Monetary Realism

Understanding The Modern Monetary System…

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.

 

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  • http://www.concertedaction.com/ Ramanan

    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.

  • http://www.concertedaction.com/ Ramanan

    “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.

  • http://www.concertedaction.com/ Ramanan

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

    should be

    “both can be profitable and both can be saving”

  • Sergei

    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!

  • Greg

    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” ;-)

  • Greg

    And I respect you guys and hopefully that is showing in my commentary

  • Госбанк

    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.

  • http://www.concertedaction.com/ Ramanan

    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.

  • Greg

    “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

  • Greg

    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.

  • paulie46

    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.

  • http://www.concertedaction.com/ Ramanan

    “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.

  • Cullen Roche

    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….

  • paulie46

    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.

  • http://www.concertedaction.com/ Ramanan

    “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.

  • http://www.concertedaction.com/ 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.

  • paulie46

    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.

  • paulie46

    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.

  • Cullen Roche

    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….

  • http://www.concertedaction.com/ Ramanan

    “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!

  • paulie46

    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

    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.

  • 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. 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

    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.

  • http://www.concertedaction.com/ Ramanan

    “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

    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.

  • Dan M.

    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.

  • Sergei

    “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.

  • Cullen Roche

    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.

  • paulie46

    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 :-)

  • http://www.concertedaction.com/ Ramanan

    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

    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).

  • http://www.concertedaction.com/ Ramanan

    “paulie46 March 13, 2012 at 5:02 pm”

    Yes bye. But please learn some accounting terminologies and stop inventing terms.

  • paulie46

    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

    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

    Cullen

    If this kept on any longer I was going to have to cancel my membership at Gold’s Gym.

  • Cullen Roche

    Good. Gold’s is for meat heads! Besides, wouldn’t you rather hang out on the internet with dorks like me all day!?!?!

  • paulie46

    Apparently I would based on the past weeks activity.

    I guess that makes me a dork too :-)

  • Cullen Roche

    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.