increases private sector net worth from $ 50 to $ 60 trillion.

    Now instead assume a $ 10 trillion cumulative surplus. (Forget about marked to market effects over time.) That means net worth has been drained from $ 50 to $ 40 trillion, essentially through taxes over time. That could show up in different ways; it depends what the government actually does with it. One alternative might be for the government to leave the surplus in TTL accounts with the banks. In that case, the government ends up funding most of the commercial banking system, which in turn has loans with households and corporations. Or the government might buy corporate bonds. Either one of these outcomes is a form of financial leverage in the conventional sense, because it constitutes debt financing as an addition to bank equity or corporate equity financing respectively. But the counterexample to either of these cases is that the government instead could invest in $ 10 trillion in equity claims (i.e. stocks). That use of surplus funds is most definitely not leverage according to conventional finance interpretation.

    Conventional finance interpretation of leverage is a matter of financial claim capital structure – the addition of debt to equity financing. As noted, a government with a surplus that has no debt to pay down can acquire debt or equity financial assets. So the deployment of a surplus has no direct interpretation in terms of conventional financial leverage. Neither does the effect of a deficit for that matter. Moreover, a government can achieve any desired conventional finance effect – debt or equity – even in the case of a deficit – by borrowing additional funds and deploy them in either debt or equity financial claims. So the bottom line is that conventional finance leverage is not the issue in the case of either surpluses or deficits.

    The conventional leverage idea applies to the financial claims structure; the notion of leverage explored here is that of the effect of deficits and corresponding NFA generation on private sector equity. Conventional leverage leverages up financial capital structure and its corresponding asset base; this version leverages up private sector net worth.

    Again, this leverage concept is the reverse image what Mosler has in mind. He views horizontal money as leveraging vertical money. In his interpretation, vertical money injects NFA equity, and horizontal money expands private sector activity with a zero NFA effect. So he refers to that as leveraging, somehow. My view of it is that horizontal activity is the basis for the creation of private sector wealth, measured not in private sector NFA net saving, but in terms of the correct comprehensive definition of saving. The “I” as backbone is the idea again, as the base for S = I + (S – I). Government NFA leverages up the “I” component of S by adding (S – I).

    Neither of these conceptualizations of the idea of leverage has anything necessarily to do with the lower down level of financial claims structure of debt and equity claims. In particular, Mosler does not use the idea of financial claims leverage in his concept of leverage. The proof of that is that both debt and equity claims net to zero in the standard MMT calculation of private sector NFA.

    Bottom line is that this idea of leverage refers to the difference between the (S – I) component known correctly as net saving and the comprehensive meaning of private sector saving, represented correctly as in S = I + (S – I). This idea of leverage here has been designed to fit that interpretation, not the conventional finance interpretation of financial claims leverage.

    • We should probably create a different term to refer to this concept because “leverage” is so widely used in finance already.

      It’s not truly leverage but rather something like “net savings ratio”.

      • Maybe.

        But keep in mind that at this point its a response to Mosler’s use of the same term in the same context, but in the opposite way.

        And the word leverage has different uses in different contexts anyway.

        Like vertical.

        Not many MMT adherents are even familiar with the specific MMT use of the term anyway, even though its part of “mandatory readings”. I’ll be interested to see if anybody from there brings it up. For the time being, I’d let it run its course as is. No need to finalize labeling until the idea’s been fully vetted.

    • Cullen Roche says:

      JKH,

      This is a really important point that MMT confuses. They will put vertical money at the top of the hierarchy in order to justify their state theory of money. But the reality is that resources precede govt money and govt uses pvt resources to leverage their strength. I think one thing that might be confusing for people is the idea that state money “gets the ball rolling” with regards to the currency in use. But once it’s in use the pvt sector takes the reins and creates wealth entirely independent of the govt. The govt at times will leverage this wealth (and can even contribute to it), but the pvt sector is not leveraging govt money. It’s a subtle point, but one that gives you a very different perspective on the relationship.

      MMTers often add to the confusion by claiming that govt has a “monopoly on the currency” in order to justify their hierarchy. But this statement is entirely false. The govt does not have a monopoly on the medium of exchange. If anyone controls the medium of exchange it is the pvt sector. And we use govt to facilitate our growing needs.

      When you connect the dots on all of this you can see exactly why the state theory is wrong, why the monopolist argument is wrong, why the vertical focus is wrong, why the consumer driven economy is wrong (or rather, one half of the coin), why certain MMT policies like the JG could be counterproductive and why MMT has an increasingly political motive based on a false foundation.

      • Right.

        And to Mike’s point again, I’m not sure this particular application of the term “leverage” needs to be formalized from an MMR perspective at all- that’s not an ax I’m grinding here. I’m just saying for now it brings out the more general idea you’ve summarized, but in this specific context, which includes some Mosler driven MMT language that we should be asking questions about. We should be circumspect about stuff at this stage. Hence the directional contrast in this (maybe temporary) use of the term “leverage”.

  8. Joseph, that’s interesting. I’d forgotten what they did with the money, and just assumed they paid down debt. I do remember Greenspan’s Humphrey Hawkins testimony where he was raising big picture issues about what they’d “eventually do” with the gigantic surplus – a surplus that of course never actually appeared.

  9. Ramanan, I still have to work through that Kalecki stuff at some point. I’m not sure what it gets you, other than a somewhat specialized slicing and dicing of national income accounting. I think it’s supposed to have something to do with the Marxian notion that capitalism can’t generate enough profits to sustain itself, or something like that, which I always thought was BS, due to a failure to understand bank accounting. Steve Keen has indicted the Circuitists on that basis.

    • Yes, one can produce an accounting model without a government where both saving is possible and entrepreneurs earn profits.

      The circuitists don’t claim that profits are not possible without government deficits but actually that they should be possible without it and to show this exactly. While it is perfectly possible to show it in a stock/flow consistent model, the ones who do not believe have the same kind of discomfort as MMTers have with “saving” IMO.

      Unnecessary big deal has been made of it it is because the whole debate is someone X comes and says something and another person Y says X has ignored something. And Steve Keen certainly does not “resolve” it because his apparatus itself is so self-inconsistent.

      It’s not a paradox for you because you proved to Keen in that famous comment on how there is no paradox as a matter of accounting ;-)

      Profits to Circuitists is what Saving is to MMT.

    • The Kalecki profits equation is useful. I did a simple regression which appears to explain well over 50% of the variation for inflation adjusted corporate profits.

      • Mike,

        The Kalecki profits equation is useful. I did a simple regression which appears to explain well over 50% of the variation for inflation adjusted corporate profits.

        Are you joking here?

        • Assuming not, it looks to me like you would have serious multicolinearity problems there–but of course I don’t really know much about Kalecki’s equation or what your method was.

  10. It’s interesting that no MMTer that has responded negatively (all of them) to the subject of S = I + (S – I) has referenced the Molser leveraging paradigm. I’m not even sure they’re aware of it. And you can see that it’s inextricably linked to the MMT interpretation of (S – I), etc. I think that’s quite telling.

    • Cullen Roche says:

      I think MMTers will claim that they don’t really disagree with us. I think they even agree that I is the backbone of S. Personally, I don’t see how anyone could reject any of this, but the obfuscation through the SBE is plain as day to anyone familiar with the MMT approach. It’s all organized to present the govt as the driving force of money. To present the govt as this omnipotent creature that can change our lives by changing numbers in an account. That the govt is this “monopolist” that must intervene, set prices, and employ everyone who is unemployed. It’s crystal clear to me that they’re working from a political position and filling in the answers as they please. But even their own work shows that this approach is wrong. And when you communicate all of this accurately (as you have) you get totally different conclusions and the veil is lifted to what is actually our reality….

      • Dan Kervick says:

        It’s all organized to present the govt as the driving force of money.

        Yes, but not the driving force of production or the driving force behind the creation of real wealth. Nor is the state theory of money a state theory of production. It’s a theory about the social and political origins of money and the institutional structure of modern fiat monetary systems.

        It has been a persistent theme of MMT that government can’t drive the investment process through monetary policy channels. Here is just one of many quotes along those lines, this one from Bill Mitchell:

        But we can take it even further. Whether there is a liquidity trap or not (and whatever that is) it is moot from the perspective of MMT. The fact is that a recession occurs when spending persistently falls short of the sales expectations of firms, which conditioned their decisions to employ and produce. Not wanting to accumulate inventories, firms reduce production and lay off workers.

        The reasons why private spending collapses are many as are the reasons why it might not recover quickly. They can mostly be summarised by the term “lack of confidence” which is exacerbated by rising unemployment and the loss of income that accompanies it.

        Private sector production decisions are determined by the calculations of private sector firms and entrepreneurs as to whether there is sufficient demand for the products they want to produce to make the additional production profitable.

        Money is a tool that assists immensely in the organization of exchange, production and savings, and without which modern economies as we know them would not be possible. It is a key part of our economic infrastructure. In modern fiat systems in which governments preserve a public monopoly over the production of money, and in which net financial assets cannot increase unless governments continually release increased stocks of money into the private sector, the monetary system is a public utility. But that doesn’t mean the utility is driving the processes it enables to occur. Without a well-constructed system of roads, by analogy, our economy wouldn’t be nearly what it is now. But building roads doesn’t automatically guarantee the production of goods transported on them.

        Rising production and rising consumption require monetary financing, increased levels of inter-bank payments moving through the banking system. These payments clear through banks’ reserve accounts, and in our system the government ultimately supplies any increases in the overall stock of reserves. If the government does not accommodate the private sector’s desire for additional reserves by supplying more base money, it will needlessly retard and stagnate cash flows, increase default risks and cause deflations. Banks don’t “create” money. They create IOUs for base money when they build deposits through loans and expand their balance sheets. This transmits the increased demand for reserves to the government, which is the supplier of reserves. If the government does not increase the supply of reserves in response to the increased demand, the price of reserves will rise – or what is the equivalent, the prices of everything else will fall.

        To say the government has a currency monopoly is not to say it monopolizes the use of the currency. A monopolist controls the supply of the thing it monopolizes.

        Of course, a public sector can also run enterprises itself, as well as consume a lot of goods, and engage in public investment if it so chooses, and those outlays might actually drive a lot of economic activity, not just accommodate it. How much government should do in that area is determined by political, social and economic judgments that fall outside the MMT framework itself. People probably know by now that I am personally in favor of an expanded and more energetic public sector. I would favor both increased spending and increased taxes to hit the optimum public sector deficit target while. But others might prefer to hit that target with both lower levels of both spending and taxes. For example, Warren Mosler argues constantly in favor of lower taxes.

        • Cullen Roche says:

          “Banks don’t “create” money. ”

          Dan, it’s hard to take you seriously when you write stuff like that. Credit is money. And banks create credit. The govt does not control the supply of credit. They set a target rate or attempt to control the money supply through various market interactions. But they don’t control the money supply. The govt has a monopoly on reservs, notes, coin and govt bonds. They do not have a monopoly on credit. And while they have a monopoly on net new financial assets it doesn’t change the fact that the govt does not have a monopoly on credit. In theory, they could control the entire money supply. That would be a fully vertical system. But that’s not how the system is arranged.

          • Cullen said February 26, 2012 at 5:48 pm to Dan K…

            “The govt does not control the supply of credit…”

            This is more nuanced than you let on.

            The government can RESTRICT the supply of credit going out by raising interest rates and can do this rather effectively. So can banks.

            The government CAN’T control the supply of credit going out by forcing customers to borrow. Nor can banks.

            This is like a valve controlling flow in vacuum (created by non-government). The government can release money into the non-government but can’t push it.

            Who’s in control?

            • Cullen Roche says:

              I’ve always maintained the pvt sector is in control as the system is currently designed. But more importantly, it’s NOT in control of the govt….And yes Paulie, your detailed response is excellent.

            • Cullen Roche says:

              Plus Paulie, is there really a need for comments like this:

              “It seems to me that some of the MMR bunch is attempting to make off with the “family jewels” of MMT in order to obfuscate it’s insights, then turn it around and use the insights for their own ends in extracting wealth via the “peoples money”.”

              • Probably better if none of us say those kinds of things – I was frustrated with some of the rhetoric I read here and vented. Bad form and I apologize. Much worse has been said over the past few weeks but that’s not an excuse.

                It’s a good example of why we shouldn’t write something on the internet we don’t want everyone to read. Like I said before, it’s not personal and I don’t want it to get that way.

          • Dan Kervick says:

            Credit is not money. It’s a promise of money; a liability for money. If I you give me a promise of of your old car, I do not yet have a car. When you fulfill your promise, I have a car. When a bank creates a demand deposit, which is a promise of money, then the depositor can at any time go to that bank and demand money. If the bank credit were already money, then the bank wouldn’t owe the depositor anything. The depositor would already have it.

            If I write a check on my deposit, and use it to buy something, and that check is deposited in another bank, then my bank owe’s that other bank money. And they have not made good on their promise until a transfer is made from my bank’s reserve account to the other bank’s account.

            If banks could create money, then they could reap seignorage profits from the creation, juts like real money-creators do. But in our system they can’t do that.

            The fact that I can exchange bank credit for something I want doesn’t make it money. I can exchange all kinds of things with people who are willing to take them. Art dealers exchange paintings for things. That doesn’t make paintings money.

            I think it’s pretty important to keep track of the conceptual distinction between a promise and what is promised.

            • Cullen Roche says:

              Dan, you might want to try getting on the same page as the people you’re busy defending because you clearly have no idea what you’re talking about.

              “Credit and credit alone is money” – Inner

              http://moslereconomics.com/mandatory-readings/what-is-money/

              • Cullen Roche says:

                Innes. Oops.

              • Dan Kervick says:

                MMT is not Innes.

                • Cullen Roche says:

                  Holy hell. I swear….Some of you MMTers are real masochists. So since you seem to enjoy the pain of being proven wrong time and time again. Here’s another source. This time from some guy who wrote the book on Modern Money:

                  “essential state money” generally means “that which is necessary to pay taxes”

                  Here’s an authority on taxes:

                  “Pay Taxes by Credit or Debit Card

                  Features and Benefits of Paying via Credit or Debit Card:”

                  http://www.irs.gov/efile/article/0,,id=101316,00.html

                  So clearly, according to MMT, credit is a form of money. Not only according to Mosler’s SCE, his “mandatory readings” on “what is money” and Wray’s book on MMT. But also according to the IRS. I’d say those are pretty definitive sources wouldn’t you Dan? Now, I know this is something that MMT can worm their way out of because you guys appear to be experts at just up and changing the definitions of words, but based on your own writings, you’re 100% dead wrong. I’d really appreciate it take your obfuscation elsewhere. I’ve really had quite enough of it.

                  • Cullen Roche says:

                    You got me going on this one. Lots more juice on this subject.

                    “Money represents a debt relation” – Kelton 98

                    “A money of account comes into existence along with debts, which are contracts for deferred payments” Keynes, 30

                    “Money is privately created when one party is willing to go into debt and another is willing to hold that debt” – Wray 90

                    “Fiat money is a tax credit” – Mosler, SCE

                  • Cullen Roche says:

                    Oh, and please don’t cite the Kelton paper with the quote on bank money and her evidence that bank money is only as good as state money because they are required to hold reserve balances. That’s trying to have it both ways. We all know from MMT that banks aren’t reserve constrained and that many countries don’t have reserve requirements so the argument doesn’t hold. Either way, it’s a totally irrelevant point as this discussion isn’t about the hierarchy of money. It’s about the monopolist feature and since even MMT acknowledges that bank money is second in the hierarchy, then it’s inappropriate to claim that the state has a monopoly on money. It very clearly doesn’t. Unless we start changing the definitions of words or getting bogged down in more obfuscation about the hierarchy or something that is equally semantic. The fact is, credit is money. And the state does not have a monopoly on bank issued credit. The idea of the “money monopolist” is a flawed starting point and totally misleads us in understanding how our system actually works. End of story.

                  • Dan Kervick says:

                    What is it with your intolerance of debate Cullen? Every comment I have written on this thread so far has been completely bereft of personal characterizations and insults, and eschewed any kind of attack mode. Can’t you just stick to the high road and drop the incessant temper tantrums?

                    Let’s put it as simply and uncontroversially as possible: In our system, M2 and M3 depend on MB, since additions to M2 and M3 are either part of MB itself, or liabilities for MB. But MB does not depend on either M2 or M3.

                    The only thing the banks are permitted to create are IOU’s for MB, and the government is without question the monopoly supplier of MB.

                    • Dan,

                      Part of this is we don’t have everything figured out yet. We’re a few guys who do other things besides MMR. Pressing us on every detail is great – I appreciate the challenges.

                      But on the other hand, it’s a massive pain in the ass as well. We have a lot to do. Your points about money are good – but lets face it, banks make money, and the leftover interest/dividend residual is viewed as valid money claims by everyone in the world.

                      You are talking about liquid money, which is a very, very important idea. But part of the reason we started MMR and the reason I think Cullen is getting frustrated here is the lack of recognition liquid money and money creation are not exactly the same.

                      I can create money which everyone in the world will recognize by creating a valuable company and issuing shares against that value. It’s not liquid money. But those claims are meaningful and have a notional value in the unit of account.

                      Then the next point is about banks and their creation of credit and money. Do banks create money? Well they push money out into the world through their ability to create money, but that all nets out except for the interest part. The interest charged by banks does not net out. It ends up as being money we owe to ourselves on an overall level.

                      You’re going off about net money – which is hugely important. But it’s missing the point MMR makes – other entities besides the government have the ability to create USDs which will be accepted in the world.

                      We’re not denying the government has a massive and crucial role to play in the world of money. We’re just saying the government alone doesn’t make it work.

                      So you can see our frustration when someone smart and persistent like you keeps throwing the MMT party line back at us over and over, with a variety of valid, intelligent, but ultimately misguided points. We get the MMT view and even accept some large amount of the premises of MMT. The lens which we’re viewing the world has been “inspired” by how MMT views government actions as they relate to money.

                      It’s just the MMT view is incomplete – and MMT people won’t accept any evidence we present to show it is incomplete, and that is really frustrating.

                    • Cullen Roche says:

                      Dan, this is not a debate. It’s a conversation where I state facts (using MMT resources like the “mandatory reading” on what money is) and you just blatantly change the facts to meet your previously inaccurate statements. What’s the point?

                • Cullen Roche says:

                  But let’s also give credit where credit is due. MMT does a fantastic job of destroying the barter myth and the metallist myths. Unfortunately, they veer to the opposite end of the spectrum and instead of saying that money is a pvt creation, they claim that money is ultimately a state creation based on the hierarchy of money. And this is true to some degree. Understanding the hierarchy is important in differentiating the types of money and where govt really does have a monopoly like on reserves and bonds.

                  But it gets taken way overboard with this whole “monopolist on money” idea. That’s vague to the point of being a ridiculous and careless oversight. The simple fact is that banks create a lot of money every single day and the state doesn’t have a monopoly on that. They could if they wanted to, but they don’t. So the chartalist ideas, while superior to the metallist ideas, also contain flaws. Some rather large ones that render some of the thinking inapplicable to the system in the present day USA.

        • I really like this comment. Really explains things clearly in keeping with my understanding. The one-sentence para on “monopoly money” is an aside, maybe a distraction.

  11. JKH,

    Moving house at present so no time to respond at any length, but thanks–that was very clear.

    I think I understand exactly what you mean now.

    The leverage is being applied exogenously to the asset side, so that, (assuming we’re still in the closed economy), a given level of assets can support a higher private sector equity base.

    Equivalently (in some sense), we have equity increasing in (S – I), a policy instrument.

  12. Joseph Laliberté says:

    JKH:
    According to your interpretation, in a private economy without any outstanding private debt and government debt, we would still have (in stock form) S=I, where I is the private sector wealth in the form of non financial assets. If the governent comes in and generate a deficit you would see this as the government leveraging the existing stock of non financial assets, that is, leveraging existing I. Then, how would you interpret additionnal horizontal activity in this context? Would you say that this additionnal horizontal activity is also leveraging the existing stock of I ?

    • Good question.

      Getting further into semantic use of the term leverage, which is allowable provided it’s defined clearly enough in context.

      I’d say the NFA is leveraging up S, where initially S = I, as per earlier concept.

      So S = I becomes S = I + (S – I) where (S – I) = NFA injection.

      I think you’ve specified in your example no horizontal debt in the original S = I.

      That almost requires that I be entirely residential real estate and durables.

      Otherwise there’s inevitable horizontal activity between the household sector and the corporate sector in order to fund corporate I through financial intermediation,even though horizontal activity on its own sums to NFA of zero.

      As to additional horizontal activity, that’s really a function of the ongoing economy. I suppose you could think of it as NFA injection leading to more aggregate demand from the private sector and more economic expansion after that. But in full context that still says that the original point of leverage was the NFA injection.

      And all of this is quite separate from the concept of corporate finance type leverage of equity with debt.

      BTW, as I’m sure you know among many uses of the terms leverage is “operating leverage” which again is somewhat different from debt/equity leverage. Operating leverage relates roughly to increased utilization of fixed cost “I”. So that idea could be worked in as well. But that’s also not what’s intended by my use in the NFA sense. Although it may factor in your example.

  13. In the previous thread JKH said…

    “Here’s a proof:
    Start with a balanced budget and balanced current account.”

    Then (I-S) = 0

    “Assume the private sector saves in the amount S.

    Then S = I.”

    I assume he meant at this point in time the private sector had a running total
    of annual saving equal to S over the previous budget history. Otherwise S = I = 0.

    “Now suppose the current account moves to a deficit of .01(S).”

    Increment (X – M) by -0.01S
    Then:
    (I – S) + (X -M) = 0
    (I – S) + (-0.01S) = 0
    (I – S) = 0.01S
    In words Net Savings has decreased by an increment of 0.01S

    “And suppose S moves to .99(S).

    So far so good. It’s an identity.

    “Then the private sector is saving overall in the amount .99(S), and the budget is still balanced.”

    Sure, we started with S (1*S) as accumulated private savings (over history).

    Private sector savings was decreased by 0.01S from S to .099S.

    We can have negative Net Savings over one budget cycle (-0.01S) and,

    We can have positive Net Savings over the history of all budget cycles

    (running total = S-0.01S = 0.99S).

    No contradiction here.

    One deficit doesn’t wipe out history’s savings.

    “So you’re right and he’s wrong.”

    So you’re wrong and he’s right.

    No revelation here.

    • Cullen Roche says:

      There’s only “no revelation here” if you’re still having trouble connecting the dots between all of this. You don’t seem to be connecting the dots from the monopolist argument to the verticalist argument to the savings argument.

      • Cullen,

        I just used arithmetic. How does his or my proof connect vertical and horizontal dots?

  14. Brief comment: One thought that strikes me is that a lot depends on what variables we think we can hold constant or take as given. For a quick e.g., and to possibly tie the conversation back to Mike’s comment at the start of the thread, we could view investment and NFA as competing for the same source of funding, i.e. private saving/savings, although that implies a very “un-MMT” take on the nature of causality at work in this relationship.

    • @vimothy: “we could view investment and NFA as competing for the same source of funding”

      I’ve thought about this a lot, because as a business owner it’s the question you face every single day. Do I buy some computers for my employees, or leave the money stored/sitting/hoarded in returns-generating financial assets? Do I spend or “save”?

      Just to say, financial assets have a big advantage over fixed assets in this decision, because after five or ten years I’ll have the returns on those financial assets and still have the principal. The computers might have generated higher return, but they — the principal — will be long gone

  15. “no revelation here”

    That’s rather trollish behavior to ask me to reconstruct something from scratch, with a whole bunch of your own stuff inserted. Could you at least provide a link to my comment?

    • JKH…

      This should be the link:

      http://monetaryrealism.com/?p=192#comment-971

      I’m sorry if you think I’m trolling. This isn’t personal. Hell, I don’t know you from Adam. You’re probably a fine fellow (gal?). I’ve been reading your stuff at various blogs for a year now and I just found disagreement with you over the last weeks.

      The proof that you presented in the other thread didn’t seem right to me so I posted it with my comments to elicit thoughtful responses.
      I couldn’t resist throwing in a barb (“No revelation here”) because I thought “So you’re right and he’s wrong.” was a bit arrogant. Make an argument or at least a statement that can be argued with, high-fiving doesn’t become you. I probably should have thought a moment before I hit Post.

      I just happen to disagree (in the sense that I have no concrete idea what it tells us) with the whole (S=I+ (S-I)) construction that you and others are selling as incontrovertible fact. The 2nd Law of Thermodynamics (entropy) is one of the most important theorems in the natural world and it can be summarized in a single sentence or paragraph. Not so your “discovery”, the proof of which seems to take several pages. A succinct statement of your theorem would be very helpful to us financial and accounting rubes. Citing data from the NIPA tables or FoF tables won’t work. There is an accuracy problem there as those are estimates and I don’t know accurate the data may be or which line items are relevant. The identity is exact, even if the virtual balance sheet doesn’t exist except in the abstract.

      When I questioned some things in the other thread there was a sense of intellectual superiority coming from some of you. Maybe you guys are above my pay grade but in the world I live in there are no experts. There are only those that are right and those that are wrong and it’s difficult to tell the difference. Don’t bother using authoritarianism or credentialism – make good arguments. On the other hand you may not (probably don’t) give a rip what I think. That’s fine, I don’t expect you to. You aren’t the only one that may follow the discussion and be able to make something out of it. The hive mind is a beautiful thing.

      I’ve made the attempt to convince myself that you might be right and I couldn’t do it so I figured I would post here and try to get someone to lead me down the path and see where it goes. This isn’t a competition.

      • Mitchell’s question:

        “When a country runs a small current account deficit and the private sector is saving overall, the government budget balance will always be in deficit.”

        That’s a flow relationship, where saving is one of the flows.

        You’ve inserted an assumption about the stock of savingS

        The flow relationship is false, as already explained there, regardless of any stock variable settings

        Mitchell was wrong in asserting its true; Ramanan is correct

        As far as the tone of my exchange with Ramanan is concerned, which meets with your disapproval, there is an involved history there – relating to both the very post in question (which was old, but which I’ve probably seen before, including Ramanan’s comment), and a multi-year dialogue about similar and related issues more generally between Ramanan and myself. That explanation and dialogue between two people with a mutual understanding based on some specific history shouldn’t concern you.

        • JKH February 26, 2012 at 4:03 pm

          “when a country runs a small current account deficit [(X-M) < 0]and the private sector is saving overall
          [(I-S) < 0 ] , the government budget balance will always be in deficit.”

          (I – S) + (G – T) + (X – M) = 0

          -∆S + (G – T) + -∆NX = 0

          (G – T) = ∆S + ∆NX; positive if in deficit, negative if in surplus.

          So, looks true to me. It looks to me like you could be saying one of three things:

          1.) “the private sector is saving overall” means a stock not a flow, so Mitchell is wrong because he should have said “the private sector is NET saving overall” He had a chance to correct his error and he didn’t. OR

          2.) Mitchell didn’t know he was making a mistake by omitting NET in his description and he thinks his statement is true either way, i.e. S > 0 or (I – S) < 0. I don't think so. My view is that Mitchell believes that NET is implied without being explicit. The statement makes no sense otherwise because he WOULD be mistaking a stock for a flow as you pointed out. I have never gotten the impression that Mitchell doesn't understand this in reading his blog. You seem to believe otherwise. OR

          3.) Mitchell is wrong because (I – S) CAN be negative (positive net savings) when (X – M) < 0 without the budget being in deficit? (It can't).

          Which is it?

  16. Cullen, have you read the comments at Mike Norman’s website about you? They’re borderline libelous. You should ask Tom Hickey to remove the post. Better yet, you should fire back with a story debunking MMT. It’s time to put these people in their place. They’re so arrogant and obnoxious that they deserve to have their little leftist movement crushed to bits and pieces. Who better to do that than a former MMTer?

    • Cullen Roche says:

      I really have no interest in the personal aspects of this “fight”. It’s not personal. It’s about finding the truth. Me, I think MMT is wrong on some of the facts. But they’re a lot more right about most of the facts than the rest of mainstream econ. So let’s not forget that. This isn’t a fight between MMR and MMT. Everyone seems to be forgetting that….

  17. There is part of this I’m having trouble comprehending…

    “Investment” as we think about it (building a factory, designing a machine, etc) is something that we attempt to measure in the private sector via private sector leverage.

    These two don’t necessarily seem to match each other. When an entrepreneur uses cash to pay a contractor to expand his factory, Investment has occured, but credit expansion hasn’t. Likewise, if a consumer takes out a loan to go on a vacation, consumption has occured, but this will be recorded as “Investment” using debt as teh measure of “investment”… or at least this is how I see it.

    Can someone please clarify this for me?

  18. Joseph Laliberté says:

    Cullen, JKH:
    where does deposit insurance fits in your analytical framework?

    • Sounds like one of those “Please have a monetary system redesign on my desk by next Wednesday” requests.

      Seriously, in terms of system design, it’s obviously of great importance, but second tier to the fundamental building blocks of how to approach the overall subject matter top down.

      Not trying to duck the question, but I have no huge problems with the basic concept right now; haven’t thought through any dramatic proposal; quite open at this point.

      I do believe in strong capital requirements and thorough risk management regulation and supervision. Any deposit insurance facility must be congruent with a capital requirements policy. So I’d tackle those two together, among other things.

      In fact, its all part of a broader risk management policy approach to the financial system, congruent with how we should expect commercial and investment banks to manage their risks.

      Cullen and the others may have stronger views on the insurance issue or the general approach as well.

      • BTW Cullen – it looks to me like it’s the one month anniversary of MMR blog inception?

        That compares to:

        “Over the past two decades a group of us has developed an alternative approach to monetary theory …”

        (from the group over yonder – their recent paper)

        Will be interesting to compare the pace of progression

        In a friendly way, of course

        • Cullen Roche says:

          JKH,

          I think we have the platform and understanding to do big things with MMR. Of course, we’re using core components of MMT so I would never say we’ve created something original, but I do think, when all is said and done, that people will gravitate towards MMR because it’s a more accurate description of the world we live in.

          Btw, thanks so much for all your help in developing these ideas. I really consider you a core developer and your insights have been invaluable. Have a good weekend.

          Cullen

          • Thanks, Cullen.

            BTW, are you around late this week or next week?

            I’m trying to clear up a few things, but I think that would be a good time for me to email/contact you with some collected thoughts and additional info.

            Hopefully this week, but next week at the latest, depending on my progress and assuming you’re around.

            I’ve got your email.

            • Cullen Roche says:

              JKH,

              It would be a pleasure to finally chat in private. I am semi OCD about checking email so please send me a note whenever is convenient for you. I’ll get back to you in short order.

              Best,

              Cullen

      • Joseph Laliberté says:

        Actually,my question sounded very specific, but was a very general one: how do you perceive the role of the State in the horizontal activity? (and I do not think this issue is second tier to the fundamental building block of how we should approach this issue)
        I have to say that my question was in direct response to Cullen’s last two paragraphs @ 11:05am, with which you seemed to concur.

        • I concur with Cullen, and I’ve answered the question as I’d like to at this point. Sorry if that doesn’t suit.

        • Cullen Roche says:

          JKH and I seem to be on the same page here on just about everything. Which is kind of creeping me out (looks out windows and checks phones for wire taps). But seriously, insurance deposit is obviously important. The horizontal system is based largely on trust. We can’t have everyone walking into banks requesting their money at once because it’s not there. But again, this puts the emphasize on the fact that we have a horizontal system and the vertical just lives in it. We could theoretically create a fully vertical system, but we don’t have it. JKH previously mentioned that there’s some rationale behind a fully vertical component. He’s dead right. And so it makes sense why Mitchell calls for a nationalized banking system. But we don’t have it now and I doubt we’ll have it any time soon. As soon as we have it MMT will be airtight and MMR will have to evolve. But for now, MMR is a more realistic description of what we actually have.

          • I think we need to be careful about connecting instances of obfuscation, ‘rhetorical overreach,’ and economists who don’t understand the NIPA definition of savings (hard to believe), to the claim that MMT doesn’t recognize the scale of influence of private sector banking. I just can’t square that with reality, especially when Mosler (been involved in all forms of banking all his life and currently owns a commercial bank) is at the helm of MMT. I can understand the ‘rhetorical overreach’ point, but this is starting to get excessive IMO (I don’t rule out that my mind could change).

            The explanation of endogenous money is core to MMT, and the most superficial analysis will show that credit money dominates. As far as Mitchell, he is a specific person with specific beliefs, and his opinions of nationalized banking are not held by all of the MMTers. In any case, if Mitchell supports a change to nationalized banking, then obviously it’s clear he realizes we don’t live in a 100% vertical world. And it then obviously follows that Mitchell, as a specific person, recognizes the vast influence of the private sector.

            And I don’t understand the idea of MMT needing to be airtight in this context. Your evaluative criteria seem to be purely current institutional reality. But MMT is a theory which explains economics, and it can explain various different institutional arrangements, including reality. I think we’re talking about different goal posts, as MMR’s goal seems to be purely to describe how specific and current institutional arrangements work (which is fine). In other words, if MMT offers ways to think about other institutional arrangements, then it ceases to be airtight (that doesn’t really make sense to me).

            I think my comment here (http://pragcap.com/diagnosing-the-balance-sheet-recession-4-years-too-late/comment-page-1#comment-102652) is relevant as a response.

            And as I mention, if MMR’s goal is to be pure reality, I think you potentially have some more issues to address, such as describing govt spending under the specific institutional arrangements of some specific country. Perhaps JKH’s alternate way of describing institutional arrangements comes into play here, but even then you’re venturing into territory where what you might be describing isn’t exactly what we see in specific countries.

            • And to show I have “balance” in my stance:

              Nice new layout and very very very interested in learning about MMR’s views on monetary policy / potential collaborations with monetarists, as per the recent update on the About page. The impact of monetary policy has always been an area where I thought MMT needed more research and substantiation (while understanding constraints of time and numbers they are under).

            • Cullen Roche says:

              Bill Mitchell recently changed the headline of his blog to “macroeconomic reality”. So they better damn well be discussing our monetary reality. Unfortunately, it’s pretty clear that the state is not the monopolist. So the whole “base case” of the theory is dead in the water because it is based on a false reality. I know MMTers are trying to obscure the definition of money here, but that’s just blatant obfuscation. Sorry, I call it like I see it. I am not going to be a part of misleading people and I certainly won’t allow MMTers to come here and mislead these readers. If they want to do it on their websites and spread myths about “monopoly supply of currency” then so be it. Do it on MMT websites.

          • Joseph Laliberté says:

            Deposit insurance being “important” is certainely an under statement. Banks’ liability are largely State liability. This is absolutely critical in the functioning and existence of horizontal activity.

            I certainely do not favour a nationalised banking sector, I would not want to leave to the government the decision to lend and to who. This being said, I think we should recognise that the willingness of the State to recognise banks’ liability as its own (no matter how stupid banks’ lending practices are) is what allows the horizontal activity to thrive and create wealth in the long run.

            • Joseph,

              We’ve been around for 21 days now! Our first post was on February 5th, 2012.

              Give us time.

            • Cullen Roche says:

              Joseph, I agree there. I am not saying that the vertical component is not enormously important in all of this. I am just being very specific about the terminology. There is no “monopoly” on money. There is the state which has a monopoly on reserves, notes, coins, and bonds. But they do not have a monopoly on credit. Even MMT emphasizes the point that bank lending is not reserve constrained and entirely determined by creditworthy customers. The term monopoly does not even apply to this sort of a system. So it’s very misleading. I think it’s crucial to understand the MMT position in full here. They say:

              “Under the metallist vision, the state takes a back seat to the market. The chartalist theory, however, places the state on center stage”.

              We don’t have a money system with the state on “center stage” or the state taking a “back seat to the market”. We have a hybrid of the two where pvt banks wield huge control over the price of money and the supply of money and this is combined with a state monopoly on components of money that have a huge influence but not a monopolistic influence on all money. MMR brings this view back to the middle where it should be.

              • Dan Kervick says:

                Do you still accept that the net financial assets of the private sector cannot increase unless they are supplied by the government?

                • Cullen Roche says:

                  The govt is the monopolist of NFAs. I’ve said that 100 times. That doesn’t make them the monopolist of money.

                  • Dan Kervick says:

                    That seems illogical to me, Cullen. Money is buy definition a financial asset. If the government is the monopoly supplier of NFA’s it must be the monopoly supplier of money.

                    • Cullen Roche says:

                      Uh, no. Now, I know you reject the MMT definition that credit is a form of money so the fact that banks issue credit is irrelevant to you. Honestly Dan. What’s the point here. Please just stop commenting here. It’s a colossal waste of time. You’re not going to change your tune and neither am I.

                    • Dan Kervick: If the government is the monopoly supplier of NFA’s it must be the monopoly supplier of money.

                      I know I am late but I am still catching up…

                      At the very least there are many governments which supply NFAs with which private sector can freely choose to transact. So when you have 200 monopolists in the world, does it still sound like a monopoly?

                      I do not know exact stats about other countries but I once checked that in Russia central bank reserves were used only for about 60% of all interbank settlement transactions with bank money being responsible for another 40%. So even on a medium of exchange topic the government is far from monopoly. And here I am not sure how intrA-bank payments were treated. I would guess they have been ignored but no bets on that.

                      The banking sector in every country is typically multi-tiered with large payment-centric banks representing tier 1. It is quite common that small (aka community) banks “outsource” their payments “departments” to these large banks purely on the cost perspective.

                      I could probably find additional points but it should be already clear that government is clearly NOT a monopoly supplier of money. Not even for the payment system needs where MMT makes claims to the contrary. (There is also a rather technical paper from BIS called something like central bank money in payment systems. There it clearly says that besides central bank reserves payment systems also rely on commercial bank monies.)

              • Joseph Laliberté says:

                Thanks, just some food for thought for the future….
                You said:
                “Even MMT emphasizes the point that bank lending is not reserve constrained and entirely determined by creditworthy customers. The term monopoly does not even apply to this sort of a system.”

                Of course the term monopoly applies to this sort of system. Right now, a private banks’ IOU is a State IOU. So the horizontal players are vested with the power to create State IOUs. The State willingly shares its monopoly power with the private banking sector when it comes to creating State liability. Without the ability of the banking sector to create State IOUs, banks’ liability would just be just that… private liability.

                Whether you are MMT or MMR, the State being center stage in the horizontal process is a matter of operational reality. Mosler says banks’ liability is not the place for market discipline, and this is why I think he would call banks private/public partnerships that are established with the public purpose of providing loans based on risk/return analysis. Implicit in this (I think), is that private banks are better able to do credit analysis than the State would. That is, the asset of the banking sector is best left to market discipline, than to State discipline (with the State of course regulating).

                • Cullen Roche says:

                  I guess we just disagree here. I don’t see how anyone can say the state has a monopoly on credit when the banks are in the business of using that privilege exclusively to make private profit. You don’t say the USA has a “monopoly” on driving just because they own the interstate highway system. Yeah, they play a really important role in getting around and you really can’t operate without it, but you would never say the state has a monopoly on driving. The term is inapplicable. There’s no such thing as a monopolist in this system.

                  • Dan Kervick says:

                    The Coca-Cola company is the monopoly supplier of Coca-Cola. That doesn’t mean that grocery stores can’t make a profit by selling Coca-Cola. Even if there is a monopoly supplier of some good, dealers can profit by renting or selling that good.

                    The banks are mostly part of the Federal Reserve system, which makes them something like franchises dealing in a single product that is supplied by the government corporation that runs the franchise system.

                    • Cullen Roche says:

                      Grocery stores don’t actually make and issue the product. Banks are in the business of issuing new money. That’s what they do. MMT can change the terminology to be more specific, but “monopoly supplier of money” is wrong.

                  • Joseph Laliberté says:

                    Cullen:
                    I am not totally sure with what you disagree. I am not saying at all that the State has a monopoly on credit (I can create IOUs myself if someone is willing to accept it). However, horizontal activity (in the sense of deposit creation) is the process of creating State liability in the operationnal world we currently live in. The State is accepting to share its monopoly power over State liability creation in order to allow the horizontal process to exist and thrive. The decision to loan (asset side management of banks) is not a decision of the State, but the State sharing its monopoly power over State IOUs creation ensures that the accompanying liability (deposits) will be universally accepted (within the State at least).

                    Maybe I misinterpret you, but the State “doesn’t just get the ball rolling”. The State is inextricably and continiously linked with S and I creation in a financial sense. Horizontal activity is not self-sustaining without the State sharing its monopoly power over State IOUs creation.

                    • Cullen Roche says:

                      If you agree with me that the state does not have a monopoly on credit then you disagree with the idea that the state has a monopoly on money. No one is denying that there is a hierarchy. But the state essentially outsources 90% of production and pricing to the horizontal level. So the monopolist terminology is misleading. The state does not have a monopoly on money. It’s a pretty simple description of our reality. The only way the state has a true monopoly on money is if you create one vertical level.

                  • A patent holder owns the monopoly on that thing. But if they license it, they’re not the only supplier of that thing.

                    Government, by law, holds the monopoly on money creation. But they “license” it widely by chartering banks to lend within the constructs of the federal reserve system. So it holds the monopoly, but it’s not the monopoly supplier.

                    ??

                    • Joseph Laliberté says:

                      Thanks Steve,
                      Nice way to put it.

                    • This theory is called chartalism because the definition of money is proclaimed by the State, and the ability of banks to produce money is granted by charters.

                      Marc Lavoie in his paper on MMT

  19. JohnfrmCleveland says:

    I realize that right now, MMR is basically a small group of guys that are all on the same page, and you get each other’s lingo. But that S = I + (S-I) equation needs some explanatory subscripts or deltas or whatever if you expect anybody else to catch on, because right now it looks a whole lot like 4 = 2 + (4 – 2), which doesn’t mean much.

  20. Cullen/Beowulf/Mike,

    Didn’t know where to post this, so posting it here.

    Nice new design.

    The redrawing of the sectoral balances on top says “a nation balances it financial sectors” – typo? I think in the earlier design it said “financial balances” or sectoral balances – don’t remember which one.

    • Cullen Roche says:

      Thanks Ramanan. We’re still hammering out some details on the new design….Probably be a few days before everything is finished.

  21. Dan Kervick
    The Coca-Cola company is the monopoly supplier of Coca-Cola. That doesn’t mean that grocery stores can’t make a profit by selling Coca-Cola. Even if there is a monopoly supplier of some good, dealers can profit by renting or selling that good.
    The banks are mostly part of the Federal Reserve system, which makes them something like franchises dealing in a single product that is supplied by the government corporation that runs the franchise system.

    Sounds like a nationalized, vertical-only coke system where the grocery store only obtains coke from the Coca-Cola company and resells it. :)

    Of course the store could always expand horizontally by issuing store IOUs with the promise to redeem them on demand for an ice cold bottle of refreshment. A thirsty public might circulate and trade for these IOUs with great enthusiasm. If the Coca-Cola company guarantees the store promise, so much the better for confidence.

    The coke monopolist might be quite pleased with this circumstance as these horizontal IOUs greatly expand the sphere of goods and services it can obtain in exchange for coke without requiring it to actually supply very much of it.

    A potential pitfall still exists in that many people might ignore coke in favor of pepsi or beer or tap water. If only the company had the power to levy a tax payable in coca-cola…

    • Cullen Roche says:

      A monopolist controls price and supply. The govt controls neither in the credit markets. They have only a loose influence on supply and price. To claim it’s a monopoly is an awful misrepresentation of our reality. I am practically floored by MMT’s insistence on rejecting these basic facts. It’s literally like arguing with austrian economists about Crusoe Island…..

    • lol this is beyond great.

    • It’s a great comment for me.

      For the last year I’ve amused myself by thinking about what commodity might e the best replacement for money today.

      I came up with: 16oz plastic bottles of pop. They are everywhere, they cost about a buck, they are easily divisible, largely portable, easy to count, easy to store, easy to make, widely acceptable, tradable, of a standard quality, ect.

      So I went through the exact thoughts you describe here about 16oz bottles of pop and giggle to myself every time I walk into a gas station or CVS.

    • I suppose since the U.S. government has a monopoly use of legitimate force they have a monopoly on every free market activity in the U.S., since they can control it by threatening to kill the heads of that industry??

      Another example: Before US dollars, our country engaged in numerous contracts, some of which were traded as money. Since those contracts were enforced by government courts, was gov’t “the monopoly issuer of currency in the form of contracts?” Put simply, we give the government a bunch of weird powers that we don’t give the private sector. If we really wanted to we could say the gov’t has a monopoly on everything because it could effectively get ANYONE to do ANYTHING it wanted with the massive destructive potential it owns.

      Taxation is a functional requirement to get a base fiat currency to stick in the long run, but since there are other factors that enter any system of democratic government, referring to it as a monopoly is just too convenient and gives an improper visualization of the relationship. Their monopoly on base money is only as strong as the public allows it to be, and since everybody gets an equal vote, it has few of the familiar traits of a traditional monopoly.

      Vertical and Horizontal money are simply two levels of the same activity. Contracts are a great form of money, but they have a liability attached to them. That doesn’t make them “not money.” The government requiring us to pay taxes in a given currency gives us the will to acquire a certain amount of that currency in a given year, but by no means does it necessarily entice us to denominate all of our transactions in that currency, save in that currency, etc.

      • Cullen Roche says:

        It’s even simpler than that Dan. As Warren likes to say, for the monopolist “it’s always about price and not quantity”. The Fed sets a “target interest rate” which all other credit hinges on. But the Fed does not set prices for credit. They set a target rate and the market sets prices from there. Try not paying your credit card for 5 months and see if the bank sets your price differently. File for bankruptcy and then walk into a bank for a mortgage and see where the bank sets the price of your credit. I am not saying the govt doesn’t wield a big stick here in influencing prices. But to extrapolate this out across the entire spectrum of credit and proclaim the entire system a monopoly is really absurd. The state does not control the price of credit except in a very loose sense. And credit is the lifeblood of the monetary system….Therefore, we can do the simple math and conclude that we don’t reside in a fully state system. It’s that simple really. MMT just has this flat out wrong. I don’t even know how anyone could reject that since I am using the same terminology that Warren uses to describe a monopolist.

        When you understand their thinking you can begin to see why they need a nationalized banking system or a 0% fed funds rate. They want to permanently be able to set prices. But without this world, MMT has a big big hole in it….

        • Cullen,

          Could we move to the next step and say that the “success” of the horizontal sector to service itself without additional lubrication from the vertical activity depends on how finely engineered it is? Aka, how much real value they can create that creates the foundation of all the new net-zero financial assets?

          For instance, if you have an economy with an under-regulated or over-dictatorial vertical component, you’ll probably see inefficient issuance of debt to players who can’t pay it back. This economy will run less smooth, and more vertical money injections will be required more often as you attempt to repair inefficient activity that’s “burning oil” so to speak.

          But in an economy with a well-regulated but efficient, effective financial sector that properly calculates risk, you can hum along on less NFA’s as a percentage of GDP.

          I’m not sure I fully accept this visualization, but I’m trying to fisualize the proper amount of (S-I) to have in a given economy at a given time.

          • I mean under-regulated horizontal component.

          • Cullen Roche says:

            Yeah Dan. I think that’s the primary reason why we have a pvt banking system. This govt was arranged to disperse the powers away from a centralized govt and across a spectrum of institutions. That doesn’t mean it works perfectly, but it’s what we have. I think you’re dead right about the dangers of under-regulation AND excessive state control of money. It’s all about finding the right balance. Personally, I think banks are under-regulated still, but I would certainly never propose a nationalized banking system.

            Calculating the “right” amount of NFA is a tricky situation because the pvt sector’s needs are always changing. I probably don’t have a great answer for you there….

            • Regardless of the proper level, it’s amazing to see the drain of NFA’s from our economy (despite “high deficits) from the late 90’s through 2008… combined with leveraged malinvestment… it’s almost insanely easy to spot in hindsight that some trouble was definitely brewing as our NFA cushion got smaller and smaller while all fundamentals pointed to overpriced housing.

        • Why would a 0% FFR, without nationalize banking, allow the Govt to permanently set prices of all loans? We all agree the market will still set prices based off of the FFR, adjusting for risk, duration, liquidity, etc. whether it’s 0% or 10%.

          • Cullen Roche says:

            It’s one big govt monopoly. Imagine Fannie and Freddie on steroids. The whole govt decides how lending is done. It’s a true monopolist then. I should have said 0% FFR WITH nationalized banking. That’s the best MMT base case because it gives the vertical component a full monopoly on all credit pricing. Get rid of the independent Fed, consolidate govt, pin the FFR at 0% and nationalize the banking system. There’s your fully vertical and true monopoly. That’s the vertical level at “center stage” with a true monopoly on govt money.

            • Right – *with* natl banking.

              • Cullen Roche says:

                I wonder if MMTers actually know this and just never say it. Because this is their true base case….Without it, there’s no monopoly on credit and just a vague explanation of the hierarchy trying to frame the horizontal as part of the monopoly when the reality is that banks clearly set price AND quantity on their own….

                • Joseph Laliberté says:

                  Cullen:
                  Let me give another go at it…. what is your explanation (or JKH’s explanation) for the fact that banks’ created money (i.e. deposits) always trade at par with government created money (i.e. reserves, currency) ? Why is it never the case that Bank X liabilities in the form of deposits are trading at 50 cents on the dollar -meaning that trying to buy a product priced at 10$ (in State money) you would have to disburse Bank X liabilities with a nominal value of 20$?

                  • Cullen Roche says:

                    I am well aware of the MMT hierarchy argument Joseph so I see what you’re doing there. This is always the MMT response. “But the hierarchy is bank money convertible into state money”. I’ve heard it before. It has no bearing on the monopolist comments. A monopolist controls price and quantity. When it comes to bank issued credit the state controls neither. I am not denying that the hierarchy exists or that the state sits atop the hierarchy. I am rejecting the use of the monopolist terminology. It simply does not apply. The state is in no way a monopoly supplier/issuer of credit or money. Regardless of the hierarchy or how one perceives it. MMT just flat out has this wrong.

                    • Joseph Laliberté says:

                      Cullen:
                      I am not speaking for the MMT community, I gave you my interpretation of what I think they mean by the “monopolist” terminology. This being said, a person not familiar with MMT who would read this thread would get the impression from you that MMTers do not believe in endogeneous money. You and I know this would be a gross mischaracterisation of MMT. I think it would be great to reflect as to why no MMTers have considered worthy engaging with you on this topic.

                    • Cullen Roche says:

                      The meaning of the word monopolist is very simple. It is an entity that completely controls the means of production and has the ability to set prices. The govt controls neither price nor supply of credit. In Warren’s “mandatory readings” Innes says “credit and credit alone is money”. That’s simple. The govt does not has a monopoly on credit. I really have no idea why you all are being so intransigent on this point. It’s crystal clear.

                    • Cullen Roche said…
                      The state is in no way a monopoly supplier/issuer of credit or money.

                      The state is the monopoly issuer of dollars without a liability attached.

                      Credit is not money at the root since it consists of dollars as defined above plus the offsetting liability.

                      Credit can’t be used to fund savings (accumulate dollar wealth) without generating unsatisfiable system-breaking liabilities in the rest of the non-government.

                      Credit is an important (invaluable) tool in funding investment. But it isn’t capable of driving an economy over the long term by itself. Vertical money is required.

                      When the credit channel breaks down the government is the spender of last resort.

                      That is what this entire discussion is about and I suspect everyone already knows and understands these things. Why is this so hard?

                    • What the hell is “money at the root?” A society that uses contracts as money would still have a monetary system. The liability does not make the money nonexistent.

                      I’d also add that I think we have to apply some kind of “different kind” of liability to gov’t debt. Since we claim it’s an asset without a liability, but future inflation will result if the economy doesn’t remain productive, I’d argue that issuance of fiat currency carries with it the “liability” of maintaining an environment that can sustain and reward productive activity.

                      So if the gov’t has to do all the other things right (infrastructure, laws, regulation, education, etc) for the NFA’s to have future value, then there IS a liability there (albeit a VERY different kind of liability than the private sector has with their currency). That doesn’t mean the currency isn’t “Money at the root,” but just that some future responsibilities must be upheld to give that currency value.

                    • @Dan M.: “some future responsibilities must be upheld to give that currency value ”

                      This seems similar to Steve Randy Waldman’s idea that holding money is essentially holding an equity position in government.

                    • Dan M.
                      What the hell is “money at the root?” A society that uses contracts as money would still have a monetary system. The liability does not make the money nonexistent.

                      Calm down. I was simply attempting to define a “dollar” in it’s simplest form of existence in the real world – a dollar with no offsetting liability in the non-government. A dollar that “belongs” to the non-government. I didn’t make any claims about monetary systems.

                      It seems to me that there is a lot of confusion between dollars as I described it above and credit dollars. The difference is not trivial.

                      It should be intuitively obvious that credit dollars cannot be accumulated in the aggregate.

                      I don’t disagree with anything else you wrote.

                    • The liabilities aren’t “system breaking.” The liabilities are what drive people to be productive… they need enough lubrication, simply, so we keep enough ultra liquid, ultra-safe money in the economy. If everyone had a monetary asset without a liability there’d be little will to engage in productive activity, and therefore this ultra-vertical system would probably result in inflation as resources are improperly allocated. We have certain safety nets, but in our system, we are in high-enough demand for non-essentials that we are forced to become productive. This is a pretty good balance. The horizontal is entirely organic and natural as young, smart, poor entrepreneurs meet rich old guys that need some ROI. The vertical is simply a form of stability, conformity, and promised overall growth that will make these contracts easier to form with confidence on the horizontal level, and keep enough oil in the engine to keep the whole system from locking up.

                      I think of the monetary system as like a finely tuned engine. The private money, consisting of the users of the money (loan takers), banks (loan makers), owners (equity holders), and regulators all come together in a complex world to properly allocate capital. These are the engine components. They are very, very complicated and involve lots of moving parts. The vertical sector is a bit more simple, as its job is simply to give that 7 quarts of lubrication that the horizontal system needs to run without burning up. It’s extremely important, and nobody would claim that the lubrication can be ignored, but try lubricating a Ford Pinto and you’ll get much, much, different results than putting that in a Porsche 911.

                    • Paulie 46,

                      Sorry, that wasn’t meant to sound as harsh as it did?

                      Steve Roth,

                      Do you agree with my assertion that there IS some sort of liability to attach to these assets? Obviously this being a VERY DIFFERENT kind of liability from the private sector liabilities is a GOOD thing… almost a sort of diversifier to the monetary system that leaves it less prone to systemic risk. I just don’t believe that you can print paper and have a net asset. You have to fulfill certain promises in the future for that dollar to hold up in value.

                    • Dan M.
                      The liabilities aren’t “system breaking.” The liabilities are what drive people to be productive… they need enough lubrication, simply, so we keep enough ultra liquid, ultra-safe money in the economy.

                      I think you’re making this much more complex than it needs to be. It also seems like you may not be fully aware of the properties of a “closed system”. Please don’t take that as a criticism, just probing.

                      You may be misinterpreting what I am saying, which is this…

                      In a horizontal-only closed system financial assets cannot be accumulated or “saved” (I’m terrified of using that word anymore) without generating unsatisfiable liabilities amongst other agents in the system. Once someone “hoards” dollars others do not have access to the dollars required so satisfy the outstanding liabilities until the hoarders “un-hoard”

                      The MMR pipples will likely ding me for inventing another term.

                    • Paulie,

                      What I was trying to illustrate is where the meat of our economic system is, and that’s in the horizontal sector. Your point is right… that a fully private system of money, no matter what it’s denominated in, is subject to hoarding and instability. That doesn’t make the gov’t the driver of the money any more than unemployment benefits are the driver of wages in our economy (ok, that was a stretch, but the best I could come up with and I think somewhat valid).

                      I will agree that there’s a degree of “arguing past each other” to all of this, but I feel like if visualization is key then we should hash these details out.

                      Gov’t provides the lubrication and has an absolute monopoly on that… there isn’t anything quite like reserves, coins, bills in the economy to satisfy these obligations. This is a cruicial role. However, if we view this as the core of the economy, and prosperity as succling from the teat of fiat currency, it creates the wrong emphasis. The fiat lubrication is basically an insurance buffer stock that our system uses to clear private money the way nothing else can, especially in crises. We simply need enough of it to keep us from locking up into an economic Mexican standoff.

                    • Cullen Roche says:

                      Dan, you’re right. They are wrong. They are simply obscuring the point to spread an ideology not grounded in reality. There’s no point responding.

                    • Dan M.,

                      Again, I don’t disagree with anything you have written here.

                      I also am not saying that the vertical component is more important than the horizontal.

                      I am simply saying that the horizontal circuit cannot succeed without the vertical component. In this context which one is more important? I don’t think that is the issue. A system without a vertical circuit cannot succeed. Credit provides the “grease” as you put it but any real work done (wealth creation) must be monetized by the vertical or the system will cease to work for most people and the financial system will collapse (as we have recently witnessed).

                    • Cullen Roche says:

                      Most wealth is not monetized. But yes, no one is saying it never needs to be monetized. We are just pointing out the reality of the matter. Credit is money and credit is the driver of economic growth. In Warren’s “mandatory readings” Innes says “credit and credit alone is money”. That’s simple. The govt does not has a monopoly on credit. End of story.

                    • I just want others to know that I’m coming at this from a place of visualization. I think if you’re going to explain economics to a layman you can’t make the government out to be some kind of tax-collecting authoritarian. You can’t make pieces of paper appear as the core of a healthy economy. You can’t tell the private sector, “YOU CAN’T SAVE WITHOUT GOVERNMENT,” without offering visual/operational context to that assertion.

                      For instance, the more a government taxes, and even moreso if they over-spend on social benefits, the more free, productive activity they might squelch. Yes, they may have removed money from the economy, but they’ve also poisoned the environment for productivity. So to say (as I once visualized it in my early MMT months) that the value of the currency is all based on taxes isn’t looking at the system as a whole, and is starting out with the wrong visualization of the interaction of money within an economy. I didn’t like Cullen’s pickiness on this point at first, but now I see where he was coming from. Taxation is one link that’s probably necessary in the long-term but doesn’t drive the whole system. For instance, we could stop taxing today altogetehr, but we’d still have tons of dollar-denominated-debt obligations to service in the real economy, and as long as we could keep the NFA injection to a reasonable level (maybe by cutting spending (suggested only for this cognitive exercise)), you’d probably still see the society continue to contract in dollars… contracts often running 10, 15, or 30 years. Why would they do this without taxation? Because it’s common and stable, and the government is encouraging productive activity, which encourages contract-holders about the future of production to be able to keep up with NFA’s.

                    • Dan M.
                      I just want others to know that I’m coming at this from a place of visualization. I think if you’re going to explain economics to a layman you can’t make the government out to be some kind of tax-collecting authoritarian. You can’t make pieces of paper appear as the core of a healthy economy. You can’t tell the private sector, “YOU CAN’T SAVE WITHOUT GOVERNMENT,” without offering visual/operational context to that assertion.

                      …even moreso if they over-spend on social benefits…

                      Understood. I suspect all of us participating here have abstract views and are trying to translate them into some real-world meaning.

                      What you are writing may be easier to understand than mine but that is not the argument.

                      I don’t know how one would determine whether we are over-spending on social benefits. Every dollar spent on social benefits ends up eventually in the pocket of a productive member of society to drive production in the direction it needs to go. The market is making these decisions, the spending is just being released into the wild by the government.

                      Spending on public purpose is another thing altogether but it still benefits us all by providing tools we need to succeed in the future.

  22. Michael:

    I’m afraid I don’t remember you from Megan’s blog. I haven’t posted there for a while, but still read it.

    I’m afraid I have no idea what you are getting at in this piece. I cannot speak for others, but I certainly don’t view “MMT as something like a really nice daddy who can turn evil at any time, and freshwater government as an thief. ”

    I’m not sure what the main difference between MMR and MMT is. My feeling is that MMR has a more clearly defined political perspective that it doesn’t feel MMT adheres to.

  23. This is too good. I always thought MMT would be debunked by someone outside of MMT. Not one of its own. Haha.

    • FDO15
      This is too good. I always thought MMT would be debunked by someone outside of MMT. Not one of its own. Haha.

      Are you old enough to post on a blog?

  24. Cullen,

    Are you insisting that the fed is truly independent? Does that mean you think they’d let an auction fail? How does your view of the fed differ frOm MMT?

    • Cullen Roche says:

      I do not think the Fed is independent. Its operations are intricately intertwined with Tsy’s. I am fine with consolidating the two because anyone familiar with their ops can see they’re two pockets in the same pair of pants. As for differences between MMR and MMT on the Fed – well, we don’t see the Fed as being as inept in controlling inflation as MMT does and we also don’t believe the Fed should be done away with as some MMTers think. I also don’t believe the FFR should be 0% as Warren has suggested.

  25. Cullen,

    Can you elaborate on your view of the FFR?

  26. Cullen Roche
    Credit IS money. Please stop changing the definition. It’s patently absurd, unless you live on another planet. If you continue this sort of blatant obfuscation i will simply delete your comments.

    Credit dollar = dollar + dollar liability = 0

    You are saying a credit dollar is the same as a dollar, which by arithmetic is clearly untrue. I never thought arithmetic would be considered obfuscation. Credit is a KIND of money.

    You need to take a chill pill.

    Anything anyone writes here is a blatant obfuscation in your mind if you don’t agree with it. It’s you ball and if we don’t want to play by your rules you will take your ball and go home. Fine.

    If you are going to ban me please also remove the video “Where does the money come from” from your you-tube site since that is my script used with permission by Michael S.

    • Cullen Roche says:

      I am not saying a credit dollar is a dollar. You are putting words in people’s mouths in order to obscure your incorrect point. I am saying credit is money. Innes says the same thing in Warren’s “mandatory reading” on “what is money”. So it’s just absurd that you come here claiming otherwise. Bordering on dishonesty.

      I don’t need to take a chill pill. You need to stop drinking the MMT kool-aid. And yes, you all have engaged in obfuscation. You’ve changed the meaning of words. You’ve said the MMT writers don’t “mean” what they write. I mean, this whole thing has reached a level of absurdity that I don’t even reach in debates with Austrians and borderline insane gold bugs. And I am pretty tolerant of this stuff on the internet. But man, you guys are the definition of intransigence. Go spread your mythology elsewhere.

      And let’s not forget which one of us is off spreading hate messages behind the other one’s back. So please don’t try to take the high road here. I already busted you trashing me on another site…..Giving readers here the impression that anyone else is being unreasonable is just more obfuscation, which seems to be something you MMTers are quite talented at.

    • Cullen Roche says:

      Consider your video deleted.

  27. Cullen
    I haven’t read Warren’s stuff – all of my arguments have been and always will be based on math and systems. If the math doesn’t work all of the semantics and definitions you come up with or claim the high ground over don’t matter one whit in how the system functions according to real-world mathematical constraints.

    Talking about a system doesn’t change it’s behavior.

    Been nice talking up to you.

    • Cullen Roche says:

      The real world math is simple. I know it, because I live it. I just took out a sizable loan to start my new business. That’s real money that is going to help me meet operational needs. This is how businesses grow. To tell me that that credit is not money is just about the most absurd thing I have ever heard. It’s sure as hell money to me. It’s sure as hell money to anyone buying a home. It’s money to everyone who has any understanding of reality. But here we have you, Phil and Dan all claiming otherwise. And the funniest part is that Innes even says you’re wrong in Warren’s “mandatory readings” on “what is money”. Yet you still attempt to obfuscate. Really unbelievable. Truly.

      -“credit and credit alone is money.” – Innes

      • Joseph Laliberté says:

        Cullen:
        Personnaly, the term “monopolist” would perhaps not be my word of choice (as I said, I think I know in what sense some MMTers use this word, but I am not positive on this). Mosler and Wray use this word a lot. Not so sure about Fullwiler… I do not recall him talking about the monopolist aspect other than to say that the Fed has a monopoly on reserve creation (I stand to be corrected, you know him better than I do). And this is how Pavlina puts it:
        “Regardless of the multiplier process, the State is the “money monopolist” of what it demands for payment of taxes.”

        In any case, what I do not get is why your take on this semantic debate is that “MMT foundation is totally wrong” (again, you understand as well as anybody that endogeneous money is an integral part of MMT). I have more substantive disagreement with MMT than its choice of words (not keen on the “no bonds” proposal, not too sure about the job guarantee, and I tend to emphasise more the State guaranteeing convertibility of banks’ liabitility into State liability than perhaps the average MMTer would), but I would not call MMT flat out wrong on the basis of these -more substantive- disagreements.

        • Cullen Roche says:

          It’s rather simple. The vertical monopolist position is the foundation of MMT. It’s from there that they build out their arguments for price setting and the JG. Without the monopolist component the foundation is flawed.

  28. I didn’t say credit isn’t money – I said that it is a different kind of money, and all forms of money are not equal. I showed you the simple equation that proves it. I assumed you knew that and I’m not inclined to talk down to people. I assume everyone knows what I know until they prove they don’t.

    You, on the other hand…have some kind of an axe to grind. I’m not involved in the MMT community – I’m an outside observer. I had nothing to say about the Job Guarantee – it doesn’t matter to me. I’m a systems analyst, and if I see someone write something stupid on the internet regarding system dynamics I may be inclined to disagree with it all the way to the root of the problem.

    I can see that you are too busy and important for that. Not only, but you don’t want to see me discussing it with anyone else.

    Pitiful.

    • Cullen Roche says:

      What’s “pitiful” is that you wrote this just an hour ago:

      “Credit is not money at the root since it consists of dollars as defined above plus the offsetting liability.”

      And now come back and claim that you didn’t say credit isn’t money. Right. You said “Credit is not money”. 4 words. Not 3.

      If you had read my comments you would have noticed that I have been exceedingly specific about the types of money. Reserves, notes, bonds, etc. All govt monopoly controlled money. And then we have credit. No one is rejecting your rather obvious claim. But I am rejecting the MMT notion that the govt has a monopoly supply of money. Because they clearly don’t.

      It’s funny that MMTers think I have an axe to grind when I am clearly just pointing out our reality. Stating the obvious, like a 30 million person job program might involve enormous risks, or that the state doesn’t have a monopoly on money. But I am the bad guy for pointing out the obvious and trying to teach readers how the system ACTUALLY works. It’s not my fault that MMTers got some stuff wrong along the way and decided that politics and policies were more important than the facts. It’s humorous to me that MMTers think they’re so righteous for calling Krugman, Sumners, etc out on their misunderstandings. But when the tables get turned people are suddenly being too mean to you all or grinding an axe. MMTers seem to think they’re infallible. Like they have some holy grail. Sorry to rain on your parade….

  29. Cullen

    “Credit is not money at the root “. You left something out. I intentionally “added at the root ” so I wouldn’t be mis-understood. You mis-understood me anyway.

    This is hopeless. I try to make a point that is incrementally more nuanced than the statement at hand. I do this to get clarity. I am also probing to see if I will get a response making some statement that is mathematically false, because that is low-hanging fruit in a debate. You accuse me of dishonesty and obfuscation when basically we have a fundamental difference in interpretation of the facts, the facts being arithmetic. you have not questioned any mathematical relationship I have presented. I have to assume you don’t disagree.

    I could say we can agree to disagree but I suspect you will continue calling me names or disparaging my character. I won’t sully your comment section any further.

    • Cullen Roche says:

      Actually, I added the whole quote for you. Reread my comment. No one misquoted your or “left something out”. Here’s the link. http://monetaryrealism.com/a-reply-to-winterspeak/#comment-1843

      And no one is calling you names so let’s not get all dramatic and start playing the sympathy card. You guys got something wrong. Big deal. Move on. Go spread your ideology to your people! I hear they’re filling up stadiums for you these days! Relish in that. But do it on MMT websites because if you do it here I am going to call you out on your mythology. Thanks.

  30. Ok, I’m going to just toss out a bone that many are going to look at this debate (right or wrong) and feel like maybe both sides are arguing past each other.

    The qualification to that being, Cullen, your description of the JG (which I’m not entirely familiar with and it appears neither is Paulie) seems to insist that it implies a monopoly on money, aka, making the vertical piece the central if not only piece of the equation. Could you maybe expand on this (not that you haven’t already)?

    This is where I think the rubber will meet the road in trying to point out something fundamentally misunderstood by the MMT’ers. Up until this point it could be argued that semantics have been driving the debate.

    If others and I could understand exactly how the JG implies state-monopolized-money (credit included) then it’d be easier to poke holes in their assertions of a monopoly, because we could actually see how they bridge that term to real policy.

    Thanks!

    • Cullen Roche says:

      The job guarantee is what Warren refers to as the “base case” for MMT. He says the state is the monopolist on money. Monopolists set prices. That is just what they do. So MMT builds this conflated message saying taxation causes unemployment and that the only entity that can provide full employment is the monopolist since they’re the price setter. Here’s how Warren says it:

      It’s about recognizing ‘JG’ is the ‘base case’ for fiat money in general.

      Back to the beginning

      The govt wants to move real goods and services from private to public domain.

      It levies a tax payable in its currency of issue.

      this creates sellers of the real goods and services it wants to buy who now want the govts currency of issue in exchange for their real goods and services.

      the govt buys those goods and services with its otherwise worthless currency, services being ‘labor’

      That is the base case.
      And that currency of issue is a simple public monopoly.
      The tax ‘unemployed’ the labor from the private sector that the govt then hires, which was the point of the exercise to begin with.

      So how does a monopolist, in the base case, do this?

      Monopolists are price setters (vs price takers) in that they set the price/terms of exchange for their ‘commodity’ and let quantity adjust.

      You’ll find examples like this in all the MMT literature. They remove the horizontal component to prove the strength of the vertical. Warren does it by showing examples of a man holding a gun to people’s heads, Mitchell does it by threatening to starve his children in exchange for business cards and UMKC does it through the Buckaroo program. But none of these systems have a horizontal level. It’s one vertical component where the currency is a monopoly of the issuer.

      Out here in the real world the banks are issuers of credit and the state controls neither price NOR quantity. It doesn’t matter that there’s a hierarchy. It doesn’t matter that state money sits atop the hierarchy, but MMT uses the worst kind of obfuscation to further this argument by claiming that the state sits atop the tax hierarchy and that that means the state is still the monopolist. Never mind that the state doesn’t control price AND quantity! Which is what defines a monopolist!!!

      They go on to promote their politics based on this myth. It concludes with the job guarantee based on the state as price setter. When you understand all of this you can clearly see that MMT is one tightly balled up theory based on a total myth. MMT’s real base case is one vertical level….Without it, the theory (as a whole) is inapplicable. Pieces of it are tremendous, but that’s separate from MMT, which is one tightly constructed theoretical framework.

  31. Reverend Moon says:

    Cullen,

    No disrespect but, when Innes says “credit and credit alone is money” he is referring to the “nature” of money; not bank credit. It is more about Graeber vs Menger than defining “money”, IMHO. It is a rejection of the one good to barter them all history of money. Also, since being the unit of account is a necessary quality of money, per the textbook definition of money, it would seem to me that bank credit is not “money”. The government certainly does not have a monopoly on book keeping; not all book keeping entries can be used as a medium of exchange.
    Since what Paulie46 said in no way contradicts anything I’ve learned from you but rather helps illustrate the balance sheet recession, I’m at a loss to figure out what the point of the disagreement is.

    By the way the irony of the video about where money comes from being scripted by paulie46 made my day :)

    Not an mmt’er by the way. Love PragCap and “money” you with advancing my understanding of macro and stuff.

    PS Yes I know that wasn’t funny but, I couldn’t help myself.

    • Cullen Roche says:

      Do you use a credit card? Do you have a mortgage? If so (like 95% of Americans), you understand that bank credit most certainly IS money.

  32. Reverend Moon says:

    Great thanks. I understand your point, I think. I wasn’t adding anything to the conversation. Sorry. I wasn’t trying to be a prick. I thought there was a distinction to be made and I think the recent Graeber historical account of money and debt (like that of Innes) compared to Menger’s theory about choosing one good to barter with that we call money, is interesting. I guess I didn’t know what money meant. I get it, it all spends the same.

    So you say that there is more than one kind of money. And both are just keeping track of who owes what to who. Fair enough I was defining it as the unit of account. And I’m making the assumption that it is the medium of exchange and store of value qualities which are the more important qualities of money in your opinion. I hope I haven’t misinterpreted what you’ve meant.

    By the way, I’ve read all the recent S=I+(S-I) blog posts and I understand the point JKH and Ramanan have been making. I didn’t think what I said contradicted any of that, though, I get the impression (probably wrong) that’s how it has been interpreted.
    Didn’t mean to aggravate anyone. Just trying to understand and put my 2 cents in.

    • Cullen Roche says:

      No worries Moon. I know no one is being a prick here. I can handle the criticism. It’s the intransigence and blatant obfuscation after 900 comments that bugs me. MMTers have been coming here in droves trying to repeat their mantra….It’s getting old and I am very familiar with the mantra. Hope to see you around often.

  33. Michael Hudson at the MMT conference in Rimini:

    The basic thrust of our argument is that just as commercial banks create credit electronically on their computer keyboards (creating a bank account credit for borrowers in exchange for their signing an IOU at interest), governments can create money. There is no need to borrow from banks, as computer keyboards provide nearly free credit creation to finance spending.

    The difference, of course, is that governments spend money (at least in principle) to promote long-term growth and employment, to invest in public infrastructure, research and development, provide health care and other basic economic functions. Banks have a more short-term time frame. They lend credit against collateral in place. Some 80% of bank loans are mortgages against real estate. Other loans are made to finance leveraged buyouts and corporate takeovers. But most new fixed capital investment by corporations is financed out of retained earnings.

    There is the I in MMT. The problem, also with Krugman’s graph, is that the usefulness of any measure depends greatly on its quality. Just measuring I vs. S or net S or any other monetray measure says absolutely nothing about the long term viability or quality of anything happening in an economy. It’s a supply side myth that I is always good and net S is a always evil. I is only always good for the financial sector but for all the rest of us, without a decent qualifier, we just don’t know. Furthermore, for for any open economy with a large trade deficit like the US, one would have to look at the ‘investor of last resort’, i.e. China and Germany, to have a full view of what’s going on. Most real investment in fixed capital was and is happening in those places that make the goods that the US consumes. One way one might look at it, is that the investment within the US, i.e. McMansions, was being leveraged (for lack of a bettwer word) off of the residual gvt. securities that the trade deficit left behind in the US banking system because there was no demand for further useful produce to be filled, nor any quality control to make sure that the I being forwarded by banks was funding anything useful. Does that make sense?

  34. Joseph Laliberté
    Cullen:
    what is your explanation (or JKH’s explanation) for the fact that banks’ created money (i.e. deposits) always trade at par with government created money (i.e. reserves, currency) ? Why is it never the case that Bank X liabilities in the form of deposits are trading at 50 cents on the dollar -meaning that trying to buy a product priced at 10$ (in State money) you would have to disburse Bank X liabilities with a nominal value of 20$?

    Oh, that is what the system is supposed to deliver. From the foreword of the BIS paper I have just referred to above:

    Contemporary monetary systems are based on the mutually reinforcing roles of central bank money and commercial bank monies. What makes a currency unique in character and distinct from other currencies is that its different forms (central bank money and commercial bank monies) are used interchangeably by the public in making payments, not least because they are convertible at par. Central bank money plays a key role in payment arrangements, as it has proved safe and efficient to have a central reference of value with which all other forms of the currency maintain this par convertibility. This role is long-established and, for the most part, uncontroversial.

    Nevertheless, as explained in this report, the role of central bank money in payment systems raises a number of questions. Developed economies have complex and interdependent payment arrangements in which there is a combination of competition and cooperation between the many institutions involved. The use of central bank money is thus part of the underlying issue of the balance between the services provided by central banks and those provided by commercial banks in the payment system. And given the widespread and fundamental changes that have occurred over the past decade or so, and which continue today, it is useful to consider whether an appropriate balance is being maintained and how the composite use of both monies can best be achieved.

    Why does not MMT ask the questions of the efficient balance but mainstream does? Maybe it is 100% central bank but I am curious to see the analysis. Anyways, the paper is not really mainstream. It is an attempt to analyze reality.

    And interestingly there are funny cases from the real life where marketable liabilities of commercial banks are traded at lower yields than that of a truly sovereign government (e.g. Czech government and the largest commercial bank in Czech republic). The reason is simple – political risk has a high price these days. I would not be surprised to find occasional similar cases in the USA as well. Just never bothered to look.

    • Joseph Laliberté, to continue thinking about convertibility… the TT&L accounts is generally a proof that the government agrees to pay the delta between demand deposit rate and the base rate for the right to “buy” a commercial bank liability. In other words commercial bank liability is more expensive :)

  35. paulie46
    Credit is an important (invaluable) tool in funding investment. But it isn’t capable of driving an economy over the long term by itself. Vertical money is required.

    Let me try beowolf here :)

    Once I had a discussion about how cool and beneficial everything that banks do is. Take floating rate mortgages with rate caps the guy went on. Excuse me, said I. First floating rate mortgages, let alone caps on them, were created … say… 30 years ago when banks realized that there is a thing called interest rate risk which they do not like. But this whole world around us exists for thousands of years.

    So what is more long-term shall I ask? The mess that we find ourselves in or the history of human civilization which to its large part lived on a purely horizontal plane upheld by 4 big elephants standing on a giant turtle swimming in a sea?

    • paulie46 says:

      Sergei

      True but the system has been reset a gazillion times over that span of history. The functional (and mathematical) equivalent of vertical money injections.

      • Really?! Maybe you are talking about some intrinsic counter-balancing mechanisms built into the horizontal component? Like people sit down, drink a beer and solve the problem.

        Or maybe by the vertical component you mean the inherent desire to rage wars on your neighbors which IS the fair part of the history of state money? Like no money – no wars.

        Or maybe it is better to slow down and admit that there is nothing in this world which is more straightforward than money. And the vertical-horizontal distinction is not about money but about the structure you want to impose on a social relationship which pre-dates any history of any theory and any state.

        So what is primary to you: the social relationship or a given theoretical structure? “When the facts change, I change my mind. And what do you do, sir?”

    • In this allegory am I the guy singing the praises of banking or the one who starts waxing philosophical about elephants and turtles?

  36. paulie46 says:

    Sergei

    Really.

    At the most granular level it is simple arithmetic.

    Financial gains must be monetized to be realized. Speaking in the aggregate sense of course as always.

    Otherwise gains are always at the expense of another.

    There’s no need to make things more complicated than that.

  37. paulie46 says:

    Sergei

    Changing the topic?

    The topic is whether or not an economy can be stable under a completely horizontal money-creation constraint. This is a math problem and not a very complex one at that.

    I’ve dealt with that topic directly in math terms which, if I’m not mistaken, cannot be refuted using any math currently known. Feel free to make your case.

    Actually the horizontal system can be stabilized by not allowing wealth accumulation. I suspect that option is off the table so…

    Looks like you are searching for ways to “win” your argument without actually making one.

    • paulie46 says:

      Edit

      “financial wealth accumulation”

      • Ha. The real math is even more simple than yours. This math has been already mentioned by JKH many times. It goes like this: for the USA the real wealth accumulation is 50 trln USD, financial wealth accumulation is 10 trln USD.

        But there is nothing in the vertical-horizontal dichotomy that monopolizes the argument of fiscal redistribution in solving horizontal imbalances. Just sit down, drink a beer and solve the problem. Interestingly enough, MMT pretty much denies the necessity to deal with and danger of those imbalances. Just run a larger deficit. Might be correct. Might be not. But who are you to claim that 20 years of Japan can be extrapolated into forever? And if it fails in the future are you ready to take the responsibility now? Does your model take into account coffee breaks and gossiping of people?

        • Sergei

          “Ha. The real math is even more simple than yours. This math has been already mentioned by JKH many times…”

          How about making your own argument instead of appealing to something someone else said. You haven’t demonstarted any level of understanding of the system within which we are operating.

          What about the $50 Trillion of outstanding liabilities owed to the banking system. How does that fit into your math? Liabilities most of which can never be re-paid without some sort of vertical operation or clawing back of all previously accumulated financial wealth. I’m in favor of that but it isn’t going to happen any time soon. See, the liabilities are in dollars and there aren’t enough of them (in a practical sense) to satisfy obligations.

          I like beer, but get real.

          • “What about the $50 Trillion of outstanding liabilities owed to the banking system.”

            50 trln you say?

            “most of which can never be re-paid ”

            Balance sheets always balance, that is assets equal to liabilities. And since banks are financial organizations, that is operating in normal terms, their assets and liabilities are financial by nature and also match.

            But I got your point. No further comments.

          • “What about the $50 Trillion of outstanding liabilities owed to the banking system.”

            Paulie … which $50 trillion is this? Because financial institutions are big one can throw various numbers around. So what $50 trillion of liabilities are you talking of? That too – to the banking system??

    • Cullen Roche says:

      Here we go with the cheap MMT debate tactics. No one said vertical wasn’t important or that its not necessary or that we couldn’t reside in a fully vertical if govt wanted it that way….

  38. Cullen

    I defined a problem…

    “The topic is whether or not an economy can be stable under a completely horizontal money-creation constraint.”

    …in response to an unsolicited comment directed at a comment I made last week…which I’m OK with.

    I do not , have not, will never (well probably never) advocate a purely vertical system, only claiming that horizontal-only is inherently unstable. This should be no biggie on the scale of controversy.

    This discussion has nothing to do with MMT as far as I am concerned. I had many of these thoughts before I ever heard of MMT, and if MMT promoted policies that defy math I would oppose them in the same way I am opposing them here.

    Every discussion I have encountered here attempts to get away from simple math constraints by introducing complexity. Then the argument meanders based on the word clouds generated. These things are not that complicated. That’s what I like about math. It will never let us down and every economic action is constrained by it. You can take that to the bank.

    “cheap MMT debate tactics”… this is your typical response to anyone trying to apply simple logic to an argument. You did it to Dan K. earlier. Talk about failing to argue in good faith.

    Further, all this name-calling and impugning of motives is obscuring whatever argument you’re trying to make which by the way is becoming more and more unclear with each passing day.

    You simply won’t engage on any terms but your own. This means to me that your goal is to “win” the debate or discredit anyone that doesn’t see things your way rather than come to some understanding of your opponents thinking.

    • Cullen Roche says:

      Paulie,

      You’re altering the focus to try to prove a point no one is debating so you can strawman the argument. I agree that a horizontal system is unstable to some degree and that the vertical is a necessary component. I’ve said this repeatedly. I’ve even said that a fully vertical has some pretty good rationale behind it. Don’t get all defensive. No one is calling you names or anything. Lord….Debating with MMTers is pointless. We get it. You guys have the whole world figured out. Great.

  39. paulie46 says:

    Cullen,

    I’m not altering the focus. Focus of what? What I stated can’t be put any simpler and for me it’s the elephant in the room. I haven’t deviated from that position.

    Clearly Sergei doesn’t agree with me but he didn’t really attack the premise of my argument. He challenged this assertion:

    “Credit is an important (invaluable) tool in funding investment. But it isn’t capable of driving an economy over the long term by itself. Vertical money is required.”

    restated as:

    “The topic is whether or not an economy can be stable under a completely horizontal money-creation constraint.”

    …with an appeal to someone else’s credentials while not bothering to argue whether my claim or the math it is based on was logical or not.

    No strawman attempt here by me. Sorry you see it that way.

    Now that private credit is grossly over-extended there is no way out other than some form of monetization, either through mass default absorbed by the Federal Reserve System or outright money creation through the Treasury. Both are vertical operations. I know we could reverse our trade imbalance and that would help some but really, that’s not a plausible solution.

    The only question is over what time period will this monetization take place because people are suffering. Taking a long time to correct the imbalance isn’t going to save a nickel and is unlikely to make anyone’s lives better, although it will lead to further wealth accumulation by those that already have too much (if the PTB don’t let them fail).

    So, what argument are you making? I haven’t got that part of the world figured out yet.

    And I’m not necessarily an MMT’er. I don’t self-identify as one, I just agree with their view of the world more closely than any other paradigm I’ve come across to date. I go where I think the truth lies. Truth consistent with the known laws of the universe.

    • Cullen Roche says:

      Okay, let’s not get off track then. The conversation is with regards to the use of the term “money monopolist”. According to Warren a monopolist control price. According to Innes credit is money and only credit is money. I agree there entirely and I think it’s hard to make an argument that credit is not money since almost all transactions occur in credit money and not state money. And as SRW just mentioned on Twitter:

      “it is absolutely untrue that most individual payments initiate a sequence settled in state money.”

      So the hierarchy argument is misleading here and not really all that informative in my opinion with regards to the monopolist argument. It does help us clarify the specifics here such as the state being a monopolist on certain forms of money (like reserves and govt bonds).

      So what it comes down to is whether you believe the term monopolist is applicable to a system where the banks control the price of credit and the supply of credit and whether you can rightly call that system a state money system or a “money monopoly”. I would argue that neither are quite accurate. Thoughts?

      • paulie46 says:

        Cullen

        I’m not a financier or an economist. I’m an engineer. Any opinion I have on that question will be from the position of a layman. That’s why I stick to system and mathematical arguments mainly.

        That said it appears to me money creation through net government spending is a monopolist operation. The government has a monopoly on dollars and dollar-denominated financial assets it issues without offsetting liabilities. The banking system can’t do that.

        Money creation via the banking system is more fuzzy for reasons that have been pointed out by many in this and other threads.

        Intuitively I’m OK with the position that the government has a monopoly on bank money as well. If it didn’t banks wouldn’t be allowed to create dollars. They would have to call them something else. Buckaroos maybe? So banks have to accept the governments “branding” if they expect it to be the LLR.

        What I won’t do is argue whether or not I understand all the implications of what a monopoly supplier is. I don’t claim to. I don’t believe it affects the money circuit I have in my head, though.

        • Cullen Roche says:

          Sure, the govt has a monopoly on net financial assets. But this doesn’t mean the govt has a monopoly on money and it certainly doesn’t justify price setting across the spectrum of money. The term “monopolist” does not even apply to money as our system is constructed because the banks control both price and supply of credit. I don’t even think the MMT economists would argue this point. But they extrapolate out from the monopoly on HPM to justify monopolist powers over all money leading to policy that brings the state “back to center stage” and the job guarantee. One could do that in a nationalized banking system, but it doesn’t apply to the current system because there is no monopolist in credit and therefore no monopoly on money.

          • paulie46 says:

            Cullen

            I don’t have a strong opinion about the money monopolist issue just as I didn’t have *any* opinion about the JG. The jury is still out on these ideas and the thoughts will float around in my head until I come to see them with clarity some day.

            I can see intuitively that there is a major difference between our system and that of the Eurozone, which is for all intents and purposes purely horizontal. I don’t see a way out for them but I do for us.

            I will leave it to you to make your case to me why it matters one way or the other that the monopolist issue is important re the functioning of a dynamic system that is closed in every way except for net government spending. I include the part of the external sector that operates in dollar-denominated transactions to be part of the closed system.

            • Cullen Roche says:

              Paulie,

              It is not my goal to “make the case” against MMT or “for” MMR. I am describing the reality of our system which involves a money system with no monopoly supplier. Personally, I don’t see how this is refutable. People who reject it are rejecting reality. And people who describe something else are describing a system we don’t have. So it’s not about refuting MMT or proving MMR. I’m describing our system. That’s all.

              Cullen

              • paulie46 says:

                I’m not saying make the case for and against MMT or MMR. Assume for the sake of argument your views on the state monopoly on money are the reality.

                How is this a game-changer?

                • Cullen Roche says:

                  Do you not believe it is the reality? Banks create money entirely independent of the state. There is no “leveraging” as MMTers have started saying in recent years (and as Lavoie cited, such terminology is totally conflated as it implies a money multiplier relationship that MMT rejects). Banks create new money independent of govt and reserve positions. It doesn’t matter that they settle payments in state money. They really do create new supply based on their own price. That’s not a state monopoly at all. Do you reject that?

                  If you acknowledge that I am right then the MMT price setting theory is wrong. Maybe “game changer” is overstating the importance of this insight, but it’s certainly important….

                  • paulie46 says:

                    I’m willing to accept for the sake of argument that you are right.

                    Now tell me why it’s important.

                    • Cullen Roche says:

                      If the state is not the money monopolist then your perspective on policy changes entirely. For instance, if you believe in the monopolist idea then you acknowledge the state theory. If you work from this foundation then you’re more inclined to believe that “persistent deficits are the expected norm” (Wray). This will lead one to believe that trade deficits allow for lower taxes and are nothing more than “real benefits”. It will also lead to a dramatically different set of policy proposals such as the JG. After all, the whole Job Guarantee proposal is based around the monopolist argument. They contend that the govt is the money monopolist and should set prices of its currency because of this (because monopolists are price setters). So if you acknowledge that the state is not the monopolist then you reject the foundation of their justification for the JG. After this you must study the JG solely based on its merits as an economic policy and I think the Fullwiler simulation offers evidence of a program that contributes little to nothing special.

                      The conclusion doesn’t result in minor differences. It results in dramatically different conclusions.

                    • It’s also pretty clear when you work from the monopolist argument, you distort the power of banks into something evil and horrible. Banks aren’t usually evil and horrible, they just need to be kept in check. It would be absolutely horrible for the state to provide all business lending, probably about as bad as having zero state.

                      The private sector does many things well and one of them is make loans. “Ha!” you’ll say – “we just had a massive banking blow out, and you said banks aren’t net profitable in another article. ”

                      “Haha!” I’ll say. As I pointed out, even though banks aren’t net profitable, that doesn’t mean they are valueless to society. They are usually pretty great at figuring out where to use funds wisely. They aren’t perfect and because of the nature of banks, we need to make sure their mistakes don’t end up destroying our economy.

                      Some money should be allocated by the private sector, to private sector ends, for private sector betterment.

                      Putting the state at the center of the entire economy obscures the fact the private sector is pretty good at allocating capital over time. Not perfect, or even great. Good is enough, and eliminating all private sector lending would be foolish.

                    • Cullen Roche says:

                      Yeah, I’ve noted that the current construct disperses power. I know some MMTers have laughed at this assertion, but I think it’s quite true. A state controlled money system with zero profit motive is ripe for problems. Of course, power must be overseen. We don’t leave power unchecked at the govt level, but for some reason we allow banks to wield enormous powers without a great deal of oversight. That makes zero sense. Anyone who’s followed my work over the years know that I’ve been a huge proponent of increased bank regs. But that doesn’t mean I am in favor of state controlled banking.

                    • paulie46 says:

                      Michael

                      Michael Sankowski March 11, 2012 at 8:52 pm
                      It’s also pretty clear when you work from the monopolist argument, you distort the power of banks into something evil and horrible. Banks aren’t usually evil and horrible, they just need to be kept in check. It would be absolutely horrible for the state to provide all business lending, probably about as bad as having zero state.
                      The private sector does many things well and one of them is make loans. “Ha!” you’ll say – “we just had a massive banking blow out, and you said banks aren’t net profitable in another article. ”
                      “Haha!” I’ll say. As I pointed out, even though banks aren’t net profitable, that doesn’t mean they are valueless to society. They are usually pretty great at figuring out where to use funds wisely. They aren’t perfect and because of the nature of banks, we need to make sure their mistakes don’t end up destroying our economy.
                      Some money should be allocated by the private sector, to private sector ends, for private sector betterment.
                      Putting the state at the center of the entire economy obscures the fact the private sector is pretty good at allocating capital over time. Not perfect, or even great. Good is enough, and eliminating all private sector lending would be foolish.

                      “It would be absolutely horrible for the state to provide all business lending, probably about as bad as having zero state.”

                      Only a very small (insignificant) minority are suggesting pure nationalized banking.

                      ““Haha!” I’ll say. As I pointed out, even though banks aren’t net profitable, that doesn’t mean they are valueless to society.”

                      Again, I don’t see many making this argument. Banks are necessary for the functioning of an economy.

                      Regarding our current situation, banks violated their fiduciary responsibilities in major ways. Not all banks, just the largest ones. Lack of proper regulation and the belief that “greed is good” led to the greatest skimming operation in the history of mankind.

                      Money was extracted from the Federal Reserve in ways that can only be described as massive financial shell games. No value was added to the greater economy.

                      “Putting the state at the center of the entire economy obscures the fact the private sector is pretty good at allocating capital over time. Not perfect, or even great. Good is enough, and eliminating all private sector lending would be foolish.”

                      Again, virtually no one is suggesting the elimination of private banking. All of the gambling/skimming operations must be severed from the Federal Reserve banking system however. Let them use their own money and fail like the rest of us.

                    • Cullen Roche says:

                      Bill Mitchell’s opinion is now “insignificant”? I doubt you mean that honestly…

                      MMT has long attacked the rentier class under the guise of the paradox of thrift. Which is fine. But let’s not pretend MMT is all gung-ho private banking.

                      We agree on the regulatory parts though so maybe that’s a start for us, huh Paulie!!?!?!!

                    • paulie,

                      It’s not a minority when it is one of the leaders of the movement, and full vertical control has some pretty vocal supporters within the movement.

                      I’d like to point out something else about MMT and banking. They have zero which addresses the actual part of the system which blew up: the securitization/repo market.

                      Normal banks aren’t the culprit as you point out, it was the largest banks. But it wasn’t just the largest banks, it was a specific part of the largest banks. It was securitized lending/repo arms which drove a massive problem.

                      This style of banking gets very little actual attention from MMT. Their major proposal is to provide more NFA from the government to try and crowd out private sector low risk assets which are used in the repo market.

                      I’d also point out the actual failure which started the crisis had nothing to do with a lending bank: Lehman. We have a system which allows a company to claim they are solvent in their quarterly statements and then file for bankrupcty a few days later.

                      These problems aren’t really banking as we are discussing it here, yet they are the problems which caused our bubble due to massive demand for high yield/low risk private sector low risk assets and then the fallout as these assets were recognized for the #$#! they were.

                      And note the “Kansas City” interest rate proposal to peg long term rates at zero actually makes this problem worse, because people will still want high yield/low risk assets. The government will provide zero risk, negative return assets.

                      This won’t fill the need in the market place, and people will just try to create those low risk/high yield assets in other areas.

                      The market which needs the attention and diligence isn’t getting much or any from the MMT crowd, and some of the proposals might even make the problem worse.

                      This isn’t a small issue, and I see very few people anywhere addressing it. I don’t see the articles by Wray and Kelton addressing it for all of the excellent work they’ve done. I don’t see Bill Black addressing it even though he’s been pounding the table about control fraud.

                    • Cullen Roche says:

                      That’s an excellent point Mike. You’re 100% dead right that the demand for high grade, higher risk paper will climb under the 0% proposal. That proposal is at odds with a profit seeking banking sector (there’s that need for nationalization again). Banks will take more and more risk as their rents are sucked away. And what will they do? They’ll create their own lower grade paper and shuffle it about (an MMT world – not with nationalized banking – will actually result in, ironically, more financial instability!). The shadow banking system isn’t growing for no reason after all and anyone who understands it knows that the shadow banking system doesn’t just wield a stick. It wields a finger over a red button with 1,000,000 nuclear bombs on command.

                      And the more I think about all of this the more I think that nationalization wouldn’t even resolve these issues because as you noted the big problems weren’t even in the banks. The biggest problems were in the non-banks (AIG, LEH, BSC, etc). We have to regulate the banks better. That’s the only way I see us resolving this issue realistically….

                    • Is the Kansas City proposal really to pin long term interest rate at 0% or just the Fed Funds rate? I don’t think pinning long terms at current CPI is a bad idea, it’d dramatically cut the budgetary cost of net interest but at the same time allows the Fed hike interest rates if inflation increases. Hell, Tsy should fix the rate and float the quantity. Sell perpetual consols at 0% real (the CPI adjustment IS the bond coupon) over the counter to all takers with no limit, I’m pretty sure Tsy won’t run out. Since consols would have no maturity date, there’s no amount of guaranteed principal adding to the debt ceiling.

                      Milton Friedman (then at Tsy) had an interesting idea during WWII, an excess profits tax on corporations that was actually a form of compulsory savings, since the corp could get their money back after the war (and before then, presumably trade their refund rights on the secondary market).
                      The idea didn’t go anywhere but Congress could do something like that today, want to add a millionaire’s tax? Knock yourself out, double the current top rate if you want… but give a tax credit for consol bonds bought. Either way Tsy gets the money and its not coming back, yet the owner’s net worth hasn’t decreased since he can sell the consol’s income stream on the secondary market at any time.

                    • paulie46 says:

                      There you go again Cullen…

                      …putting words in my mouth.

                      I don’t agree with all of Bill Mitchells positions but I don’t have any strong diagreements either. One more time – I don’t belong to MMT…most of it just resonates with me. So far, you guys haven’t come up with anything I see as outside the MMT box. That doesn’t mean I think you won’t – I just think you may be going about it the wrong way. My opinion and a dollar might get you a cup of coffee.

                      I think the private/public banking issue is a red herring and personally I’m not that interested in it. Banks must be tightly regulated into boring public utilities.

                      “We agree on the regulatory parts though so maybe that’s a start for us, huh Paulie!!?!?!!”

                      I’m not sure we have any major disagreements on substance. We just look at the world differently and what I think is important does not seem all that important to you. I have no problem with that.

                      My view is pretty simple. There is a fundamental relationship between flows and stocks of financial assets and the relationship is defined by very simple math. The economy would be hamstrung without financial asset creation of both types under our current system.
                      We can tinker around the edges of this model with all kinds of policy proposals that will have only 2nd or 3rd-order effectiveness at best. I don’t care to waste my time on those issues just as aI don’t see any point in giving up my electric toothbrush to save energy.

                      The public needs to be educated that 90% of economics is just that simple, not some impenetrable dark science. The public also needs to understand that Congress is not capable of managing the economy, politically, intellectually or in any other capacity. We need automatic stabilizers. Or something. Anything else is a fools errand.

                      we must “endeavor to persevere” – Lone Watie in “The Outlaw Josie Wales”

                    • Cullen Roche says:

                      No one put words in your mouth. As far as I know, Mitchell is the only one who has the guts in the MMT crowd to wear his politics on his sleeve and he’s the only one who’s come out and said he’s in favor of bank nationalization (although to Randy’s credit I do see him now describing MMT as progressive. Mitchell’s certainly the only one I’ve cited here as claiming anything about nationalization. So unless you’re referring to someone else who is “insignificant” then I just assume you’re referring to Mitchell since he’s the only one I know of who’s proposed nationalization.

                      You keep claiming to be this independent thinker who has no ties to MMT, but you’ve absolutely shredded me on other sites in defense of MMT. You’ve been rabid in your defense of MMT and at times unreasonably personal. I had to catch you doing it and cite it to get you to stop. So if you’re unbiased then it certainly doesn’t come through in your approach.

                      It’s fine that you think we’re headed in the “wrong way”. But the proof as they say is in the pudding and so far we’re the ones garnering broad support from many different schools of thought. You guys are on your secluded MMT island because you’ve built your work around a political agenda and gone all in on a policy proposal. That’s perfectly fine, but I know which “way” will garner more support from the public over the long-term because people won’t like the “my way or the highway” approach taken on my MMT. MMR is what MMT should have always been and if you can’t see the major differences then you’re not looking hard enough.

      • “And as SRW just mentioned on Twitter:”

        I saw that exchange. SBK says “Yes, there is netting so the bank will gain/lose at close of business. But HPM is involved in each transaction”.

        I don’t know why MMTers use words like always, impossible etc. The above statement is wrongly constructed because there are “On Us” transactions in which two agents have an account at the same bank. No HPM is involved.

        • Cullen Roche says:

          Good point Ramanan. SBK didn’t point this out conveniently….There’s Kelton using the word “lose” again. These are rather basic oversights….They’re extreme in many comments. They have to be in order to bring it back to their extreme position that the state is the monopolist.

    • “Clearly Sergei doesn’t agree with me but he didn’t really attack the premise of my argument”

      Your argument depends on the posited requirement of vertical money. It is circular in a sense. I tried to point out that there might not be such requirement per se as the idea of vertical money itself is relatively new in the history of human civilization. Moreover, the idea that vertical component guarantees long-term stability is also far fetched. There are plenty of examples of the opposite in the relative short history of the component.

      So the burden of proof of the requirement is on you. Assertion alone is not enough. And I am afraid you can not prove it regardless of the number of equations or math you throw at it. The only way you can approach it is to postulate. Which is what MMT has done. Fine. But why do you think that appealing to this authority makes your argument stronger?

      And btw, I am a physicist by background. Logic, systems, theories and *assumptions behind them* are not alien to me. But if you change assumptions, you can arrive at another theory. The question is then how realistic your assumptions are. Have you challenged them strongly enough?

      But above all and ironically for you, MMT does nothing to solve the problems of the horizontal component which you claim it solves.

      • paulie46 says:

        Sergei

        “Your argument depends on the posited requirement of vertical money. It is circular in a sense.”

        My argument depends on nothing but the properties of closed systems and arithmetic.

        Vertical money is one possible solution. It is clear some solution is required.

        “I tried to point out that there might not be such requirement per se as the idea of vertical money itself is relatively new in the history of human civilization. Moreover, the idea that vertical component guarantees long-term stability is also far fetched.”

        History is interesting in the sense of what we can learn from it. You invoked history. I made no claims other than there have been many resets in history as a result of undesired economic outcomes in response to your example. You ignored my response.
        Nor did I make any claim that vertical money is guaranteed to make the system stable, although I believe that it can.

        “There are plenty of examples of the opposite in the relative short history of the component.”

        Maybe so but those are not sufficient to prove your point, whatever it may be. For now I’m unsure of what it is.

        “So the burden of proof of the requirement is on you. Assertion alone is not enough.”

        My only assertion is that horizontal-only money systems are inherently unstable, and remain so without vertical components that work in concert. That alone is not enough to guarantee stability, nor did I claim that it was. Little steps.

        “And I am afraid you can not prove it regardless of the number of equations or math you throw at it.”

        I haven’t tried to prove anything. I have been trying to make a point that I think is important in the analysis of our current economic situation and monetary finance in general.

        “The only way you can approach it is to postulate. Which is what MMT has done. Fine. But why do you think that appealing to this authority makes your argument stronger?”

        I have appealed to no authority other than the requirement that any argument one makes cannot trump the known laws of closed systems and arithmetic.

        “And btw, I am a physicist by background. Logic, systems, theories and *assumptions behind them* are not alien to me.”

        I made no attempt to pull rank on. I judge you by your responses. I give everyone the benefit of the doubt. You have made no arguments based on those things you are not alien to.

        “But if you change assumptions, you can arrive at another theory. The question is then how realistic your assumptions are. Have you challenged them strongly enough?”

        What assumptions have I made or changed? That the ability for individual agents to extinguish liabilities is hampered by accumulation of financial wealth by a relatively small segment of the population in a horizontal-only environment? Is that controversial?

        “But above all and ironically for you, MMT does nothing to solve the problems of the horizontal component which you claim it solves.”

        I haven’t invoked any MMT theory in any of my arguments. You made that assumption on your own. Nor did I claim MMT theory “solved” anything. With me it’s all about the properties of closed systems and arithmetic. Not even complicated arithemetic. Balance-your-checkbook arithmetic when you get right down to it.

        I have not made any policy proposals. My main argument is an attempt to define the problem before effort is made to solve it.

        • Paulie, one can built a closed system without vertical component which even re-adjusts itself without major “resets”. As an engineer wouldn’t you find this mental excercise interesting, i.e. how to built a self-sufficient closed system? There are plenty of examples around proving that that is possible. Vertical component is NOT the only possible solution to our problems. Thus, vertical component is NOT required. It does not mean it is bad. But that is NOT the argument. It means it is NOT required. Moreover, even invoking the vertical component you have to understand what you are doing. You can easily make the system even more unstable which is enough to give you a pause and think.

          • paulie46 says:

            Sergei March 12, 2012 at 2:30 am
            Paulie, one can built a closed system without vertical component which even re-adjusts itself without major “resets”. As an engineer wouldn’t you find this mental excercise interesting, i.e. how to built a self-sufficient closed system? There are plenty of examples around proving that that is possible. Vertical component is NOT the only possible solution to our problems. Thus, vertical component is NOT required. It does not mean it is bad. But that is NOT the argument. It means it is NOT required. Moreover, even invoking the vertical component you have to understand what you are doing. You can easily make the system even more unstable which is enough to give you a pause and think.

            “Paulie, one can built a closed system without vertical component which even re-adjusts itself without major “resets””

            So I’ve heard. I even said it was probably possible in response to someone else – maybe Ramanan in a recent post. You would have to point me to specific historical examples of utopian stability as I am not aware of any.

            A good counter-example would be the Eurozone which has barely made it 10 years.

            “As an engineer wouldn’t you find this mental excercise interesting, i.e. how to built a self-sufficient closed system?”

            I not motivated to solve this problem myself but I would be interested in looking at the details of such a system. If it existed. Hope you aren’t talking about the Eurozone.

            “…Vertical component is NOT the only possible solution to our problems. Thus, vertical component is NOT required…”

            The U.S. has had this vertical system since day one 230 some-odd years ago. Now you want to try what the Eurozone is doing? Tell me you aren’t serious.

            “Moreover, even invoking the vertical component you have to understand what you are doing. You can easily make the system even more unstable which is enough to give you a pause and think.”

            Yep, even though the car will go forward, reverse, left, right someone still has to drive it and make sure it doesn’t run into something. If we can’t do that we’re doomed anyway.

  40. paulie46 says:

    Ramanan

    I’ve read estimates by various people and sources on the internet that there is approximately that level of private debt in the non-government. I’ve also seen comparisons between private and public debt that show private debt is 3-4 times that of public debt. That puts private debt in the $45 T to $60 T range as a check.

    The actual amount is not as important as the reality that total financial wealth is in the $15 T range and held as cash or treasuries as accumulated financial wealth, so many (most) of those dollars are effectively out of play. One group (65% of the population has no savings) is holding liabilities for which the cash to extinguish is essentially unattainable. Being unemployed is a further obstacle and not a small one.

    It would take a claw-back of nearly all existing financial wealth to satisfy much of the private debt. That is not going to happen so we are in stalemate until someone makes a move.

    • Careful.

      Private debt is high. But private debt is also someone else’s asset.

      “Total” financial assets of the private sector is not simply $15T or whatever because that’s just net. The private sector also holds private sector assets.

      • Im not sure I agree with this. That “someone” is, in most cases, a bank. (We can ignore, because it isnt measured in charts of private debt levels, the 1000 dollars I owe to Vinny). All the private debt we are referring to is mostly mortgage and credit card debt and to say that there is a “someone” with a surplus on the other side of my debt (who is likely to invest that surplus….. is the rest of that conjecture) is a fallacy as I see it. Would you say that a govt running a perpetual surplus is a great thing that all citizens should support? Banks are really no different than govts. They sit outside the household sector and provide credit. If we all max out our credit we cannot then be said to be in a situation that is neutral…….. our debt being the banks asset! If we are all maxed out on credit, the credit cycle stops! You sound like you are arguing that banks actually “lend out” their surpluses….. which we all know to be false.

        • Greg,

          You understand what i am trying to say.

          • I think i do Paulie.

            I know I disagree with Ramanans and many other mainstream economists conjecture that one mans debt is another mans asset. That treats private debt as just between to private sector agents, which is demonstrably false. When I am indebted to a bank it is no different to having an unpaid tax liability o the govt (and with a renewed vigor by banks to criminalize failures to pay debt it is becoming much more like). If the govt imposed a 90% tax on everyone (and could enforce it) we wouldnt have ANYONE arguing “Oh well one mans tax liability is another mans asset” they would be laughed off the planet. Owing lots of money to a bank is not a neutral situation where someone else just has a lot of extra money to spend and the interest rate channel will make it all work out. If there is anything my study of MMT/MMR and economics in general the last few years has taught me its that private debt and public debt are NOT any where near the same and it is our private debt levels which were responsible for this crisis and are keeping our recovery form being adequate.

            • paulie46 says:

              Greg

              There you go.

              Stuck with no way out except government spending. Or a mass debt forgiveness.
              Or millions of people will suffer for decades. Hope you aren’t a young person.

              • Cullen Roche says:

                What ever happened to bankruptcy? I’m not saying that the govt can’t do a lot to help or that govt spending isn’t good, but we don’t live in a world of “no way out except govt spending”. We should have allowed a lot of banks and homeowners to learn a lesson in 2008. And we should have also provided support via govt spending to keep the system from crumbling. Instead, we live in this weird world where it’s become okay for no one to lose ever….just because govt has the power to prop up everything…..MMTers just love to forget that homeowners made huge mistakes in this crisis. But they attack the banks because it’s all about bring the state powers back to center stage….

                • paulie46 says:

                  Cullen

                  Bankruptcy for who?

                  • Cullen Roche says:

                    Are you proposing that the boom cycle should just always result in bailouts? That we should just offer debt forgiveness every time someone makes a mistake because the govt has the power to do so??

                    • paulie46 says:

                      Cullen Roche
                      Are you proposing that the boom cycle should just always result in bailouts? That we should just offer debt forgiveness every time someone makes a mistake because the govt has the power to do so??

                      No. I think you are misunderstanding me.

                      When You asked what was wrong with bankruptcy I assumed you meant all of the homeownwers in distress. I just wanted to clarify before I wrote anything else. I will assume you meant homeowners. Millions of them. Then:

                      …that will result in the option I listed that is mass debt forgiveness or default. Same thing. The bank doesn’t get it’s dollars. The liability cannot be extinguished and it follows that those liabilities become monetized. At the Fed’s expense. No biggie because the Fed has unlimited dollars.

                      This is defacto deficit spending. Calling it bankruptcy doesn’t make it any different than any other government spending except the money has already been spent. The banking system takes the loss, the losses are monetized. The individual banks don’t have the assets necessary to absorb losses of this magnitude so there is no option.

                      If banks were allowed to fail maybe we wouldn’t have these major credit events.

                    • Cullen Roche says:

                      A debt jubilee is not bankruptcy. When you go through bankruptcy your personal currency (your credit) gets demolished. You learn a very personal lesson about how your personal currency matters to society. Debt forgiveness just says “well, you don’t have to learn a lesson here so we’ll just wipe the slate clean for you instead”. That’s no way to build an understanding of money or the foundation for a prosperous society.

                    • Cullen Roche says:

                      And I hadn’t even noticed this, but MMTers support a debt jubilee….Not one bit surprising. http://www.dailykos.com/story/2011/12/12/1044389/-Envisioning-A-Debt-Jubilee

                    • paulie46 says:

                      Fine. The effect on the economy finances is the same. The losses are monetized.

                      Banks are out of business, homeowners are renting houses they used to own at much lower prices than their mortgage payment and they have money to spend.

                      The banking system is stuck with a bunch of homes they won’t be able to unload for decades. No one will have any credit. At least not the people that need the housing. Who gets hurt most in this scenario? Houses are just bricks and mortar.
                      Homeowners have already had their butts kicked. Mass foreclosure will kick the banks butts. I’m all for it.

                      I recommend everyone get rid of all their debt anyway. I don’t have any, except for a small mortgage that will go away soon. Debt sucks.

                    • “And I hadn’t even noticed this, but MMTers support a debt jubilee….Not one bit surprising.”

                      So does Steve Keen who is a horizontalist. Are you one to insist that all debts, even those which can NEVER be said to be able to be repaid, must be repaid. Is that your position? Im not saying that we need a jubilee today but there may come a point where that MUST be the choice or we will simply fail to move forward. I guess some think we have already got there. I dont know.

                      Listen, we’ve screwed this whole thing up……… badly. Everyone. In order to move forward, I dont think any option should be ignored, including a form of jubilee. Putting everyone in a financial purgatory because of the actions of a minority is just plain ignorant imho.

                    • Cullen Roche says:

                      I never said that. Look Greg. I get it. MMT has the whole world figured out. I don’t know why I debate anything with any of you. It’s totally pointless. At least you’re one of the more respectful ones so thanks for that….

                    • “I never said that. Look Greg. I get it. MMT has the whole world figured out. I don’t know why I debate anything with any of you. It’s totally pointless. At least you’re one of the more respectful ones so thanks for that…. ”

                      Cullen, there is no need to take an exasperated tone with me. I dont claim to have the whole world figured out and it wasnt thru my MMT/MMR readings that I became familiar with the concept of a debt jubilee. (Thats actually biblical but I didnt get it there either…… just want to show its an OLD idea).
                      I dont find any of these discussions I enter with you or Rmanan or anyone pointless (well the ones with FD015 are pretty pointless but………).
                      I said earlier and maybe it bears repeating. I think what you guys are doing will be a positive thing. The three of you are smart, straight up guys whose only goal is to get people to look at the world differently/correctly when it comes to money, but you know you dont have it all figured out either.
                      I entered the whole economics blogosphere in 2008 thru the MMT portal and it has served me well but I certainly dont think any of these guys walk on water (but Warren sure is getting quoted all over the place by everyone it seems these days).
                      I dont care whether something is left right or center I only care whether its correct. Sometimes people who are intentionally centrist are wrong because sometimes the left position happens to be correct and sometimes the right position
                      As Colbert says “sometimes reality has a left wing bias” ; )

                      And I hope my posts sound respectful because I do respect you guys even if I may have a different take on some things

                    • Cullen Roche says:

                      How is it not exasperating for you all? I mean, you can’t type the words MMT on the internet without being hounded by you guys. It is the very definition of exasperating. Maybe that’s your goal though? To make everyone so exasperated that they don’t refute anything MMT says….

                    • Cullen Roche March 13, 2012 at 10:27 am
                      How is it not exasperating for you all? I mean, you can’t type the words MMT on the internet without being hounded by you guys. It is the very definition of exasperating. Maybe that’s your goal though? To make everyone so exasperated that they don’t refute anything MMT says….

                      I think you mean “disagree with” here not refute. To refute something requires a proof. Many of the things being discussed here are difficult to prove. You haven’t refuted anything that I can see.

                      People disagree. Really?

                      I for one do not feel exasperated. Feels more like I’m playing chess.

                      I thought you appreciated the traffic on your site.

                    • Cullen Roche says:

                      We certainly refuted your “money monopolist” terminology pretty well. And it turns out that my position on the JG is entirely supported by Fullwiler’s simulation. So it looks like the two primary positions I’ve taken again MMT were both right.

                      And trust me – MMT conversations KILL traffic. I know from running Pragcap. MMT conversations generate LOTS of comments from around 100 of the same people and drives everyone else away….

                  • The trouble with debt jubilees is they make people feel like suckers. For example, people who didn’t buy a house because they knew it was too expensive or had to keep renting because it didn’t occur to them to lie on the mortgage application to qualify, or the people who’ve paid off their mortgage free and clear and would have liked a debt jubilee, oh, anytime during their 30 year mortgage.

                    That’s not to say the govt can’t or shouldn’t spend more money to help people in need. But it needs to be done in a transparent, fair way with eligibility determined by income (which is the only equitable way to distribute govt subsidies for those not disabled or retired). Expanding the EITC program could help homeowners pay their mortgage, it would also help apartment dwellers pay the rent and help retirees pay their property taxes and Medicare deductibles (I don’t think EITC subsidizes Social Security income now but it should). What it wouldn’t do is give some taxpayers a windfall while giving their neighbors the feeling they just got played.

                    • Yes and the trouble with refusing to consider a jubilee is that the system may NEVER move forward. Not saying we are at that point right now but it must be considered. Look at Europe for chrissakes. Life is not so simple. We cant always get what we expect and having debts repayed to you on YOUR terms is one of those things that you may not get and then the question becomes how far are you going to push and how much do you intend to punish those that stiff you?

                      Again, this is why I think a private money/bank controlled currency system is inherently unstable. It plays things like they are a zero sum game, but only when the chips are down. When things are going good everyone has enough but let the first cracks appear and suddenly we get all defensive. Its quite natural I know, as Kahnemans book “Thinking fast and thinking slow” argues, but just because its natural doesnt mean its productive and a positive. Death is “natural” too but only in really bad situations do we consider death the optimum option. Cooler heads and “slower thinkers” must prevail and not let the emotions of “I need to get mine back” dominate the zeitgeist.

                • geerussell says:

                  Banks are the focus because that’s where the systemic crisis happened. Homeowners made mistakes but homeowners didn’t write their own loans.

                  • Cullen Roche says:

                    Yes, I know the MMT position here. It was all the fault of the banks. Homeowners didn’t get greedy and forget to read contracts or understand how their mortgage might change or impact their lives in the coming years. Sorry, but the reality is that the homeowners screwed up big time and it was primarily their fault and not just their banks fault. They weren’t just taken for a ride. MMT is, not surprisingly, imbalanced and unfair in this position.

                    • Did the banks not have the ability to say no to the loans? Was a gun to their heads? They had the tools to look and see how credit worthy their customers were. How about calling an employer?

                      Sure people (just like capitalists) were chasing a dream of making hundreds of thousands off their houses ( I would think the right would be cheering this… its greed at work) but in the end only one entity had the control of whether the loan happened or not……………….. the banks.

                      This is not to demonize the banks but simply to put focus where it should be. Banks made the loans cuz they were profiting greatly form them. They even started paying the loan initiators when only three loan payments were made, which was a change from the old boring days. Yes crack users need crack dealers but we certainly come down harder on the dealers than the users.

                    • Cullen Roche says:

                      No, the homeowners chased the loans because they thought there was money to be made. MMT blatantly contradicts itself on this position. Remember the part where loans are not reserve constrained and driven entirely by demand (that little insight is causing big problems for MMT all over place now)? The banks didn’t make all those people walk into their offices. They didn’t force the homeowners to take on record amounts of debt. The people willingly signed those contracts. Granted, the banks made absurd offers and were egregiously poor risk managers in this process, but it’s just flat out wrong to say that one side “made the loan” with the explicit intent to divert fault from one party and onto the other.

                    • “No, the homeowners chased the loans because they thought there was money to be made”

                      I believe I made that point in my first sentence but are you denying that the banks had the ability to say no? MMTs position that loans are demand driven is irrelevant here (besides you know its true), Im simply talking about whether the loans could have happened without a bank saying yes. They couldnt. Banks do have the ability to deny loans and are under no compunction to lend to anyone who walks through the door. The MMT point only highlights the fact that no matter how cheap you make the credit you wont necessarily affect loan demand if customers are maxed out on credit, or feel that they are. Its the amount of credit to income that determines loan demand not interest rates on the loan.

                      Again, this is not to put it all on the banks. Its only to put the lions share on them because ONLY THEY had the tools to check credit histories and employment situations of prospective borrowers. If someone comes to me wanting to borrow money it is up TO ME to determine whether I think I will get paid back. And if I dont get paid back then I missed something. Of course sometimes its just bad luck that someone lost their job and could no longer pay. But this is why having an economy too dependent on borrowing form banks is fragile

                    • Cullen Roche says:

                      The loans couldn’t have happened without the customers walking in the door. It’s ultimately a consensual agreement and yes, the banks made big mistakes. I’ve never said otherwise. But to pin one side and not the other is just wrong. You’re like the guy who says he fell down and his penis just slipped inside the girl he impregnated. If only the girl had been more careful or said no!! Surely that wasn’t your fault! How’s that for a credit crisis analogy!?! :-)

                    • Cullen,

                      I tend to agree with you, only a few days ago you said you thought that the fed buying up mortgages at face value served a “public purpose.” Now you’re suggesting that forgiveness of debt isn’t harsh enough for homeowners… that they actually should be going through bankruptcy.

                      I’m not trying to misquote you or take stuff out of context, but this seems like you are suggesting that the fed let the banks off super easy by buying their junk at par, but holding the homeowners’ feet to the fire.

                      Can you clarify here?

                    • Cullen Roche says:

                      The Fed’s operation was a bit different. There was no market in MBS or many other markets for that matter. They weren’t bailing out the banks necessarily. They were creating stability where fear had crippled the market. That’s why QE1 was effective to the degree that it was. Not unlike JP Morgan walking onto the floor of the NYSE in 1929 ans declaring “I am a buyer!!”

                      I was in favor of cram downs and losses for the banks back in 2009. I was also in favor of homeowners getting crammed down. But I was also in favor of the govt stepping in and guaranteeing the payment system and providing much more stimulus.

                    • “There was no market for them.”

                      Well that’s the market for you… bad direction of credit tends to do that. How do you buy MBS’s in droves from banks at face value and call that anything but giving them a significant bailout?

                      I don’t see how the housing market in some areas is any different… panic causing “no market” for housing and you get $20k houses in detroit.

                      How does a bank fail if the fed is buying all its bad assets at face value?

                    • Cullen Roche says:

                      Well, when the banking system seizes up the payment system seizes up. The Fed was trying to create confidence in the marketplace so the payment system would unfreeze. That’s the Fed’s primary duty – to make sure the payment system works. It stopped working in 2009 and one thing they did to help unfreeze it was QE. Here’s how I described it in 2008 in real-time:

                      “We have a major capital problem at the U.S. banking level. What Ben Bernanke and Hank Paulson are essentially proposing is an asset swap. The Fed will take on the toxic assets of the banks and they will receive reserves in exchange. This is important because it will alleviate the strains in the credit markets. That’s a good first step, however, it is not a solution to the problem at the household level and THAT is where the real economic weakness is. By introducing this asset swap idea Ben Bernanke is simply altering bank balance sheets. He is not fixing the economy.

                      So, the government has a partially correct solution. Not the BEST solution, but it gets to the core of the credit issues. They will essentially trade the bad paper for good paper and it will alleviate many of the pressures on the banks. As I have written here many times the banks are the lifeblood of the system. I like to think of the banks as the oil in the engine. If you run out oil the system begins to break down and eventually the engine stops running. You can’t have a healthy functioning economy if the banks aren’t lending. Unfortunately, because this won’t fix any problems at the household level it won’t induce any borrowing. So, it’s a clever way to resolve the banking crisis, however, it doesn’t fix the root of the problem which is at the household level. So, again I ask – is this a “bailout”? You bet your ass it is. Unfortunately, it’s not a bailout of the entire system. It’s just a bailout of the banking system. And their problems are merely a symptom of much bigger problems at the household level.”

                • In a normal situation bankruptcies are not too disruptive. In the situation of 2008
                  mass bankruptcies would have been horribly disruptive. Its all a matter of scale.

                  I think the problem comes with monetizing and commoditizing (my word) everything. The profit motive is great for many things but not for EVERYTHING.
                  Best example I know of that is the story I saw where the private company that runs many jails now was saying that we need to keep our jails at 90% capacity in order to make their model profitable and they were lobbying congress to be harsher in their penalties and send more people to jail! In my view this is phucking INSANE. Now we have to incarcerate more people so stock holders of a private prison company can get their return. Invest in the incarceration of Americas youth!!!!!

                  • Cullen Roche says:

                    Why did 2008 even happen? In large because the govt has implemented the exact policies you all are promoting where the govt can just paper over all the losses. The banks take extraordinary risks because they know the govt is there to bail them out. Homeowners take extraordinary risks because we live in a world where no one loses anymore. Stocks always go up thanks to govt support. Home prices can’t fall to levels of equilibrium because it would be “horribly disruptive”. So we implement homeowners tax credits and cash for clunkers and all sorts of other stupid policies that exacerbate this environment of capitalism without losers. The MMT approach on the CAD is the same. It’s not a loss in our competitiveness. No no. We can just paper over the leakage and everything will be fine. It’s funny you know. In all their efforts to understand Minksy’s boom bust cycle it seems like MMT decided that the boom wasn’t a problem because the bust can always be papered over….Big mistake in my opinion.

            • Greg,

              “I know I disagree with Ramanans and many other mainstream economists conjecture that one mans debt is another mans asset.”

              Ha ha !

              “All the private debt we are referring to is mostly mortgage and credit card debt and to say that there is a “someone” with a surplus on the other side of my debt (who is likely to invest that surplus….. is the rest of that conjecture) is a fallacy as I see it. ”

              Private debt is not just mortgage and credit card debt !

              “If the govt imposed a 90% tax on everyone (and could enforce it) we wouldnt have ANYONE arguing “Oh well one mans tax liability is another mans asset” they would be laughed off the planet. ”

              Careful about syntax. First no government is going to imposed a 90% tax on everyone. Second tax rate is not a liability. Tax itself is not a liability in the flow of funds. Someone may have tax payable because of delays in payments and reasons as such but that is different from taxes which is a flow. Taxes are flows.

              “If there is anything my study of MMT/MMR and economics in general the last few years has taught me its that private debt and public debt are NOT any where near the same and it is our private debt levels which were responsible for this crisis and are keeping our recovery form being adequate.”

              Again, you do not have to keep repeating the same thing and assume the person that you are arguing has no knowledge of these things. And it comes with making gross accounting errors.

              Paulie first invoked a $50T debt and mentioned the private sector has “total” financial assets of only $15T and hence insufficient etc. That is like Randy Wray arguing $29T of secret loans.

              • I never said that private debt was JUST mortgage or credit card debt. Yes there is student loans and business loans and others as well. None of this changes my point that private debt is NOT a zero sum game where my debts are simply another mans credits. Those credits are held by banks which are not men and surpluses at banks are no more useful to us than surpluses in govt coiffers. Having everyone massively indebted to banks is not a positive in any way shape or form. In spite of the fact that banks might love it.

                • “I never said that private debt was JUST mortgage or credit card debt. Yes there is student loans and business loans and others as well. ”

                  Yep and there are securities issued by corporations and held by households directly or indirectly as well. You keep thinking all debt is toward the banks.

                  “None of this changes my point that private debt is NOT a zero sum game where my debts are simply another mans credits”

                  But one sector’s liabilities are another’s assets.

                  “Those credits are held by banks which are not men and surpluses at banks are no more useful to us than surpluses in govt coiffers. Having everyone massively indebted to banks is not a positive in any way shape or form. In spite of the fact that banks might love it.”

                  Do you know how the balance sheet of the household sector looks like? Banks hold the loans as assets but that does not mean they do not have liabilities to sectors such as households. Households hold various claims on banks in many form ranging from deposits to bank bonds to bank’s equities.

                  I understand the private sector is hugely indebted (in the gross sense) but you are presenting the case as if the lenders has little or no liabilities at all, thereby exaggerating the case.

                  • Thanks for engaging me here Ramanan, this is helpful for me.

                    “Yep and there are securities issued by corporations and held by households directly or indirectly as well. You keep thinking all debt is toward the banks.”

                    No I dont think that all debt is toward the banks, but most of it is. And its the banks that are “currency issuers”, outside the system (supported by our CB) and therefore by running a surplus are actually making the rest of us, who are paying to them (which is most of us), poorer.

                    “But one sector’s liabilities are another’s assets.”

                    Again, to me its a so what! So the banking sector has a lot of assets…… whoopeee. We American citizens should be celebrating that.??!! Its the citizens that are made better off when THEY hold the assets not the banks.

                    “Do you know how the balance sheet of the household sector looks like? Banks hold the loans as assets but that does not mean they do not have liabilities to sectors such as households. Households hold various claims on banks in many form ranging from deposits to bank bonds to bank’s equities.”

                    No I dont know what the balance sheet of the entire sector looks like. And you are right that the banks have liabilities TO us as well. I believe those liabilities are being covered by the CB though….. dont you think? Very few people are over the FDIC guaranteed deposit limit at any one bank I suspect. This kind of strikes me as arguing that since I put money in a safe at your house you have a liability to me. True but all you have to do is keep the safe around and not steal the money and it will be there. Relatively easy to meet the requirement but certainly not 100% risk free for me. Households claims on banks are their own money as I see it. Banks want to be currency issuers and control the money supply and then complain about having to meet the liabilities of people who wish to store their money with them?? Cry me a river.

                    “I understand the private sector is hugely indebted (in the gross sense) but you are presenting the case as if the lenders has little or no liabilities at all, thereby exaggerating the case.”

                    Maybe, but its not intentional exaggeration. I simply do not know the level of liability in some cases. Nor do I think the liability rises to the level of caring about in others. They are storing my money for me and YES I do expect to get it back at some point. They are big boys, I think they can handle it.

  41. paulie46 says:

    “…private debt is also someone else’s asset.”

    Thats the basis of much of my argument.

    The agents holding the liabilities do not have access to the assets needed to satisfy their obligations.

    To be clear here I am talking in terms of financial assets only.

    • Well, are you arguing that all agents in an economy should have positive net financial assets?

      A successful firm does not need to have net financial assets. It can have fixed capital and services its debt out of its *income* and makes a profit.

      It is theoretically possible to have a pure private economy in which the whole process it is sustainable. You cannot rule it out by simple matters of accounting.

      For example you can check some stock-flow consistent models of Godley and Lavoie in which they have a pure private economy. (Of course the authors have always made the case for fiscal policy).

      • paulie46 says:

        Ramanan

        “Well, are you arguing that all agents in an economy should have positive net financial assets?”

        No that’s not my argument. I wouldn’t use the word “should” although I do believe that an economy featuring win-win outcomes is a preferred framework.

        Growth must be monetized by vertical money expansion unless one thinks that persitent deflation is desirable. This is a mathematical reality.

        “A successful firm does not need to have net financial assets. It can have fixed capital and services its debt out of its *income* and makes a profit.”

        Profits are an accumulation or gathering of financial assets. Skimming. Saving. In a closed economy profits must come at the expense of another agent.

        A closed system cannot expand itself. An exogeneous source is necessary.

        “It is theoretically possible to have a pure private economy in which the whole process it is sustainable. You cannot rule it out by simple matters of accounting.”

        Theoretically possible yes, probably. I think it would take a system that didn’t allow savings or profits or at least minimized them, and a mechanism for re-distributing financial assets so the spending flow is continuous. Everyone would have to spend all of their income. Planned re-sets if you will.

        “For example you can check some stock-flow consistent models of Godley and Lavoie in which they have a pure private economy. (Of course the authors have always made the case for fiscal policy).”

        As I said it probably is theoretically possible. In practice I don’t think it is.
        The Eurozone is a good example. It has only taken about 10 years to self-destruct. Doesn’t prove anything but supports my argument.

        • “Profits are an accumulation or gathering of financial assets. Skimming. Saving. In a closed economy profits must come at the expense of another agent.”

          That is not how profits are defined.

          “Doesn’t prove anything but supports my argument.”

          Look, you don’t have to keep repeating that fiscal policy is important especially given that everyone around here knows its importance. But you can’t invent your own definitions and appeal to “arithmetic”.

          • Госбанк says:

            Paulie has a very good point indeed:

            In a closed economy profits must come at the expense of another agent.

            He is wrong of course about profits as an accounting category but the point above is well taken.

            • paulie46 says:

              Ramanan and Госбанк:

              Ramanan please try to stop being so reactionary.

              I’m not trying to redfine terms or change accounting lingo – I’m just not motivated to be a student of accounting terms. I will continue to limp along because the things I am talking about are not that complicated and I don’t care to make them so.

              Definitions only matter as a matter of communication anyway (argument coming in 3…2…1…). The only thing I really care about is whether or not others understand the point I’m making in math and system terms. Math is a language everyone knows.

              Clearly in this case Госбанк does, although he seems concerned with terminolgy also.

              Yes, I know profits and savings are not the same in accounting terminology. As far as a system is concerned they are mathematically equal. Did you know that every different molecule in our world is made up of the very same atomic particles, just in different combinations? I digress.

              “Doesn’t prove anything but supports my argument.”

              Please. I only threw that in there so you wouldn’t claim I was claiming it was proof of my argument. Heading you off at the pass so to speak. My strategy obviously didn’t work in this case.

            • “Paulie has a very good point indeed:

              In a closed economy profits must come at the expense of another agent.

              He is wrong of course about profits as an accounting category but the point above is well taken.”

              I am afraid he is incorrect. Firms can make profits even when the government’s budget is in surplus.

              Because

              Profits = Undistributed Profits + Distributed Profits

              and we know from Michal Kalecki that

              Undistributed Profits = Investment – Household Saving.

              Investment is a huge source of profits for an economy.

              • i.e., assuming the budget is in balance.

                • So which is it Ramanan? DO we have to assume that the budget is in balance for firms to make profits or can it happen with the budget in surplus? Youve stated both in the span of three sentences

                  • “So which is it Ramanan? DO we have to assume that the budget is in balance for firms to make profits or can it happen with the budget in surplus? Youve stated both in the span of three sentences”

                    Nope. *Not* recommending balanced budget but pointing out that even if it is, firms can profit.

                    • paulie46 says:

                      “…even if it is, firms can profit.”

                      No one said they couldn’t. It’s always at the expense of another agent.

                      How could it not be?

        • Paulie: “Growth must be monetized by vertical money expansion unless one thinks that persitent deflation is desirable”

          Why do you think that it is NOT desirable? Sounds like the” vertical component is required”. That is scientifically dishonest and reflects your ideological position. Fine. But please do not sell it as ultimate truth. It does not mean I disagree with your position. Which, given the previous discussion, I am afraid you will interpret in this way. It is just *scientifically*dishonest*.

          Let me try to pull a beowulf again and give this quote which I really like:

          One extreme possibility might be the situation the French anthropolo­gist Jean-Claude Galey encountered in a region of the eastern Himalayas, where as recently as the 1970s, the low-ranking castes-they were referred to as “the vanquished ones,” since they were thought to be descended from a populat”on once conquered by the current landlord caste, many centuries before–lived in a situation of permanent debt dependency. Landless and penniless, they were obliged to solicit loans from the landlords simply to find a way to eat-not for the money, since the sums were paltry, but because poor debtors were expected to pay back the interest in the form of work, which meant they were at least provided with food and shelter while they cleaned out their creditors’ outhouses and reroofed their sheds. For the “vanquished”­ as for most people in the world, actually-the most significant life expenses were weddings and funerals. These required a good deal of money, which always had to be borrowed. In such cases it was com­mon practice, Galey explains, for high-caste moneylenders to demand one of the borrower’s daughters as security. Often, when a poor man had to borrow money for his daughter’s marriage, the security would be the bride herself. She would be expected to report to the lender’s household after her wedding night, spend a few months there as his concubine, and then, once he grew bored, be sent off to some nearby timber camp, where she would have to spend the next year or two as a prostitute working off her father’s debt. Once it was paid off, she’d return to her husband and begin her married life./blockquote>

          They also thought that what they did was required.

          Lets get back to deflation. The problem is not the deflation per se. Deflation is actually an absolutely natural phenomenon related to the growth of productivity. And what we, people, try to do is to deny this natural force by artificially pumping inflation into the system. And funnily enough we also get surprised at the results.

          The problem is obviously not the deflation but debt. And rather its distribution. Lets not go into details of what type of debt we have today and how we came to this situation. Lets play with the argument of deflation alone.

          MMT likes to use minimum wage as a disciplinary force against unproductive business. I.e. if any business model can not survive under the given minimum wage regulation – it shall die. And society will benefit says MMT. In some sense I feel sympathy with this argument but that is not what I want to say.

          Now, from a purely scientific and engineering perspective, lets say that we let prices do whatever they want, i.e. we do NOT artificially support the price structure of any goods in the economy. Then productivity growth will become a disciplinary force on companies whose business models can not survive *productivity* induced price competition. Hm, that is actually the argument that MMR guys make. Anyways, was not my intention. :) Additionally there will be no way for companies to wait until government papers over the past mistakes. You take what you get. Again that is the argument I feel sympathy with. Overall I probably like this approach much more than inflation as it by definition implies less waste in the *productive* economy. We surely need to compare it to the unproductive economy (i.e. unemployment) but I am afraid we can not run a ceteris paribus case there. However my gut feeling tells me that nothing of substance will change there. Might even improve.

          Otherwise I declare my task as accomplished. I managed to bring life to this thread and promote it to No.2. Another 700 comments please!

  42. Sergei @March 11, 2012 at 3:31 pm,

    Good points.

    The following is a bit out of context and it goes into all the balance of payments constraint and so on but hopefully won’t be discussed further here. Francis Cripps (Wynne Godley’s earlier partner in his stock-flow models) in 1983 said that there is no State at the international level!

  43. Cullen – I agree with your points on the monopoly, but you should be aware that MMTers will come back by saying the monopoly is on NFAs and they’ll justify price setting in that way.

    • Cullen Roche says:

      I don’t see how that matters. There still isn’t a monopoly supplier of money. I don’t think it’s appropriate to take a subset of monopoly power and proclaim it applicable to the system as a whole (something which the JG and the “price anchor” debate is a clear attempt to achieve). For instance, the Fed is technically the monopoly supplier of reserves, but even they don’t set prices. They set a target price and the price of bonds and reserves hinges off this. Translating this effect from NFA’s to the entire spectrum of money is an even bigger reach than the Fed’s monopoly. Either way it doesn’t really matter to me. This is only partially applicable to the JG debate (and kind of semantic there since the JG has proven weak in other ways), but the monopolist argument is totally inapplicable in a broader sense when applied to money as a whole….

  44. geerussell says:

    It’s not the whole picture but fraud is certainly a critical piece of it. Would the crisis we had at the scale we had it have even been possible without the enabling elements of it that were purely fraudulent?

    • paulie46 says:

      geerussell
      … Would the crisis we had at the scale we had it have even been possible without the enabling elements of it that were purely fraudulent?

      No.

      This has been another edition of simple answers to simple questions. :-)

  45. paulie46 says:

    Cullen

    “no one put words in your mouth”

    Sorry, guess I need to use a smiley when I write something like that. You’re quite sensitive.

    “You keep claiming to be this independent thinker who has no ties to MMT, but you’ve absolutely shredded me on other sites in defense of MMT. You’ve been rabid in your defense of MMT and at times unreasonably personal. I had to catch you doing it and cite it to get you to stop. So if you’re unbiased then it certainly doesn’t come through in your approach.”

    Everyone has biases. I don’t claim to be unbiased. I was already aligned with the MMT bunch and I have a great deal of respect for them. It was you that branched. I didn’t so much choose MMT – I made the choice to stay where I was – with my own thoughts. I want to move away from the he-said, she-said.
    Anyway, I self-identify as a progressive and I imagine it’s obvious. I generally don’t bring policy proposals or politics into my arguments so I don’t think my leanings matter that much. I don’t expect to convince you or anyone else of that. But…

    I wouldn’t say I absolutely shredded you on other sites.

    This is what I wrote…

    “It seems to me that some of the MMR bunch is attempting to make off with the “family jewels” of MMT in order to obfuscate it’s insights, then turn it around and use the insights for their own ends in extracting wealth via the “peoples money”.”

    … it came back to haunt me right away and I apologized – right away – it took about 3 seconds. I did not mention any names as anyone can see. I don’t believe that what I wrote is true after reflection but once committed to the internet it’s there for prosperity.

    Anything I wrote after that has been pretty tame even though we went at it pretty good and I wanted to say a lot more. I’m old enough now to know that anything we say in anger never helps us so I tried to chill. I’m not capable of carrying grudges but if a dog keeps biting me I will avoid it. No offense intended.

    I don’t mean to come across as argumentative but I have a point to make and I want to do everything I can to be sure that I am understood. Kind of like someone else who posts here but I hope I don’t appear to take it that seriously.

    Plus, the point I’m attempting to make is much simpler than S = I + (S -I) :-)

  46. geerussell says:

    Cullen Roche
    No, the homeowners chased the loans because they thought there was money to be made. MMT blatantly contradicts itself on this position. Remember the part where loans are not reserve constrained and driven entirely by demand (that little insight is causing big problems for MMT all over place now)? The banks didn’t make all those people walk into their offices. They didn’t force the homeowners to take on record amounts of debt. The people willingly signed those contracts. Granted, the banks made absurd offers and were egregiously poor risk managers in this process, but it’s just flat out wrong to say that one side “made the loan” with the explicit intent to divert fault from one party and onto the other.

    One party is a far more at fault than the other. A homeowner might have though malice or negligence signed for a loan they couldn’t afford.

    The banks, financial experts and gatekeepers of credit abandoned underwriting standards, used fraudulent appraisals, established MERS to circumvent real estate law, and conducted fraudulent conveyance of mortgage notes in securitization all in the service of originating a high volume of loans as raw material for “innovative” risk-obfuscating financial instruments.

    That’s not even close to being equal fault. When fraud reaches the level of being systemic, you look at the system.

    And none of the above really has anything to do with MMT.

    • Cullen Roche says:

      That’s a matter of opinion, not fact. When I sign a legal contract it is my responsibility to understand that contract and know how this will impact my future. When you buy a financial product of any kind you should always understand the risks involved in that process. Whn you buy a mortgage representing 10 times your annual income you should understand that contract 10X better than any contract you sign in your life. But Americans floated through the home buying process thinking there was no risk. “Home prices never go down”. That was the mantra on Wall St and Main St. They all got suckered in. There is no “he was to blame”. They were all to blame.

      And yes, this has everything to do with MMT because the MMT mentality is always to blame the horizontal level, refocus attention to the state and their powers. I don’t know if I’ve seen a single MMTer say the homeowners were to blame. I used to say it all the time when I was an MMTer, but I don’t think anyone else did….It’s about understanding the components of the boom. Not just the bust and how we can deal with it.

      • geerussell says:

        It would be nice if it worked that way but reality says otherwise. A person might buy a home somewhere between zero and a few times in their life and typically will never become very expert in it. Lenders are the experts. It’s about as asymmetrical as having a conversation with your doctor.

        The equal blame idea truly doesn’t pass the laugh test. Imagine a lender saying “you see, my bank exploded because consumers were too stupid to stop me from using them as grist for my fraud mill so they’re just as much to blame as I am.” Cue the laugh track.

        Also, outside of loan origination there’s still a laundry list of fraudulent activities that don’t involve the borrower at all.

        No part of this is macroeconomic theory, MMT or otherwise.

  47. Thanks for engaging me here Ramanan, this is helpful for me.

    “Yep and there are securities issued by corporations and held by households directly or indirectly as well. You keep thinking all debt is toward the banks.”

    No I dont think that all debt is toward the banks, but most of it is. And its the banks that are “currency issuers”, outside the system (supported by our CB) and therefore by running a surplus are actually making the rest of us, who are paying to them (which is most of us), poorer.

    “But one sector’s liabilities are another’s assets.”

    Again, to me its a so what! So the banking sector has a lot of assets…… whoopeee. We American citizens should be celebrating that.??!! Its the citizens that are made better off when THEY hold the assets not the banks.

    “Do you know how the balance sheet of the household sector looks like? Banks hold the loans as assets but that does not mean they do not have liabilities to sectors such as households. Households hold various claims on banks in many form ranging from deposits to bank bonds to bank’s equities.”

    No I dont know what the balance sheet of the entire sector looks like. And you are right that the banks have liabilities TO us as well. I believe those liabilities are being covered by the CB though….. dont you think? Very few people are over the FDIC guaranteed deposit limit at any one bank I suspect. This kind of strikes me as arguing that since I put money in a safe at your house you have a liability to me. True but all you have to do is keep the safe around and not steal the money and it will be there. Relatively easy to meet the requirement but certainly not 100% risk free for me. Households claims on banks are their own money as I see it. Banks want to be currency issuers and control the money supply and then complain about having to meet the liabilities of people who wish to store their money with them?? Cry me a river.

    “I understand the private sector is hugely indebted (in the gross sense) but you are presenting the case as if the lenders has little or no liabilities at all, thereby exaggerating the case.”

    Maybe, but its not intentional exaggeration. I simply do not know the level of liability in some cases. Nor do I think the liability rises to the level of caring about in others. They are storing my money for me and YES I do expect to get it back at some point. They are big boys, I think they can handle it.

    • Greg,

      The best is to directly look at data such as the Table B.100 here:

      http://www.federalreserve.gov/releases/z1/current/z1.pdf#page=113

      A simple loo at the household balance sheet shows things are fine. Household hold financial assets worth $49T and have liabilities of $13.8T

      In the next page the balance sheet of corporations shows financial assets worth $15T and liabilities of $13.6T as well as equities issued whose market values are $14.3T.

      These are financial and they hold nonfinancial assets as well which is worth $14.8T

      So just looking at this doesn’t tell you a story on why something is wrong when something is really wrong.

      Of course one argument is the distribution of this within a sector etc so one has to “unconflate” that rather than stating one big indebtedness number.

      I understand it is not an intentional exaggeration but the argument has to do more with how flows affect stocks and how the burden of debt affects because the person making the payments is different from the one receiving it and the two have different propensities to consume etc.

      My whole point is that just saying indebtedness is huge is not the full argument.

      One person’s liabilities is another’s assets is true but when gross liabilities and assets grow something goes wrong.

      So instead of presenting the case as if net liabilities are high (which it’s not) even if it’s not intentional one should present it as if gross liabilities are high and it is an indicator of something going wrong.

      I am saying this because some comments come out as it is presenting the case that net liabilities themselves are as high as stated.

  48. paulie46
    “…even if it is, firms can profit.”
    No one said they couldn’t. It’s always at the expense of another agent.
    How could it not be?

    What do you mean expense of another agent?

    • paulie46 says:

      Ramanan said across two posts…

      “Paulie first invoked a $50T debt and mentioned the private sector has “total” financial assets of only $15T and hence insufficient etc. …”

      Paulie said there existed only $15 Trillion in NET financial assets – assets unencumbered by an offsetting liability. Any other financial assets issued through the Federal Reserve banking system (loans) are issued with equal offsetting liabilities. Therefore the net value of those financial assets is zero for the economy as a whole.

      This becomes a problem when the asset portion of those loans is accumulated, hoarded, saved, whatever by a relatively small segment of the population because the agents that must acquire dollars to satisfy their obligations have somewhat of a problem trying to claw back that wealth. Meaning there is for the most part no way to do it.

      Credit event. Non-controversial.

      From z1 Table L.1 Credit Market Debt Outstanding Q4 2011
      Line 1 Total Credit market Debt owed = $54.134 Trillion

      From z1 Table L.2 Credit Market Debt Owed by Nonfinancial Sectors Q4 2011
      Line 1 Total Credit market Debt owed = $38.315 Trillion

      “…That is like Randy Wray arguing $29T of secret loans.”

      Really?

      Ramanan Ramanan March 12, 2012 at 7:00 pm

      paulie46
      “…even if it is, firms can profit.”
      No one said they couldn’t. It’s always at the expense of another agent.
      How could it not be?

      What do you mean expense of another agent?

      One persons spending is another person’s income or profit

      One person’s saving is another person’s dis-saving

      • Paulie,

        You said

        “The actual amount is not as important as the reality that total financial wealth is in the $15 T range”

        Then you point out that

        “From z1 Table L.1 Credit Market Debt Outstanding Q4 2011
        Line 1 Total Credit market Debt owed = $54.134 Trillion

        From z1 Table L.2 Credit Market Debt Owed by Nonfinancial Sectors Q4 2011
        Line 1 Total Credit market Debt owed = $38.315 Trillion”

        But this is mixing up GROSS and NET. The financial sector is HUGE and it issues and holds a lot of debt within itself for example. So while you count $38T in liabilities you forget to count $38T of that in assets.

        ““…That is like Randy Wray arguing $29T of secret loans.”

        Really?”

        Yes it IS.

        “One persons spending is another person’s income or profit

        One person’s saving is another person’s dis-saving”

        Bad syntax again. You will continue to get this wrong. While it is true that one person’s spending is another person’s income, but can be profitable and both can be saving. If you continue to define these concepts as simply financial assets accumulation you will continue to make such incorrect statements.

        • “but can be profitable and both can be saving. ”

          should be

          “both can be profitable and both can be saving”

        • paulie46 says:

          Ramanan March 12, 2012 at 11:39 pm
          Paulie,
          You said
          “The actual amount is not as important as the reality that total financial wealth is in the $15 T range”
          Then you point out that
          “From z1 Table L.1 Credit Market Debt Outstanding Q4 2011
          Line 1 Total Credit market Debt owed = $54.134 Trillion
          From z1 Table L.2 Credit Market Debt Owed by Nonfinancial Sectors Q4 2011
          Line 1 Total Credit market Debt owed = $38.315 Trillion”
          But this is mixing up GROSS and NET. The financial sector is HUGE and it issues and holds a lot of debt within itself for example. So while you count $38T in liabilities you forget to count $38T of that in assets.

          Not mixing gross and net. Here’s what I’m saying in a nutshell:

          NFA = Total Credit + National Debt; then:

          NFA = Total Credit Dollars + Total Credit liabilities + National Debt

          NFA = $54T + (-1)$54T + $5T + $10T(treasuries)

          NFA = $59T + (- $54T) + $10T(treasuries);

          The last equation shows that we have $5T in dollar assets unencumbered by an offsetting liability plus another $10T in dollar-denominated financial assets (treasuries).

          The $10T in treasuries are off the table as far as being usable to satisfy outstanding liabilites.

          Further, roughly 65% of the population has no savings. Has no net cash. Lives paycheck to paycheck, S/S check to S/S check, unemployment check to…you get the picture.

          It also means that the dollars necessary to retire the 65%’rs debt are held by the remaining 35% as financial wealth.

          This gives us an idea how the financial wealth is distributed but we don’t know how the liabilities are distributed.

          My guess would be a not insignificant portion is held by the 65%. Say 10% or $5.4T.

          I will venture to say that most of the unemployed fall within this group. This group includes a lot of consumers.

          It’s going to take a long time to repay debts with disposable income in this group. Many of the dollars used to satisfy liabilies in this group are fiscal transfers (deficit spending) so that will help. The rest will have to be clawed back from the 35% by working for them.

          The 35% group is the kicker. Agents in this group must satisfy their liabilites by acquiring dollars from members of their own group.

          This group holds the balance of the cash and liabilities so:

          Net cash held = Total Cash held – Liabilities held

          Net cash held = $53.6T – $48.6T

          Net cash held = $5T (All net financial dollar wealth which is what we expected.)

          It doesn’t take a great leap to see that the dollars needed by the 65% to satisfy their liabilities are held by the 35%.

          If the 65% is able (highly unlikely) to acquire this wealth from them to satisfy obligations, the 35% will have no dollar wealth left, only treasuries.

          Further, there would be no net dollar wealth left in the non-government. The horizontal system some seem to be longing for.

          Introducing more credit into the system may help for a while, but it can never extinguish the liabilies outstanding as distributed.

          Besides, the people that need the money have no credit left. They are maxed out or unfit.

          It will take a long, long time; forever without net government spending. Or a debt jubilee. Or mass bankruptcy. Or something.

          • “NFA = Total Credit + National Debt; then:

            NFA = Total Credit Dollars + Total Credit liabilities + National Debt

            NFA = $54T + (-1)$54T + $5T + $10T(treasuries)

            NFA = $59T + (- $54T) + $10T(treasuries);

            The last equation shows that we have $5T in dollar assets unencumbered by an offsetting liability plus another $10T in dollar-denominated financial assets (treasuries).”

            An unencumbered asset has a specific meaning in finance. Suppose a bank holds some government bonds and has it pledged as collateral to another party such as the central bank or some private bank in repos, then it does not qualify as an unencumbered asset. This is important for those who worry about the credit risk of a firm because these assets won’t be accessible in case of a bankruptcy. I do not know where you picked that terminology from.

            The $54T you quote has nothing directly to do with *households* because these can be held by other financial institutions.

            You looked at the wrong table in Z.1. The right table is B.100

            The Net Worth of Households in the United States is about $58.5T (!!!) which is assets minus liabilities.

            Households neither owe $59T nor $54T. This is important because your discussion seems to be focussed on households.

            • Ramanan

              “The Net Worth of Households in the United States is about $58.5T (!!!) which is assets minus liabilities.”

              Net worth includes real assets. Real assets that can be inflated on balance sheets as in “I think my house is worth $300k even though I would be lucky to sell it for $150k.”

              I am looking at the right table for the argument presented. Holdings of isolated *households* is immaterial to the argument.

              My argument is and always has been focused on nominal assets, specifically state money. I have never given the impression otherwise.

              MMT (and I thought MMR also) is a model based on Modern MonetaryTheory. Monetary is the key word here.

              • “I am looking at the right table for the argument presented. Holdings of isolated *households* is immaterial to the argument.”

                You are free to think that but in your analysis you bring in households in the very next step.

                The credit market debt you quote is in a sense immaterial because financial institutions have liabilities which are held by other financial institutions.

                You will make no sense if you ignore the amount of nonfinancial assets households hold. It is ridiculous to ignore that. At any rate, households hold $49T of assets and their liabilities are $13.7T.

                • paulie46 says:

                  Ramanan March 13, 2012 at 10:43 am
                  “I am looking at the right table for the argument presented. Holdings of isolated *households* is immaterial to the argument.”
                  You are free to think that but in your analysis you bring in households in the very next step.
                  The credit market debt you quote is in a sense immaterial because financial institutions have liabilities which are held by other financial institutions.
                  You will make no sense if you ignore the amount of nonfinancial assets households hold. It is ridiculous to ignore that. At any rate, households hold $49T of assets and their liabilities are $13.7T.

                  “You are free to think that but in your analysis you bring in households in the very next step.”

                  I brought in no households. Not in the sense that you are claiming.

                  I estimated the distribution of all of the dollar and dollar-denominated state money assets and liabilities that exist in this world including the entire universe combined.

                  My argument is based on the closed economy for financial assets at the most granular level possible. It cannot be reduced any further. This is the relationship as of Q4 2011:

                  NFA = $59T + (- $54T) + $10T(treasuries). Pretty simple. And reasonably accurate.

                  These assets/liabilities are distributed within the closed economy among a finite number of agents, each with a finite number of each type (including zero) and the sum totals of each equal the amounts in the equation…

                  You may change the parameters of my scenario (distributions) in any way you like as long as it is consistent with the real world. Have at it.

                  (Aside) – You claim z1 Table L.1 is the wrong table. The title says clearly:

                  Table L.1 Credit Market Debt Outstanding Q4 2011


                  Line 1 Total Credit market Debt owed = $54.134 Trillion

                  The number supports my previous estimate and I had never seen that table before you linked to it. (end Aside)

                  …from which I constructed the equation above. This is it for any and all financial assets that are called “dollars” or “US Treasuries”. Sum total. There ain’t no more. If that table is off then I am off, and of course I just ball-parked the National Debt™ number.

                  “You will make no sense if you ignore the amount of non-financial assets households hold. It is ridiculous to ignore that…”

                  So you are just now realizing that MMT doesn’t account for anything other than financial assets? Nor does the sectoral balances relationship? Life is full of surprises. No wonder S = I + (S – I) was such a big deal for you guys.

                  You then go to some other table and pick numbers that include real assets, and estimates at that and throw together some dizzying but irrelevant response.

                  You can’t mix in real assets when discussing nominal. Write that on the blackboard 100 times. Please.

                  You can’t satisfy nominal liabilities with real assets, particularly when the liabilities are owed to the banking system. You can’t pay your taxes with real assets.

                  MMT stands for Modern “Monetary” Theory. What part of MONETARY isn’t nominal?

                  It doesn’t matter how many accounting transactions or tricks or categorizations you want to appeal to within the space defined by the equation above.

                  You cannot change the constraint of quantity because that can only be changed by the state. Any change must come from outside the closed system. The government. Introducing more credit that can’t be serviced will just make the system more unstable with no net increase in financial assets.

                  Attempting to mix real and nominal will bring no clarity to the discussion. Real and nominal are related in a non-linear and unknowable way because the relationship changes at the whims of the marketplace. Nominal is constrained by mathematics. It is finite and knowable at all times. It can be accounted for with accuracy to the penny.

                  The discussion has been useful in pointing out that you have no understanding of the concept of closed systems. Up until now I have given you the benfit of every doubt. No doubt exists now. You are unaware of the unknown unknown. Hopefully some of the people following this exercise (assuming there are any) will get it.

                  There’s a reason J.K. Galbraith said “The process by which banks create money is so simple that the mind is repelled.”

                  I feel like I just wasted an hour of my time …

                  • Cullen Roche says:

                    I think it’s funny how you come here pretending to be some unbiased spectator trying to learn or something and then leave these sorts of comments which make your allegiance perfectly clear. It’s also funny how you keep trashing MMR based on Ramanan’s comments. He’s a horizontalist. Not an MMRist.

                    It’s equally funny that you guys still haven’t grasped the whole S=I+(S-I) thing yet. Or maybe you do and you just can’t overcome your allegiance to NFA’s and the pro govt stance that you all take to push that position.

                    • paulie46 says:

                      Cullen

                      Are you saying arithmetic has a pro-MMT bias?

                      I’m sorry you think I keep trashing MMR. JKH accused me of the same thing after about two posts, and the worst thing I said was the jury was out on S = I + (S – I).

                      I just don’t get what you are trying to do. I’m not rooting for you to fail. I would like you to teach me something.

                      I wish I knew what it was other than the “fallacy” of the monopolist view of money or S = I + (S – I), which I still don’t get. I’m a pretty curious guy. I love to learn new things. I won’t defend turf that doesn’t stand under scrutiny.

                      It appears that anyone that doesn’t agree with your worldview or characterization of how the world works is trashing your ideas. You’ve had hundreds of posts to make your case. I hope you don’t give up trying.

                      Part of the problem is Ramanan isn’t doing a very good job of selling it so someone else needs to step up.

                      Further, my arguments haven’t needed anything particular to MMT or the monopolist theory of money. That’s the great thing about math.

                      My arguments will work with a gold standard or horizontal money. Won’t work with real assets because the relationships are non-linear and unpredictable. Too much he-said, she-said. All I need is an understanding of the properties of closed systems and basic algebra skills.

                      Monetization brings real into the nominal world. I do hope you all have a better idea of what a closed system means now. All of the accounting in the universe won’t be able to expand a closed system from within.

                    • Cullen Roche says:

                      Paulie,

                      The thing about accounting identities is that they’re always true. So constantly pointing to them as “arithmetic” is right, but not always very illuminating. MMR does not reject the SBE. We just take it a step further than the MMT analysis generally does. We want readers to deep dive into it rather than thinking that (G-T) or net financial assets are the backbone of S and the economy or that “persistent deficits are the expected norm” (Wray). This can lead to a very misleading perspective of the world and a totally misguided policy response. It leads one to believe in Job Guarantees where MMT’s own evidence doesn’t prove it does much. It could lead one to believe that perpetual current account deficits are just “real benefits” that can be printed over.

                      What we tried to illuminate in that discussion was that I is necessary to improve living standards while (G-T) is not. But MMT will often portray the SBE in a manner so as to show that “persistent deficits are the expected norm” (Wray) or that the private sector experiences a “loss” when the private balance is negative (yes, I understand the point she was making there, but it is still terribly misleading). We even proved this by citing the fact that from 1997 to 2008 the private balance was negative while net worth increased by 120%. That was shrugged off as “unsustainable”. When we say that I is the backbone of S we want people to come away from the discussion with the understanding that real wealth is created through innovation, creativity, individual hard work and not just (G-T). We want people to understand that I really is the backbone and that NFA’s are a facilitator. Here’s a good chart sent from a colleague that supports this point:

                      Now there’s a visual of I as the backbone of S! Randy Wray shrugged the equation off as meaningless. He couldn’t understand our point. We’re not “debunking” MMT with this point. We’re just taking the analysis a step further than MMTers ever do. I’ve never seen an MMTer make this point so clearly as we have (maybe they have and I’ve missed it, I don’t know). But instead of MMTers saying “good clarification” they said we were “monetary retards” and they lashed out like children and perpetuated their reputation as being vicious and nasty with everyone they come in contact with.

                    • “Monetization brings real into the nominal world.”

                      No, it does not. It allows parties to transact. Like central bank reserves allow banks to transact and monetize own liabilities all the time. You can not mix the balance sheet of the banking system with the balance sheet of the central bank. They are different animals. So does money. It allows to transact which is another word for monetization. State money just provides a stable point of reference. So accounting does NOT bring real world to nominal. Since you appeal so hard to closed systems you obviously understand that real and nominal (financial) are two closed systems. However their interaction creates economic activity as we know it. Like payment system where central bank money interacts with bank liabilities. But real and nominal do not and can not mix up. You can add up them if you bring both to the same measurement scale but you can not mix them. Todays convention is to use a monetary measure in adding. History also knows another convention – natural measure – which was not really successful. But you can not mix two systems up.

                  • Regarding “satisfying nominal liabilities with real assets,” this is a big part of where you are wrong. The non-financial assets backing a lot of the debt in this country satisfies the liability if you can’t pay. When the assets are worth enough, creditors don’t mind going into foreclosure because they get a productive asset out of the deal that they can market. The quality of the real non-financial assets backing the horizontal money is what gives it so much strength much of the time… but when those assets become way over-priced, and then crash, the debt left over all of a sudden becomes a real problem, and this is when demand for NFA’s spikes.

                    Notice ONLY when the value of the real assets (factories, businesses, and homes) crashes do you tend to see the weakness emerge in the horizontal sector’s ability to continue to service itself (no joking about my terminoligy, now :)).

                    The downplaying of this relationship is an error of MMT, IMO, for if the bank does a good job of allocating loans, we can go a long, long, time without a bunch of NFA lubrication as the private sector grows. Telling us that EVENTUALLY it will come down to NFA’s doesn’t help us through those periods much. NFA’s are the rudder on the titanic, not an e-brake. Credit money can drive the economy for a long time precisely because of those Real Assets you mention that are quasi-unknowable in relative value.

                    • paulie46 says:

                      Dan M.

                      “Regarding “satisfying nominal liabilities with real assets,” this is a big part of where you are wrong. The non-financial assets backing a lot of the debt in this country satisfies the liability if you can’t pay.”

                      Non-financial assets don’t satisfy your liability. It’s called default.

                      Foreclosures most often result in a loss for the bank. A substantial loss. The liability isn’t satisfied until the asset is sold or “monetized” at which point in most cases there is a significant part of the liability that isn’t satisfied.

                      Banks are not in the real-estate business or legal business because they want to be. Paying those expenses are un-budgeted items when it comes to foreclosures. Banks are only prepared for losses in the 5% range if I recall.

                      Mass foreclosures are another thing altogether. If banks were able to quickly foreclose on every one of the some 16 million (?) homes that are underwater and behind on their payments the losses would quickly render them insolvent.

                      This is a margin call the banks can’t meet, and it’s a good thing for them foreclosures are dragging along the way they are. Once the losses are booked it’s bye-bye banking system.

                      The banks are just buying time and hoping.

                    • Ok, foreclosures CAN be a pain if the underlying asset doesn’t pay for itself, but you’re completely skipping over the fact that the underlying non-financial asset is a HUGE stabilizing factor to horizontal money. This is why collateralized debt is at a much better rate than credit card debt.

                      It’s even more evident when you look at the risks involved when long-lived non-financial asset values crash, and the debt is left over. If the growth in the economy from 2000-2005 had been in other sectors besides housing that were more sustainable and correctly priced, we wouldn’t have seen the 2008 crash, and the subsequent uber-high demand for NFA’s… at least not anywhere close to as bad as it was.

                      The non-financial assets that act as a structural support for the horizontal monetary sector are fundamentally linked to that money. Trying to brush them off is a mistake.

                    • paulie46 says:

                      Dan M. March 13, 2012 at 4:54 pm

                      The underlying asset almost never pays for itself. The losses are usually large compared to the asset, because real assets are usually overvalued.

                      The banking system is not designed for mass foreclosures at the scale at which we are experiencing. Underwriting is an essential, the most essential component of lending. It was completely ignored for several years.

                      Right now the credit market is frozen. You need to ask yourself why instead of wasting your time trying to take me down various rabbit holes.

                      Questions:

                      Are the underlying liabilities likely to be satisfied any time soon?

                      Where will the money come from? I’ve showed you an approximation of who has it and where it must come from if debtors can’t get it there.

                      Do you think that letting things wind down at the current rate is good for the economy and the citizens? (Hint: Debts are unwinding at a rate of less than $0.5T per year without someone getting into their savings).

                  • “NFA = $59T + (- $54T) + $10T(treasuries). Pretty simple. And reasonably accurate.

                    These assets/liabilities are distributed within the closed economy among a finite number of agents, each with a finite number of each type (including zero) and the sum totals of each equal the amounts in the equation…”

                    But foreigners also hold US Treasuries and you claim you have done some estimation for a closed economy! Have some sense in what you write. At any rate, you should also understand that lot of the government debt is intra-governmental holdings.

                    “You then go to some other table and pick numbers that include real assets, and estimates at that and throw together some dizzying but irrelevant response.”

                    Just an assertion.

                    “You can’t mix in real assets when discussing nominal. Write that on the blackboard 100 times. Please.”

                    I can do and all national accountants mix nonfinancial and financial assets if that is what you mean by real and nominal. You keep inventing stuff.

                    “The discussion has been useful in pointing out that you have no understanding of the concept of closed systems”

                    More assertions!

                    “You can’t pay your taxes with real assets.”

                    But I can sell real assets and pay taxes with the proceeds.

                    “I feel like I just wasted an hour of my time …”

                    IMO, you waste much more time inventing accounting terms.

                    “So you are just now realizing that MMT doesn’t account for anything other than financial assets? ”

                    Sorry are you claiming MMT doesn’t account for nonfinancial assets? This is a ridiculous claim!

                    :-)

                    • paulie46 says:

                      Ramanan

                      “But foreigners also hold US Treasuries and you claim you have done some estimation for a closed economy! Have some sense in what you write. At any rate, you should also understand that lot of the government debt is intra-governmental holdings.”

                      Foreigners holding U.S Treasuries are included in those numbers. All transactions in dollars between domestics and foreigners are part of the closed system. You can make this as complicated as you like and keep yourself confused. It isn’t necessary.

                      I’m aware of the intra-governmental holdings. Where do you think the $5T came from? The money is still spent into the non-government, just not held by the public. You really haven’t been paying attention to the things Warren Mosler, Scott Fulwiller and Randy Wray have written.

                      We started in 1776 with nothing. One can’t borrow zero over and over again 235 times and get to $5T.

                      The National Debt™ in the beginning was around $75 Million. You couldn’t borrow that over and over 235 times and get to $5T (and dollar NFA’s would have to be much less). You could only get to $17.6 Billion.

                      You really are pushing me towards MMT. All I need to do is grok the JG and I’ll be there.

                      As far as the other stuff I’m not motivated to respond any more. Maybe some other time.

                      Adios :-)

                    • “paulie46 March 13, 2012 at 5:02 pm”

                      Yes bye. But please learn some accounting terminologies and stop inventing terms.

                  • Paulie46,

                    Further, when I said “wrong table”, I meant the focus of what you are looking should be another table altogether.

                    At any rate, you keep making the case that I am dumb and know nothing so here is something for you to look at – a comment by Scott Fullwiler who is an MMTer as you know:

                    http://heteconomist.com/?p=3066&cpage=2#comment-32485

                    “And I do not mean to imply that I have a problem with Ramanan. He and I agree on 90% of how things work, perhaps more. I consider him an ally, overall, and I’m continuously impressed with his knowledge and the amount of research he has done starting just a few years ago to learn how the monetary systems of the world function.”

                    • paulie46 says:

                      Ramanan,

                      I sincerely apologize if I gave you the impression I thought you were dumb. Quite the contrary.

                      I simply feel that you do not have a good grasp on closed system analysis and you have the mistaken notion that MMT addresses anything other than nominal.

                      Not seeing the closed-system part is pretty normal – it’s non-intuitive and if one hasn’t been introduced to Thermodynamics in an academic environment it may be nearly impenetrable. Not because it’s complicated – the laws can be stated in one paragraph. In my experience very few understand it but why should they? It isn’t something that is important in everyday life. It’s not interesting for most people, but it is fundamental in understanding systems.

                      It is why there is no such thing as a perpetual-motion machine. It isn’t possible under known laws.

                      The MMT/nominal relationship/conflation thing caught me by surprise. I thought that was clear to everyone. Anyway, I have never considered myself an official member of the MMT club because I don’t generally join clubs and some things I haven’t made up my mind yet. Cue Cullen in 3…2…1…

                      Like I said, I’m burned out for now so maybe some other time.

                      Respectfully,
                      Paul

                    • Cullen Roche says:

                      3…2…1….Burned out? Quick, call in reinforcements!!! The MMT brigade can’t afford to leave a comment section unmanned. You never know when someone might say something remotely negative about the Theory to end all theories!!!!!

                      :-)

                    • paulie46 says:

                      Cullen

                      If this kept on any longer I was going to have to cancel my membership at Gold’s Gym.

                    • Cullen Roche says:

                      Good. Gold’s is for meat heads! Besides, wouldn’t you rather hang out on the internet with dorks like me all day!?!?!

                    • paulie46 says:

                      Apparently I would based on the past weeks activity.

                      I guess that makes me a dork too :-)

                    • Cullen Roche says:

                      Well, MMR or MMT or whatever you want to call yourself – I think we agree on a hell of a lot Paulie so thanks for not taking any of my comments too personally. I am honestly just trying to spread a better understanding of the way our system works. So whatever people want to call that – I call it reality. It’s too bad that this split has caused so much angst. I just really don’t agree with the perspective that we need policy and politics involved in all of this. So that will be my approach going forward….

                      Anyhow, I’ll see you around.

              • “Net worth includes real assets. Real assets that can be inflated on balance sheets as in “I think my house is worth $300k even though I would be lucky to sell it for $150k.”

                That’s a ridiculous argument. The assets are estimated by the Fed based on the market value not what the person owning it thinks it is.

                • Ramanan
                  “Net worth includes real assets. Real assets that can be inflated on balance sheets as in “I think my house is worth $300k even though I would be lucky to sell it for $150k.”
                  That’s a ridiculous argument. The assets are estimated by the Fed based on the market value not what the person owning it thinks it is.

                  Right.

                  Estimated to the penny I’m sure.

                  Your argument continues to be based on data mining rather than analysis.

                  I have things to do but I will address your post before this one when I get the chance.

                  • “Your argument continues to be based on data mining rather than analysis.”

                    Well, I am afraid you come up with definitions and terminologies and when presented with the appropriate thing, you say this!

                    You can’t simply pick up the highest number out there and present a case just based on that. Again, I say this I understand the need for fiscal expansion but you can’t argue on the basis of holding notions that profits come at the expense of others and that if one’s saves, another’s dissaves.

                    “Estimated to the penny I’m sure.”

                    At least better than your estimate. Plus they don’t ignore it!

    • Госбанк says:

      Paulie’s right:

      For the business sector as a whole to make a profit consumption expenditures C have in the simplest case to be greater than wage income YW. So that profit comes into existence in the pure consumption economy the household sector must run a deficit at least in one period

      Taxes, Profits, and Employment: A Structural Axiomatic Analysis, Egmont Kakarot-Handtke

      • “Paulie’s right:

        For the business sector as a whole to make a profit consumption expenditures C have in the simplest case to be greater than wage income YW. So that profit comes into existence in the pure consumption economy the household sector must run a deficit at least in one period”

        No he is not right. We do not live in a pure consumption economy. Firms make capital goods as well.

        • Госбанк says:

          What’s the difference ? The product of the business sector as a whole has to be priced so that it sells at a price higher than wage outlays. So, inescapably workers have to borrow to buy stuff in excess of their wages, or government has to compensate or some businesses have to be losers to bankroll winners.

          • Not sure what you are aiming at, here’s an example.

            Let’s say I own a mobile phone equipment company. I am making profits by getting revenues from phone bills and my current costs are mostly wages and interest payments. I make profits and distribute some of it as dividends to shareholders.

            I also buy some equipment – fixed capital from your firm which manufactures it. I do so by issuing securities to households. Th expenditure doesn’t affect my profit because profits are defined that way. On the other hand, for you it is income and you make profits out of it.

            Both firms pay wages and still make profits and household consume and save. Generalize this for the whole economy by replacing phone services with consumption widgets and you get the idea … everyone is well-off … Almost except that the Keynesian principle of effective demand is still operating and there isn’t full employment.

            And that picture is quite different from saying “some profit out of expense of others” which is misleading.

  49. Cullen Roche
    I never said that. Look Greg. I get it. MMT has the whole world figured out. I don’t know why I debate anything with any of you. It’s totally pointless. At least you’re one of the more respectful ones so thanks for that….

    Cullen, there is no need to take an exasperated tone with me. I dont claim to have the whole world figured out and it wasnt thru my MMT/MMR readings that I became familiar with the concept of a debt jubilee. (Thats actually biblical but I didnt get it there either…… just want to show its an OLD idea).

    I dont find any of these discussions I enter with you or Rmanan or anyone pointless (well the ones with FD015 are pretty pointless but………).

    I said earlier and maybe it bears repeating. I think what you guys are doing will be a positive thing. The three of you are smart, straight up guys whose only goal is to get people to look at the world differently/correctly when it comes to money, but you know you dont have it all figured out either.

    I entered the whole economics blogosphere in 2008 thru the MMT portal and it has served me well but I certainly dont think any of these guys walk on water (but Warren sure is getting quoted all over the place by everyone it seems these days).

    I dont care whether something is left right or center I only care whether its correct. Sometimes people who are intentionally centrist are wrong because sometimes the left position happens to be correct and sometimes the right position happens to be correct. As Colbert says “Reality has a left wing bias” ;-)