More on Savings and Investment

Here is a mashup of comments from Steve Waldman, from the comments section over at Steve Roth’s excellent Asymptosis.

“It is perfectly possible to hold the international balance constant, have the government reduce debt, and have “people” save more.

“People’s” financial savings consists of claims on firms and claims on government. If I perform some work for a firm that (however infinitessimally) increases the firm’s real economic value, and I accept as payment a share of that firm’s stock, I have performed the economic act of saving, and increased the net saving of “people” — of the household sector. Net private sector financial assets have not increased: my “savings” is the firms’ obligation, the household sector’s surplus is offset by the business sector’s deficit.

But much of what we call saving is exchanging real resources for claims on the private business sector. And as long as the private business sector doesn’t entirely squander those real resources, that act contributes to macroeconomic S. If the private business sector does squander the resources, then while I still perceive my contribution as “saving”, the value of macroeconomic S = I does not increase, and my claim amounts to a transfer from other shareholders of the firm.

But even in today’s terrifyingly %$&*-ed up world, people make a lot of productive contributions to private business in exchange for financial claims. The act of doing so increases S = I, but has no effect on “net private-sector financial assets” and requires no government accommodation.

Suppose out of honesty or competition for my labor, the owners of the firm want to pay me the full value of my work, less some small epsilon of profit we’ll ignore. They have a choice: They can all give me ~9% of their existing shares (0.1/1.1), or they can have the firm issue 10% more shares and give me those.

In real terms, the effect is the same. I end up owning ~9% of the firm (the fruit of my labor), and they end up epsilon better off for my efforts. But the dollar value of the shares will be different by virtue of the two choices.

If they give me 9% of preexisting shares, there will be “deflation”. The value of each share will have increased by 10%. They will have 91% of their original number of shares, each worth 10% more, so they’ll retain 100% of the original value. There will be “deflation”, if we consider company stock as a kind of currency.

Alternatively, if they issue new shares to cover the increase in value, the old owners will hold the same number of shares that they held before, and they will each have the same value that they had before. The extra value that I created would be diluted away from them by the issue of new shares.

In a world of stock, “deflation” or “price stability by dilution” is a choice of the firm. In either case, I have genuinely saved in a real economic (terms).

It’s just a question of how we account for the savings, by holding the unit of account stable and making direct transfers to me, or by “inflating” the unit of account and accounting for the real value inflated away from the old owners by giving claims made from thin air to me.

There’s no such thing as a fixed supply of nominal assets in a world where banks can issue nominal claims. If we are in a regime where the central bank targets consumer price stability, my creation of firm value will not necessarily cause any policy response.

But suppose that the value that I produce means that the firm can sell consumer goods more cheaply, and this puts downward pressure on the consumer price level. The status quo response to this (before the Great Recession & ZIRP) would be for the central bank to lower interest rates to prevent the deflation. The lowering of interest rates corresponds to a reduction in the rate with which net financial assets are issued to the private sector, as the transfers of interest from the government are diminished.

Another policy response, much discredited during the “Great Moderation” but nevertheless potentially effective, would be for the government to spend money into the economy to counter the recession while the central bank held interest rates constant.

So, while it is true that one potential reaction to economic value production is issue of NFA by the state to hold the price level constant, that is a consequence of one uncertain conjecture and two discretionary policy choices:

  1.  the economic value production must impact consumer prices of existing goods;
  2. The state must hew to an anti-deflationary price stability commitment; and
  3. The state must implement that commitment via fiscal rather than conventional monetary policy. (Conventional monetary policy involves no issue of net financial assets.)

There is no “to the penny” sort of accounting relationship between household-sector financial saving and government issue of NFA. You can tell stories of how there might be a positive relationship between the two, but those are a function of policy choices and behavioral models, not logically necessary as a matter of accounting.

And it is household-sector saving that conventional morality so strongly proclaims as a virtue. No bourgeois moralist ever complains when the value of a firm’s assets rise, implying an increase in business-sector “indebtedness” to shareholders. (Firms owe their full value to financial claimants, as their value rises, so does what they owe.)

It is a bad rhetorical trick that MMTers sometimes pull, to confuse an increase in “private sector net financial assets” with an increase in household-sector savings in order to recruit bourgeois support for the latter in the cause of promoting net issuance of government securities.

There are a lot of perfectly good reasons to support net-issuance of government securities during times like now, and I’m certainly allied with MMTers in their promotion of wise fiscal policy. But claiming “saving” is impossible as a matter of accounting without a government deficit is a bait and switch, a game played with definitions by rhetorical confusing household sector financial surplus with an aggregate private sector surplus.”

Steve is pretty sharp. Godley’s theorem tells us we need some sector to run a deficit, but it doesn’t really have to be the government sector. It can easily be a private company or bank which runs this deficit, as long as it’s willing and able to do so, and as long as the rest of the world accepts the “NFA” created.

(RE: Equity in a firm. The nominal value is the number of shares which can be expanded or destroyed at will.  The real value is the economic value of the firm. It’s like a mini-government, able to create script, which is only dependent on the willingness of others to accept that script.)

It’s extremely misleading to claim the government is the only possible source of savings. It’s not true. And admittedly, it’s really hard to talk about Savings in a non-confusing way, so I cut those others a bit of slack.

But these points about savings are really important for people to understand, and it’s crucial to be able to discern when fiscal or monetary or trade policy or private money creation “should” be used, and also how these things impact our economy. Yes, we’ve been relying exclusively on monetary policy for a long, long time, so it seems reasonable to blame monetary policy for everything that’s gone wrong.

But banks are an important part of what humans do. Credit has been part of human society since we started recording documents. Some of the first written documents we have are tallies of credits and debits. We humans like banks and credit, even if banks are not net profitable over their entire history.

It seems dangerous to me to ignore the ability of the private sector to create savings out of nothing.

(P.S. I frequently have a “problem” with Steve W’s posts and comments. Every line seems to demand a book length exploration! )

Comments

  1. On a somewhat related point, creating money and government bonds doesn’t require the government to run a (net) deficit, since the private sector can be “in debt” to the government in the same way that the business sector is “in debt” to the household sector.

    That is, the government can “save” money into the economy (i.e. acquire private financial assets) as well as “spend” money into the economy (i.e. acquire goods and services).

  2. geerussell says:

    “It can easily be a private company or bank which runs this deficit, as long as it’s willing and able to do so, and as long as the rest of the world accepts the “NFA” created.”

    If it’s not at the top of the liability pyramid, doesn’t it still face the same solvency and convertibility constraints as any other currency user? That is, if it runs deficits it will go broke.

  3. Dan Kervick says:

    Yes, households are not the whole private sector. They are only part of the private sector. The private sector can be in surplus even if the non-household part of the private sector is in deficit.

    In the system as currently constituted the endogenous bank-driven processes of money creation involve private banks creating liabilities for government money, in a way that is not constrained by their prior reserves. Ultimately, if the liabilities are validated and not cancelled, the government has to supply the money whose creation was initiated by the private sector lender.

    We can create mathematical models of free-banking systems that are purely endogenous, with one or more private banks creating their own money, and other banks creating additional liabilities for those private monies. But that is not the system we actually live under.

    A lot of this discussion is moot, however, because the issue is not what sort of operations and causal effects are possible in principle, but what kinds of effects we can expect from policy decisions taken in the economic environment we are actually experiencing. The fact that banks can in one way our another – whether as chartered subsidiaries of the government’s monetary systems or through free concoctions of purely private money – supply the financial resources needed for a booming economy means nothing if the reason the economy is not booming is due to an inadequate demand for credit, consumption and productive investment. The problem with our economy does not lie on the financial supply side.

    • I totally agree Dan, I was just hoping to set out some basic ideas on money. We need government NFA, we need government.

      This is great, btw;

      “The fact that banks can in one way our another – whether as chartered subsidiaries of the government’s monetary systems or through free concoctions of purely private money – supply the financial resources needed for a booming economy means nothing if the reason the economy is not booming is due to an inadequate demand for credit, consumption and productive investment. The problem with our economy does not lie on the financial supply side.”

      Banks and such are good at getting credit going (and creating control frauds), but they aren’t as good at keeping demand high.

      I’ve been considering Mosler’s SCE and the Triple balance equation, then keep in mind MMR’s focus on trust and freedom as essential elements, and then remember Godley’s theorem too.

      We need someone credible to go into debt to create incentives for people to manufacture growth. This credibility can’t always be the private sector due to necessary privacy, and it can’t always be the government because the government is “semi-communal” property.

      Either extreme results in the lack of trust necessary to run credible deficits.

      And that moving part you mention “chartered subsidaries” is a big deal. I don’t even want to get started – it’s a series of posts not just a comment!

  4. This relates to an understanding I came to thanks (as so often) to JKH. It’s about the little word “with.”

    When you talk about a person or sector’s net financial asset position, it means nothing unless you’re talking about their position *with* some other individual(s) or sector(s). All money, and all financial assets, are credits; put roughly, who holds the debits?

    MMT likes to point to the private sector’s NFA position, but the words they often leave out are “with the government and the international sector.” Saying that they’re in identity *with* cumulative deficits/trade imbalances is basically a tautology.

    And, since the private sector is consolidated in that view (all the claims among households, banks, and firms are netted out), the statement says nothing about the household sector’s NFA (“savings”) position with firms and banks. And it tells us nothing about the firm and banking sectors’ NFA positions with government.

    In the context of Steve’s explanation, as JKH has explained, the crucial nexus of household saving is with firms. When households work and receive equity claims in return, their NFA position *with firms* increases. (The firms hold the debt in the form of RHS equity.)

    Since this all nets out in the accounting consolidation of the private sector, it has no impact on the private sector’s NFA position with government.

    I think that makes sense and adds up. ??

    • Correction. I said “(The firms hold the debt in the form of RHS equity.)”

      Should have said “The firms are their debtors, as represented on the firms’ balance sheets by RHS equity.”

    • It’s a crucial point- we can and do increase our wealth without the government involved.

      It’s not the same as saying we dont’ want the government involved, or it’s not about the size of the government.

      It’s a simple recognition of the fact we can get wealthier solely due to private sector concerns.

      There is no doubt having a robust government sector makes the world wealthier on average, and even less doubt people like and want government and create them as soon as even a few people get together.

      But they also truck and barter, trade, create businesses, and interact entirely outside of the realm of government. Ignoring this side of human interaction isn’t healthy.

      • Cullen Roche says:

        Yes! Which is why I always like to say that govt should be viewed as a partner with incredible powers that CAN be leveraged in productive ways. Govt isn’t always bad. It’s only bad when its users use it badly.

    • Yeah the whole point of non-government sector NFAs is that they are NFAs because the government holds the liability or debt. Maybe you missed that part of the MMT primer.

      • a liability is a liability is a liability, except when it’s a govt liability established as an axiomatic asset by law.

  5. Great comments. I love where MMR is going with this. The business acumen of its developers is showing.

    This seems to all mesh with Cullen’s point about production. Production is the cornerstone of everything. As he says, resources precede taxation and money. Those things just accommodate production.

    I think we can blend all of this into S = I + (S-I) to show that I is the center of everything and that the government just accommodates I. The government has to INITIALLY supply the savings to make I possible in the state’s unit of account, but the resources still preceded the spending. The more important point is that I can expand based on private savings and the household financial position can expand without deficits.

    Sound right?

  6. In Steve W.’s comments quoted here he seems to show how if someone does work for a firm, then that firm will reward that person with a payment (a transfer of balance sheet financial net worth). Pretty standard stuff.

    Then the firm issues new shares with that worker as the buyer of those shares. That’s just a financial/market operation — neither the individual nor the firm’s net worth changes in this step, though the firm’s balance sheet expands as it “gets back” the “money” asset (the payment made for the work), but with a new offsetting liability (additional equity). Effectively the initial payment for work had reduced the net worth of existing share holders, however you account for the subsequent financial operation of new share issuance.

    Steve’s combination of those two steps into one makes the matter more confusing than it need be, IMO.

    The point is a firm wouldn’t give the transfer in net worth to the worker unless the firm projected that doing so would be a net benefit to the firm’s future balance sheet. This happens all the time at the micro level, but doesn’t represent the macro level, where at the same time other firms are reaping the rewards (via increased revenues and profits) of their past payments to workers.

    “Godley’s theorem tells us we need some sector to run a deficit, but it doesn’t really have to be the government sector. It can easily be a private company or bank which runs this deficit, as long as it’s willing and able to do so, and as long as the rest of the world accepts the “NFA” created.”

    As I see it, the whole point of the MMT emphasis here is that the government sector is the ONLY entity willing to consistently reduce its balance sheet net worth (i.e., potentially going more and more negative) in order to serve “public purpose” of meeting the economy at large’s needs and net savings desires. Yes, strictly speaking the government net worth might be positive if you count all its tangible assets, and especially if you count fuzzy nonfinancial things like the happiness of its populace, but you don’t find any attempt to add up the nonfinancial asset side of the government balance sheet in any US statistical publications, AFAIK, nor mechanisms to ensure assets exceed liabilities.

    Let’s say the US government decides to balance its budget next week, indexing all spending to tax receipts in real time and massively cutting safety net spending no matter what the grim consequences.

    Sure, Warren Buffet COULD in theory then declare himself the new benefactor of humanity (in the US) and create a new supplemental safety net, including an infinite willingness to transfer net worth to companies and households in the economy at large in satisfaction of their net savings desires. His fortune would vanish rapidly and his net worth would go more and more negative. He would need to own a bank that could be a buyer of last resort for his debt in order to ensure the liquidity of his liabilities so solvency would never be an issue. (Assuming legal and regulatory bank oversight allowed the bank to keep operating, which I realize is a stretch). Yes, he would need to convince the nation that he and the heirs of his negative-net-worth estate would never renege on this commitment, otherwise there would be a run on his liabilities. So there are lots of ways it could fail in reality, but that’s not the point.

    I think MMT’s point about government as provider of net savings is simply that in the context of the institutional structure we live with it’s the only entity ostensibly dedicated to public purpose at the macro level (and capable of acting as such) rather than maximizing its own measurable balance sheet net worth.

    • I ended with: “…rather than maximizing its own measurable balance sheet net worth”

      I wasn’t precise enough here. Clearly households that give to charity aren’t maximizing balance sheet net worth. But they do generally avoid going negative (less assets than liabilities), which was the larger point emphasized previously.

    • Steve W’s point is really important though. The stock of a firm is a liability of the firm and an asset of the owner and could have been financed entirely out of savings. This nets to zero, but can expand over time based on what its perceived value is. More importantly, it can expand from NOTHING.

      If I buy a cow out of my savings and generate 10 gallons of milk the “value” of my cow has increased. If I package this cow as “equity” I can sell stakes in that cow and pay “dividends” in the form of milk. If I breed the cow (maybe through a bank loan by purchase of a new cow) you can see how this process could expand infinitely regardless of what the government does. This is the power of production.

      I have a liability in the form of equity and the shareholders have an asset, but we’re all better off. There’s no such thing as me settling this position with my shareholders since I want the cash flow from cow profits to continue expanding and my shareholders want the dividends.

      • Sorry, the firm’s outstanding liability is obviously not “equity”.

      • I think I agree with everything in your comment. Yes, private sector production is important. Yes, companies can create value and nonfinancial assets that can be part of equity claims by households, and yes and production matters.

        Apologies if I misunderstood Steve W’s point, as I have not read the source thread, so maybe I shouldn’t have commented. But he seemed to be making a macro argument (government isn’t necessarily the only provider of NFAs) based on micro foundations (individual companies can provide NFAs to households if they choose).

        The tangible stuff matters, but for every $X of total GDP that includes benefits of productive cows and such, households and businesses attempt to hold $y of savings in the form of strictly financial assets. The relationship between x and y can vary but most of the time they would rise together. On net these (y) have to be someone’s liabilities, and generally individual firms don’t volunteer to serve their country this way at the macro level.

    • I think you are confusing net worth with MMT “net saving”. The MMT’ “net saving” flow is really (something like), “nominal saving net of private investment”–IOW, the part of the change to net worth that doesn’t come from private investment.

      The private sector can and does hold savings in the form of claims on tangible capital. But by definition, it cannot hold savings net of claims on tangible capital in the form of claims on tangible capital.

    • “As I see it, the whole point of the MMT emphasis here is that the government sector is the ONLY entity willing to consistently reduce its balance sheet net worth (i.e., potentially going more and more negative) in order to serve “public purpose” of meeting the economy at large’s needs and net savings desires.”

      Yeah I think this is crucial, and I think the mechanism is this: politicans (fiscal) and monetary authorities are forced, over the long run, to monetarily accomodate the increased savings generated by households/firms through production. They are forced to do so by economic downturns. The people get squeezed, they squeeze the politicians (and the monetary authorities have to give *some* nod to their dual mandate), and…

      In this notion it’s the production that forces the fiscal/monetary accommodation.

      • In this notion the exact mechanisms of money creation — simple deficit spending or byzantine multi-institutional machinations — is almost immaterial (at least long term); the necessary money will get coerced out of government someway, somehow.

        • The money only needs to be “coerced” to meet the settlement of payments. For instance, most wealthy people in this country are “asset rich and cash poor”. They own a home or a business, but there’s no such thing as “settling” all of these positions at once. They get settled and transferred on occasion (especially in a downturn when cash flows tank), but there’s not such thing as netting the positions.

          • Cullen Roche says:

            A great example of this is my stupid website. Pragcap is, for whatever silly reason, worth a decent amount of money. And what is it? It’s just a void. A void in the internet with words scribbled on it. I started it out of my own savings with a few hundreds bucks. The rest is investing my time and effort into it. But people attribute value to it (by visiting, presumably because it adds value to their own lives in some way) and it generates a certain cash flow as a result. To me, this adds to my net worth. It came from where? NOTHING. It’s an unrealized gain and it’s not real savings to me (yet), but I could really sell the website for $X and increase my savings if I wanted to. I didn’t need the government to spend more money to make my website worth $X. I like the comment about being asset rich and cash poor because it brings the point home for a lot of people. So as value grows the government needs to accommodate this to settle payments where they occur. But that’s secondary to the production.

            • SRW made this point to me in email some time ago. NFAs (between whatever sectors) don’t represent anywhere near the value of existing real assets. Many haven’t been monetized.

              In my words, maybe misrepresenting his thinking: in order for them the be monetized there needs to be enough money. That must eventually come from government.

              So how’s this: People work and invest and create real goods. They want to monetize those goods by selling equity claims (for instance, selling all of or some claim on receipts from pragcap). If the quantity of unmonetized real goods is large but the quantity of money is small, they will face stiffer competition relative to other real goods — the price they can get for pragcap will be less.

              If people see that the pragcaps of this world aren’t selling for much, they’ll be less likely to create a new pragcap.

              So the quantity of money affects incentives to invest and produce.

              ??

              • Cullen Roche says:

                Yeah, complex relationship there, huh? I like to start with the idea that resources precede government. Additionally, we create state money to mobilize resources (both in the public and pvt domain) in an efficient and acceptable manner that is in-line with our goals as a society. We create the infrastructure of this system to help streamline the process (laws, regulations, taxes, structures, payments system, etc). In this regard, we can think of the govt as guard rails that keep us from going off the side of the road. But they aren’t the driving force. They are an accommodating force, which, if used properly, can make the cars operate MUCH more efficiently.

                The way the govt is used has an enormous impact on all of this. But in the end we have to go back to the idea that resources precede government and that I is not driven by (G-T), but rather is the backbone of S. But this understanding shouldn’t neglect the reality that govt, if used wisely, can contribute in VERY positive ways to I & S. So I like to view govt as a partner of ours which should be embraced, but used wisely. In the end, I always come back to the idea that living standards are best improved by giving us more time and we obtain more time ultimately by becoming more productive. So you can think of I as being the centerpiece upon which better living standards are constructed. Everything else conforms to how productive/useful I ends up being….

                Not sure if I’ve got all that right, but I think I am headed in the right direction….Thoughts?

                • Again, I have my notions, but in pursuit of words that explain this well to the common (business)person like you and me: in what sense is investment the “backbone” of saving? Certainly it (ultimately) constitutes the *bulk* of household saving, $50 out of $60 trillion by JKH’s reckenin’

                  • Cullen Roche says:

                    Investment is the centerpiece upon which we build real wealth. This blends beautifully with the reality that money is not necessarily the same thing as wealth….

        • lol – exactly. I really think the economy “demands” money to be created! This is what happened in the late 1990s with the internet. There wasn’t enough money, the internet needed money, they created money out of internet stocks, the credibility got diluted through increased supply, and the value of that script crashed.

          Same thing in real estate.

          this is all related to Nick Rowe’s demand for bubbles and my take that individual sectors will demand a bubble. When the demand gets high enough, it gets met even at very high prices.

          • Michael,

            This is all really interesting… does this mean that the gov’t should have accomidated those bubbles by more deficit spending?

            Part of me wonders whether these bubbles were 1/2 bubble, and 1/2 telling our economy “yes, you can grow…. we need more money though… great things can be done… please just make sure we have enough net financial assets to be the lubrication our economy needs to run.”

            Thanks much.

            • @Dan: “please just make sure we have enough net financial assets to be the lubrication our economy needs to run.”

              I’ve been wondering if a sufficient stock of govt money might serve a function similar to deposit reserves at the fed — the buffer that allows everything to clear. Insufficient buffer means things lock up, deals don’t happen, because people aren’t sure their deals will clear (promptly or at all). Back to the trust thing?

              This is very different from either JKH’s or Mosler’s leverage thinking, not sure how they might be reconciled.

              Related: As new real goods are produced (i.e. pragcap), their owners want to monetize them. Is that why things lock up — deals don’t happen — in absence of sufficient govt money?

              This is not saying that’s *where* things lock up; it could happen elsewhere in the ecosystem. But it could be the ultimate cause?

              • I think there is something to this line of thinking. Liquidity seems like a fetish but it is a reasonable response to a poor bid/ask spread. You can be right in the investment but still lose money if you can’t sell it.

                I do think different parts of the economy demands bubbles, and it’s due to each sector having a different return compared to their costs. I’ll have more on this at other times, but there is enough already going on here we don’t need to mix it up even more.

      • George Melillo says:

        I’ll toss out my favorite way of conceptualizing this here, since it is as good a place as any.

        I understand NFA as representing the total monetary value of dollar claims that the private sector wants to hold *in excess* of what is required to monetize all real production from inception to the end of this accounting period. And I don’t think it matters whether that real production is consumed or saved. And I don’t think this business about being paid in equity claims on a firm matters much to this understanding (but I could be wrong about both of those).

        Armed with this point of view I can now parse the difference between “real saving” and “net financial asset saving”. The former is the act of not consuming all that is produced in this accounting period. This residual, if monetized, will show up on the balance sheet of the private sector as increasing its net worth. So in this sense the government is not required to provide “net savings”. But the latter (the NFA case) is the stockpiling of claims on nothing – the creation of more dollar claims than is needed to monetize everything we want to monetize, whether consumed or saved. And government is the only actor in position to do *that*.

        From this point of view, most of the confusion that people have with MMT is the difficulty understanding the idea that the deficit position of the government represents its creation of claims on nothing. Dollars are supposed to have their “value” whether they are dollars denominating credit relations between private sector agents, or between private sector agents and government. We twist in the wind trying to figure out what fractional claim on the total production of the United States a dollar represents. It’s a mistake, and it’s motivated by the fact that we denominate two qualitatively different kinds of credit relations in the same unit of account.

        To return to the main story: it’s our propensity in the aggregate to want to hold claims on nothing that requires the government (as the sole provider of claims on nothing) to run consistent deficits.

        Re-stating the distinction, for my benefit as much as anyone’s: When the private sector runs a net positive position with the government sector those claims that it stockpiles are *potential* claims on real assets vis-a-vis other actors in the private sector, but not claims on real assets vis-a-vis the state. Private sector agents might be interested in using those dollars to denominate the credit relations created when people exchange stuff, but the state will not extinguish its credit relations with stuff, only in the offsetting of a tax liability. And yet those qualitatively different forms of credit are denominated in the same “dollars.”

        It’s this delightful double function of dollars, this ambiguity, that makes them work their magic. The private sector wants to stockpile potential claims on real assets in excess of the real assets monetized in this accounting period. So the government steps in as the counter-party, providing empty dollar claims to the private sector. The private sector can then feel good about holding those potential dollar claims on real private sector production and go about its business in peace. It will (probably) use some of those claims in the next accounting period to monetize the additional real assets produced as productivity rises, but it will then again want to hold a little extra stockpile of potential claims.

        We rinse and repeat until the government’s lack of understanding of what it’s doing compels it to try to “clean up its act” and reduce it’s net deficit position. This squeezes the private sector, which hopefully forces government back on to the straight and narrow road of permanent profligacy.

        Or maybe this is all smoke and wind…

        • This story makes sense to me

        • Dan Kervick says:

          George, why are the additional dollars that the government needs to supply only those that the private sector wants to “hold” or “stockpile”? Even if every dollar not used to discharge a tax obligation were being used to transact purchases in the immediate term, whether for consumption or capital goods, the total volume of such transactions might be increasing as the total output of goods and services is increasing, so the private sector demand for dollars would be rising.

          I also am unsure about the idea that the value of a dollar, or the claim it represents, depends on the denomination of credit relations, and that there are “excess” dollars representing a claim on nothing. Every dollar in existence at any time represents an equal claim on the total volume of goods and services available for sale at that time – except perhaps if there are legal restrictions preventing particular people from purchasing particular goods and services.

          • George, Dan, not much time here but I think it has to do with the specificity of claims. If you hold dollars you hold claims against everyone else who accepts dollars. Credit. But you can’t force any specific individual to honor that claim in return for a specific thing. (Except govt which has to sell you tax satisfaction.) If you give me a mortgage, you have an enforceable claim against me specifically, for a specific thing: my house (or in lieu, a stream of payments). SRW wrote about this but I don’t have time to find it…

          • George Melillo says:

            My naive answer is this: if the government doesn’t supply dollars equivalent to what the private sector wants to hoard, we get deflation. It isn’t compelled (directly) to provide them, though it may be compelled by real world happenings to provide them (eventually).

            I will restate my simple minded idea: the credit relations that we have to the state are fundamentally different from the credit relations that we have to other private actors in the economy. There are a wide variety of liabilities that we can create to each other, some of which we monetize. For instance, we have “liabilities” of a sort to our friends and family, for their support and kindness, but we don’t monetize them. We don’t use the state’s unit of account to render them abstract, quantifiable, and transferable. But in many of our economic relations we do just that: when I provide a service as a musician, for example, I put a dollar value on that, thus monetizing the liability. The change in the respective “balance sheets” of myself and my audience represents the adjustments that result from this new indebtedness. We each carry a running tally of our credits and debits as we provide (and take) things of value from one another. Of course, some of my liabilities to strangers aren’t monetized (no one fines me when I forget to say “thank you”). And some of our mutual obligations with the state (that it use its power to provision resources for public purpose and that I grant it a measure of gratitude and loyalty for doing so) are also not monetized. We enforce those obligations not through economic acts, but through political ones (voting, revolting, shaming the disloyal, etc.)

            And it is not just those obligations that differ from private sector obligations. The accumulation of a positive dollar balance with the state does not empower us to “buy things”, the way my accumulating a positive balance with respect to the rest of the private sector empowers me to “buy things.” All the private sector can do with that positive position is extinguish a tax liability. There is no other way to “cash them in.” A “claim on nothing” is a dollar claim we don’t want to use (yet) for the purposes of economic transaction. I think Steve from Interfluidity once posted at Asymptosis a conceptualization whereby the net claims we have on the state represent a claim on the state’s ability to coercively seize stuff and give it to us. I think that’s a mistake. Our positive balance with the state ain’t worth a heck of a lot – and certainly not that much.

            I don’t know the dollar value of claims we want to stockpile. That changes with circumstance. And I don’t know why we want to stockpile them, exactly. But (I think) I know that if we did not want to hold some dollar claims in reserve, the government could not run that deficit without it being inflationary.

            I’ll leave it to the others, capable of producing words upon words of comments faster than I can read them(!), to sort out the particulars. I just hope I see the forest for the trees. Either I’m right, and much of this discussion is the use of impressive economic brainpower to misconceive something simple. Or I am wrong, and all of this is going over my head because it should!

        • George,

          I followed 90% of that, but wow did that work for me. THANK YOU!

          It makes so much sense when thought of in some of the ways you describe.

    • Payments for work done for an employer are usually called “wages”.
      The debt is created by the worker literally doing his job. The employer then clears the debt by paying the wages owed.

    • Dan Kervick says:

      I think MMT’s point about government as provider of net savings is simply that in the context of the institutional structure we live with it’s the only entity ostensibly dedicated to public purpose at the macro level (and capable of acting as such) rather than maximizing its own measurable balance sheet net worth.

      hbl, I think there is something more going on than this.

      The financial balance sheet of the government, and the whole idea that the unified government has a financial net worth, is a mere bookkeeping convention or artifice with no significant correspondence to economic reality. The public sector does contain stocks of real assets, and those stocks can be either augmented or depleted by government operations and transactions. The same is true of the government’s stocks of financial assets denominated in foreign currencies. But there is no real economic significance to the nominal attribution to the government of a stock of financial assets denominated in its own currency.

      In my essay “Public Money for Public Purpose,” I argued that there were three equally acceptable conventions one could apply to the unified government account:

      The infinite account model: The government possesses an infinite quantity of the public currency. Money flows into and out of the government sector, but since the amount of currency in the government account is always infinite, these inflows and outflows do not alter the amount of currency in the government account.

      The empty account model: The government possesses a zero amount of the public currency. Money does not flow into or out of the government sector. Rather the government is engaged in ongoing operations that either extinguish or augment the amount of money in non-government sector accounts.

      The quotidian account model: The government possesses some arbitrary finite amount of the public money. Money flows into and out of this account from the non-government sectors, augmenting and diminishing the quantity of money it the government’s account. But the government is also capable of increasing or decreasing the amount of money in its account by any arbitrary amount at any time.

      I argued that the choice of which model to use is entirely arbitrary, and that we can understand the substantive economic effects of government financial operations using any of the three models. The only thing that has a real economic import are the changes that take place on the non-government balance sheets. These other entities do not possess the privilege of arbitrarily and unilaterally augmenting or diminishing the quantity of the public money that is in their accounts. Thus, to the extent that that the public’s money accepted in the real world to finance consumption and production, these entities possess financing constraints in that money that are lessened or tightened as their accounts receive or lose some quantity of that money.

      Governments prefer to use the quotidian account model because it is the model most comforting and intelligible for a public accustomed to working with private sector balance sheets with ordinary budget constraints, and helps communicate government operations and intentions with the least confusion. But those constraints are fundamentally inapplicable to the unified government sector, and if a government decided to shift to the empty account model or infinite account model, everything important could transpire just as before.

      So it’s not just that the government, animated by public purpose, is the only entity willing to run down its financial stocks for the sake of the greater good. That sounds too heroic, as though the government was sacrificing some of its financial wealth for others. The point is that the government, as the issuer of the government currency and not the mere user of a currency created by some other entity, is the entity within the system for which the concept of financial stocks is of insignificant application.

      That’s not to say that the government cannot make bad decisions in its financial transaction. But the goodness or badness of these decisions depends only on how they affect other balance sheets, and the value of the currency.

      BTW, none of the above depends on the theory of tax-driven money or any other theory of how demand is generated for the government’s money, and how it acquires its exchange value in the real economy. It is only based on the idea that for any government run monetary system, where the government reserves for itself the privilege of creating or extinguishing base money, however that system was established, the monetary stocks attributed to the currency issuer are economically insignificant.

      • Dan,

        I think you’re right that “there is something more going on…” and “it’s not just that the government, animated by public purpose, is the only entity willing to run down its financial stocks for the sake of the greater good.”

        If I were to augment my initial comment, it would be that I left some things out from the example of the Warren Buffet corporate titan transformed by his own volition into a pseudo-government. The example wasn’t meant to be realistic because I was trying to make the point that this sort of thing simply would not happen in the real world in order to help illustrate why I thought government was “special” in the savings flow arena, but that may have left the wrong impression and been incomplete.

        The qualifiers around the powers Buffet’s bank would need to make this setup work were insufficient. It’s not just having the legal and regulatory authority to keep operating, the bank would need to have the FULL blessing (non-revokable and unlimited access to reserves) of the currency issuer in order to have the trust of the public using the currency, which would essentially make it like a part of the currency-issuing government.

        At least that’s the way it’s occurring to me now, and I think it’s consistent with at least a subset of your comment… but I do think your comment adds a useful and broader perspective than I shared, thanks.

        I think the focus of my comment was regarding my disagreement with the macro-level (versus micro-level) applicability of the quoted Steve W. statements related to “claiming “saving” is impossible as a matter of accounting without a government deficit is a bait and switch”. I read the context as focused on net financial saving, which may have been incorrect if he actually meant either just “saving” or “accumulation of real assets”.

  7. “The money only needs to be “coerced” to meet the settlement of payments. … They get settled and transferred on occasion (especially in a downturn when cash flows tank), but there’s not such thing as netting the positions.”

    Right I think we’re saying the same thing. Since those settlement problems are generally made manifest by banks having to write down their loan assets, the solution is often to inject money into banks. But does this mean that the problem could have been avoided by injecting money via deficit spending, earlier? (And by this construction — insufficient supply of money caused the problem — without the danger of spiraling inflation?)

    • “Since those settlement problems are generally made manifest by banks having to write down their loan assets, the solution is often to inject money into banks….”

      Of course it’d be simpler to cut the capital requirement; cutting it from, say, 8% to 4% has the same monetary impact as injecting an additional $1.5 trillion (i.e. equivalent to total bank capital) into the banking system– except Congress doesn’t have to appropriate any money (the TARP bailout, at the time and in retrospect, makes no sense).

  8. I wonder if someone with an accounting background can clarify something for me. Would it be accurate to say the sector balances equation should read:

    S + (X-M) + (G-T) = 0, where S = I + (S-I)?

    • S = I + (G – T) + (X – M) always

      (S – I) = (G – T) + (X – M) always (linear translation from above)

      S = I + (S – I) always
      (a simple rearrangement of terms from first
      principles; you can also derive it from the first
      two above)

      • BTW, a verbal explanation of the first one above:

        S = I + (G – T) + (X – M):

        Private sector saving is enough to fund investment plus the government deficit plus the capital account deficit

        (capital account deficit = current account surplus)

        or, private sector saving is enough to fund investment plus private sector NFA with the government plus private sector NFA with the rest of the world

        (using the word “with” as Steve R. noted elsewhere here)

        • Cullen Roche says:

          I think you said it best the other day when you mentioned that the “backbone” of S is I. I am still trying to think of a way to communicate this to the layperson. It’s a huge point. A total game changer in the emphasis and our goals as a society….

      • I think the following is illuminating:

        I = S + (T – G) + (M – X)

        In words, aggregate investment can be financed by private saving, public saving and foreign saving. You can also think of the first two terms on the RHS as being equal to the change in national net assets, given I.

        • Very nice. There is a “demand” for each of these little nubs. We can’t go broke, but we can debase anyone of them, too.

        • Right, V.

          That’s a nice way to show it, especially if you’re thinking naturally in terms of a shortage of private sector saving, with the difference made up by a government surplus and a foreign surplus, in order to fund investment in total. Some of the variations I noted may be more natural when thinking about a surplus of private sector saving that can fund investment as well as a government deficit and a foreign deficit. Lots of permutations though.

    • maybe I didn’t answer your question directly

      no

      S + (X-M) + (G-T) = 0 is not correct

      would have to be:

      (I – S) + (X – M) + (G – T) = 0

      is correct, but not a particularly illuminating expression, IMO

      • Cullen Roche says:

        I don’t know about you, but the whole S = I + (S-I) point is a total game changer for me. Once you get it you rearrange the entire emphasis from govt to private sector (or at least a much more balanced view). Govt becomes a secondary piece of the puzzle! Accommodative as some have said…

      • Thanks. Nice way of thinking about it. And it shows that the pie can grow without the government’s help. As some people have pointed out, it looks like MMT presents this in a way to emphasize the government’s power to justify a political platform. Your accounting cuts through their BS.

        • I also think this way of presenting it helps to reinforce the ideas of freedom and trust in government. Any of these sectors can continue to run deficits/surpluses as long as there is sufficient trust in that sector.

          They each have different agendas, so the trust each sector manifests is subtly but materially different. The trust in government to set the script/unit of account and providing some amount of NFA doesn’t mean the govt should be the sole provider of NFA, and this is what we see demanded by real people in the real world over centuries and centuries of economic life.

          Cullens point about the people giving the power to the government is 100% relevant here. It’s pretty clear a government based on freedom has a built in trust factor other governments do not, which allows them to issue more (and higher quality) NFA to help the private sector if needed.

      • It’s nice written this way.

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

        Positive signs describe injections to demand and negatives leakages.

  9. Great discussion, all.

    Once you get into the idea of thinking about money and money-like issuances, it’s hard to stop. For me, a big part of this has to do with Tom H’s observation about MMT and how it implies issuing government NFA will cause the private sector to not need to use as much credit.

    It’s a type of crowding out, perhaps a beneficial kind, driving the MMT idea we don’t have enough government issued NFA in the economy. And it’s perhaps right – it seems like the world demands these GNFA.

    JKH makes the note the (S-I) part is a kind of leverage. More GNFA causes the leverage ratio to fall. Of course, leverage is awesome if used correctly and horrible if it gets too high.

    hbl, I fully agree – I wasn’t trying to claim “We dont’ need govt to issue NFA”, only pointing out there are other paths to get there. I am a full-throated supporter of the government issuing NFA, and right now, issuing a ton more NFA.

    This is why I brought up trust there – because right now, we have a lack of trust of non-government NFA, combined with a high demand for NFA of high quality. It’s a recipe for disaster.

    “I think MMT’s point about government as provider of net savings is simply that in the context of the institutional structure we live with it’s the only entity ostensibly dedicated to public purpose at the macro level (and capable of acting as such) rather than maximizing its own measurable balance sheet net worth.”

    This is truly awesome – it’s part of the reason we’re MMR and not MMT any more. The only way government can credibly provide that backstop is if the government is largely trusted to be “good”. You don’t have that everywhere, and coercion alone can’t explain it.

    I had written up something along these lines “ostensibly dedicated to public purpose at the macro level (and capable of acting as such) rather than maximizing its own measurable balance sheet net worth.” but it started getting really muddy.

    But I fully agree. This is an important public service – acting in a way that’s not directly profit maximizing for the economy helps those sectors which are profit maximizing. Being a big, indifferent provider with different goals and ambitions insures the economy against risks the private sector cannot or will not afford to insure against.

    My take on govt is that it’s primary function is to insure against the uninsurable. As we get richer, what the govt can afford to cover gets larger, and we head up Maslow’s hierarchy of needs as we can afford it.

    I think I have an email to Cullen and beowulf on this idea – I’ll see if I can dig it out.

    • “My take on govt is that it’s primary function is to insure against the uninsurable. As we get richer, what the govt can afford to cover gets larger, and we head up Maslow’s hierarchy of needs as we can afford it. ”

      Right, its like Krugman always says, Uncle Sam is an insurance company with an army.

    • geerussell says:

      “The only way government can credibly provide that backstop is if the government is largely trusted to be “good”. You don’t have that everywhere, and coercion alone can’t explain it.”

      Good government is always a preference but it’s not sufficient as an explanation. Government can be that backstop because it’s the only entity that isn’t solvency constrained.

  10. Cullen,

    “I think you said it best the other day when you mentioned that the “backbone” of S is I. I am still trying to think of a way to communicate this to the layperson. It’s a huge point. A total game changer in the emphasis and our goals as a society….”

    I’ve probably said many different ways – I’ve gone through it so many times around the blogosphere.

    Try this:

    S = I + (S – I) always

    Take the current account out of the picture for a moment; i.e. assumed it’s balanced.

    Moreover, assume the cumulative current account is perfectly in balance and the “net international investment position” is net zero.

    Now consider the government’s role

    The government provides NFA injections through budget deficits

    But the budget deficit = (S – I), when the current account is balanced

    So S = I + budget deficit (in this case)

    And what that says is that for a given I, the government is leveraging up the private sector’s saving by running a deficit and injecting NFA.

    When you translate that from flows to stocks (cumulative flows), it says the government is leveraging up the existing private sector equity base (savingS required to support outstanding stock of cumulative “I”), by adding more private sector equity created by the government’s NFA injections.

    So there you have the idea that the government is performing a useful leverage function in augmenting the existing private sector equity base – a base that supports a given level of cumulative “I” as an outstanding stock.

    And you just have to consider household net worth to get a rough feel for the proportionate dollars involved here.

    The total is about $ 60 trillion (I tend to round to the nearest $ 10 trillion when making points of concept).

    :)

    The government debt (reserves, currency, and bonds, really), net of internally held stuff like social security, is about $ 10 trillion (= NFA of non government with government).

    Because we’ve assumed the cumulative current account is in balance, the household sector’s NFA balance with the government is $ 10 trillion (some of that could be indirect through household financial claims on businesses that hold NFA with government).

    The rest of the household sector’s net worth is $ 50 trillion, and that consists of a combination of directly held physical investment (e.g. real estate) and financial claims on what is in effect the ultimate physical investment held by the business sector.

    So that says that the value of cumulative “I” is $ 50 trillion as per that representation.

    So there you have $ 10 trillion leveraging $ 50 trillion into $ 60 trillion.

    I.e. the government is issuing $ 10 trillion in debt (reserves, currency, and bonds really, but analogous to debt) in order to leverage $ 50 trillion of private sector equity into $ 60 trillion.

    That’s the way I think about it.

    Adding in current account complications is a relatively minor adjustment from there.

    Now, the deficit dynamic I described above is standard MMT stuff, but their explanation tends to obscure this sort of expression directly involving “I”.

    Moreover, as I said earlier, Mosler has a currency model in which he views NFA as the cash market and horizontal money as the futures market, with the horizontal leveraging the vertical. That’s opposite to the way I view it. His version positions NFA as the thing being leveraged, instead of vice versa as mine. I think my version puts the whole thing on a parallel plane with corporate sector equity as the thing that is leveraged in that case and in the usual meaning of leverage.

    I think I’m dumping my best ideas on you. But it’s for a good cause.

    :)

    (I also went through most of this with Steve Keen almost 3 years ago.)

    • Cullen Roche says:

      JKH,

      This is too good. Thanks for laying it out there so plainly. I approach this all from the perspective of a small business owner so I am an example of someone who is (potentially) asset rich and cash poor. If I wanted to cash out I could be cash rich in short order (hopefully at least!). I consider my businesses real savings to me even though they’re just incremental monthly cash flows. While the gains aren’t realized they are very real in my world and they’re the backbone of my life’s work, efforts, aspirations, goals, etc.

      I love the way you show that the govt leverages the pvt sector’s resources because it’s a very personal thing to me having taken nothing and built something. I am personally surprised that Warren doesn’t see it similarly since he’s built something much larger than I have. Maybe he just didn’t have a JKH to show him the accounting behind it all! In fact, the summation equation is so misleading that it explains much of the MMT perspective and how it’s plugged in to validate the state theory and the JG conclusion….

      Anyhow, I am rambling. I need to digest this all a bit more and expand on it in a post that allows the layperson to more easily connect the dots on all of this. There’s a hugely important message in there about money, real wealth and the role of govt in our lives. So thanks for clarifying so much of this.

      Cullen

      PS – I do hope at some point you’ll let me attribute much of this to you. You’ve been too influential not to get credit (if that matters to you in the first place?!)….

      • Hi CR-
        Wanted to congratulate u guys. I’m doing my best to keep up with the dialogue.
        I appreciate so much of where your heart is on all this stuff. I’ll be reading from a far. But with u all the way. Still getting my MMR legs underneath me…after reading JKH I can tell it will be fun when this stuff clicks for me. But for now I’ll be learning from the readers comments. Give Beowulf my best:-)

    • JKH:

      “savingS required to support outstanding stock of cumulative “I”

      “private sector equity base – a base that supports a given level of cumulative “I” as an outstanding stock.”

      I have some notions, but would like to hear your words: in what sense is that private sector equity base “required to support” the stock of fixed investments?

    • Dan Kervick says:

      JKH, although I don’t think I disagree with this idea of I being the backbone of S, something hangs me up here about whether this is a proper use of the term “leverage”. Although it is customary to account for money as a “liability” of the government, there really is a difference between the private sector borrowing money from the government and the private sector simply receiving money from the government.

      So when you say, “reserves, currency, and bonds really, but analogous to debt”, I think that might be confounding some things that ought to be kept conceptually separate.

      There are different mechanisms by which government NFAs get introduced into the economy. On the one hand, we have banks creating liabilities for the government’s base money in the process of creating loans. These liabilities are exchanged among people in the real economy and in the process finance the creation of additional real economic value. So long as things are running smoothly, the government continually validates the creation of additional financial assets by supplying the additional injections of base money that secure the system against over-leverage. So the quantity of broad financial assets, base monetary assets and real non-financial assets creep up in tandem. But the leveraging occurs in the private economy, with the additional base money supplied after the fact. The government asset provision isn’t doing the leveraging. The private sector expands broad money assets first, and the base money assets come later.

      However there is also the process by which the government directly injects base monetary assets into the real economy, either in exchange for the transfer of real assets for the government sector or the performance of a service for the government sector, on the one hand, or as a pure gift or transfer payment on the other hand. (The government also directly extinguishes base monetary assets through taxation.) As a result the financial assets of the private sector increase, but they haven’t been leveraged up – the government has simply directly added to them.

      The latter process can then certainly contribute to the former process as a secondary effect. The recipients of new base money assets might want to use them for the purchase of some consumption or investment good. The new money is presented in the market as demand for additional goods. Producers of those goods demand loans, which initiates the first process I described. The private sector leverages its existing assets through balance sheet expansion into the creation of new real value, and then the government validates the balance sheet expansion by supplying additional base money assets to the reserve stocks.

      If the initial provision to the private sector through process one is $10 billion, then the private sectors NFA’s go up by $10 billion. But the assets weren’t leveraged up to $10 billion; it’s just a straight injection of income. Then later, when some leveraging occurs to produce the additional goods and service needed to satisfy the additional demand, the $10 billion in the hands of its recipients hasn’t been leveraged. The producers’ additional assets have been leveraged by bank borrowing, and that will subsequently be validated by an additional injection of of government base money assets.

      • Dan: “the government validates the balance sheet expansion by supplying additional base money assets to the reserve stocks.”

        I like “validates.” I’m not sure it puts across the chain of intentional causation well (nobody says “I’m gonna validate those balance sheets”), but it imparts the temporal chain, and helps the conceptual understanding. Mine at least.

        • Dan Kervick says:

          Steve, that’s a term I learned from Minsky’s work. I’m not sure I’m using it in exactly the same way, but I think I’m close.

    • “Because we’ve assumed the cumulative current account is in balance, the household sector’s NFA balance with the government is $ 10 trillion… The government debt (reserves, currency, and bonds, really), net of internally held stuff like social security, is about $ 10 trillion (= NFA of non government with government).”

      Its like you WANT me to cite RSJ (advancing slightly my theory that your real name is RSJ) :o)

      The first thing to notice is that the quantity of MZM held by the public is already roughly equal to the quantity of Federal Debt held by the public, and more often than not, the former exceeds the latter.

      http://windyanabasis.wordpress.com/2011/03/28/leaving-modern-money-theory-on-the-table/

    • Beowulf,

      You seem mildly obsessed with the RSJ meme; more so than me, I must say.

      :)

      Prior to resumption of levity, a few points of analysis:

      What he’s pointing out is a similarity in the size of government NFA and the commercial bank deposit base, which makes it sort of convenient to slap together a nationalized balance sheet. I guess his numbers show a tracking of the two magnitudes over time. I’m not sure that will continue in the near term. If the government is issuing more debt while the private sector is deleveraging, it would seem to call for an inflection point. In the long term, these are both macro structural finance numbers, so we should expect both of them to grow along with NGDP. That doesn’t imply any meaningful correlation or causality between the two, apart from the more general relationship of each with NGDP.

      Also interesting, the comparison you noted is not very valid in the context of real world facts. My model above, from which you quoted, assumed a balanced current account and zero net international investment position for simplicity. The adjustment from that to a more real world situation is minor in relation to the concept of the model. But it’s tricky in numbers. In fact, much US government debt is held by the foreign sector. Moreover, it’s disproportionate compared to the net international investment position. That further complicates the relevance of his correlation somewhat, because the debt that he’s correlating to domestic deposits is in fact not held by the domestic sector (maybe more on this later; it’s an interesting more general point about sector balances, I think).

      Anyway, what I’m talking about above has nothing to do with that particular nominal relationship.

      And, as you know, I’m not a fan of his tax/nationalize idea.

      So this would be quite a Jekyll/Hyde relationship if your hypothesis is true.

      But who’s to say?

      :)

    • Dan,

      I’d like to come back to your comment later today. There’s quite a bit there I disagree with – in a very fundamental way. This goes well beyond the mere interpretation of the term “leverage”. So it could be worthwhile to respond in that context.

    • Steve,

      “I have some notions, but would like to hear your words: in what sense is that private sector equity base “required to support” the stock of fixed investments?”

      This is quick and dirty:

      Don’t forget that my little model assumed a balanced budget/zero debt and balanced current account/zero net international position, for simplicity of illustration.

      In that case, S = I.

      As per our “Asymptosis Marathon” discussion, the cumulative stock of S is private sector savings (net worth or RHS equity), marked to market on some specified valuation basis.

      So the “requirement” S = I in that context is one of balance in a specified accounting sense. Conversely, coherent accounting, whatever the chosen methodology, demands balance.

      For example, the Fed Flow of Funds balance sheet valuation would be ROUGHLY as follows:

      Private sector net worth is fully reflected in household net worth. Household net worth consists of directly held physical assets (e.g. real estate) plus net financial claims on the business sector (remember assuming no government NFA here). Conversely, the business sector owns non-household held physical assets on which it issues ultimate balance sheet claims. So the total valuation reflects the direct market valuation of household physical assets plus the indirect financial market valuation of the rest of the physical assets held by businesses. You have to interpret cumulative “I” as a stock in the sense of those direct and indirect valuations respectively. But when you do, cumulative S = cumulative I according to consistent valuation.

      P.S. this obviously dovetails into the valuation methodology question per se, where we left off in our discussions at Asymptosis. As promised, I’ll let you know on Monday where I stand on that.

      • JKH, thanks. I am actually to the point that I get all that. But I’m still wondering in what sense you’re using the word “support.”

        • “support”

          only in the sense of accounting identity (which is actually quite a lot)

          perhaps misleading

          could have used “match” I guess

          but I like “support” for some reason

          • To me “support” suggests some kind of intentional ex-ante causality rather than ex post description (“match”). The nexus of those two is where so much of this (or at least my) thinking goes off the tracks. The insatiable human desire to tell stories explaining past occurrences.

            If you have any thoughts on why “support” seems attractive to you — if there’s a useful story about causation there — would love to hear them.

    • Steve, you’re forcing me to go deep.

      Therefore, you may want to make sure your bullshit filter is plugged in and fully operational here.

      :)

      Context from my original:

      “And what that says is that for a given I, the government is leveraging up the private sector’s saving by running a deficit and injecting NFA.

      When you translate that from flows to stocks (cumulative flows), it says the government is leveraging up the existing private sector equity base (savingS required to support outstanding stock of cumulative “I”), by adding more private sector equity created by the government’s NFA injections.

      So there you have the idea that the government is performing a useful leverage function in augmenting the existing private sector equity base – a base that supports a given level of cumulative “I” as an outstanding stock.”

      1. I’m working out a response to Dan Kervick’s earlier comment, and there’s a bit of an intersection with that here. It has to do with the use of the word “leverage” in Mosler’s MMT. More in my response to Dan, but I don’t like it. I’m not sure it should be used at all, but if it is, it should be used differently. I’ve used it in the above context as per my preference. When one leverages in the corporate finance world, one is generally using equity as the base of support for leveraging with debt. Here, the usage would be more complicated; additional in my reply to Dan, later.

      2. Put the emphasis on “required” rather than “support”, and you get a “required” ex post accounting identity, whereby the accounting value of savings “supports” (i.e. reinforces or confirms or validates) that identity and the corresponding value of “I”.

      3. Savings is a form of internally generated funding. You can think of funding as supporting assets to which funds have been deployed. The RHS of the balance sheet supports the LHS in that sense.

      4. Banks often refer to equity as capital support for assets. RHS supports LHS.

      Take your pick?

      • Cullen Roche says:

        So much to say on all of this. Looking forward to hashing it all out over the coming weeks.

        I thought you might be interested in some thoughts I’ve been having on all of this regarding the CAD. Your thought experiment highlights a flaw in the MMT thinking. S = I + (S-I) shows that the non-govt can save without govt spending. That’s a huge step in highlighting what our focus should be (production). I is the core of improved living standards, because, in my opinion, it is through I that we create things that make us more productive and therefore give us more time. (G-T) helps/accommodates, but I is the main driver here. But it’s only one piece of the puzzle here differentiating MMR from MMT.

        The other piece that I find interesting (Ramanan where you at??) is the foreign sector. If we take your thought experiment and just balance the budget we arrive at a similar position of (I-S) = (X-M). Now, MMT says we should just spend to offset the leakage from the CAD. But let’s take Warren at his word on “the bigger the trade deficit the better”. Bill Mitchell has made similar comments in an article about how we don’t need to produce that which we can just consume from abroad (downplaying production). So what happens in this environment where we don’t produce domestically and just consume from abroad (taking the MMT examples to their logical extreme)? Well, I craters. S can remain bolstered by (G-T), but is that a sustainable trend? Well, working from our above understanding that it is really I that causes the improvement in living standards, NO! I would reference Volney’s natural law as something that makes this environment totally unsustainable and defeating the very purpose of state money. Or as Kaldor once said:

        “If (a large trade deficit is) continued long enough it would involve transforming a nation of creative producers into a community of rentiers increasingly living on others, seeking gratification in ever more useless consumption, with all the debilitating effects of the bread and circuses of Imperial Rome”

        Boy is that right! And I think we’ve got the pieces of the puzzle nearly connected to prove Lord Kaldor (awesome name, btw) right. I’d love your thoughts here….I’m still digesting, but it’s slowly coming together, I think….

        Also, I am trying to digest your use of the word “leverage” here. I think it blends well with my idea that resources precede govt money. Maybe you have some thoughts on blending those ideas in a way that the layperson can better understand?

        • A more balanced definition of money by Lord Kaldor …

          The definition of money

          The meaning of money in everyday parlance comprises everything which is widely used as an instrument for paying for goods and services bought, or for hire of labour or other ‘factors of production’, which is accepted by the courts as a proper medium for discharging a debt, and by the Government for the payment of taxes. On this definition ‘checking accounts’ (or current accounts) with any of the clearing banks form part of the ‘money supply’ of the non-banking public as well as the notes and coins in circulation outside the banking system.

          – in Monetarism and UK monetary policy, 1980.

          and also in an Article in The Times in 1971 after the fall of Bretton Woods …

          http://www.concertedaction.com/wp-content/uploads/2012/02/Bretton-Woods-And-After-Reserves-On-A-Commodity-Standard.jpg

          “But if such “fiat money” is not permenantly tied to any major currency, what is there to ensure it continued acceptability in the face of changes in its conversion ratios into national currencies? In the case of a national currency the general acceptability of “fiat money” is ultimately linked to political sovereignty. Everyone in Britain accepts payments in pounds in the confident knowledge that the Government accept pounds in payment of taxes and the courts will support any debtor who tenders payment in pounds to the creditor.”

          I guess Lord Kaldor can be called the father of Neochartalism ??? ;-) (but he’s Lord – doesn’t need a gun!)

          The breads and circuses appears here

          http://www.concertedaction.com/wp-content/uploads/2012/02/Bretton-Woods-And-After-The-Sea-Change-Of-The-Dollar.jpg

        • Dunce Cap Aficionado says:

          Been thinking about this all weekend-

          -“I is the core of improved living standards, because, in my opinion, it is through I that we create things that make us more productive and therefore give us more time.”
          – Cullen Roche

          “I is the backbone of S”
          -JKH

          I think these are direly important points, which actually play off of and into each other to make one larger idea. So, I’ve chosen to look at the SBE equation solved for I. This seems logical to me. (I had it a bit differently, but I’ll use the version Vimothy posted below, maybe my algebra was wrong).

          I = S + (T – G) + (M – X)

          Because there are 3 ‘stocks’ in the SBE, I like to look how the private sector is affected by a change in one while the other is held constant (not necessarily 0). I believe JKH did something similar in a thread, by removing either the foreign or public sector altogether.

          Holding the Budget Deficit unchanged, if the CAD increases, that represents a greater leakage from the private sector. So, (I + S) decreases in the total SBE equation. At this point, MMT says to simply run a larger budget deficit to offset this. This is a policy prescription, not macroeconomic truth. From a completely apolitical standpoint, the government doing just about anything in response to the private sector allocating capital is a policy prescription. So, lets go back to just the description; (I + S) decreases. Now, the way I think of “I is the backbone of S” is that $$ spent into successful Investment end up as Savings at the maturity of the investment. I’d like to hear more from others (including the mysterious one himself) on JKH’s backbone comment. This means to me- (generally) increases in I preceded ‘real’ increases in S, that as Investments successfully mature, they represent increases in Savings. (I will not go into how, but my description above, growth in real I & S are wholly circular, and the government sector can only provide different ‘environment’ for this).

          Now let’s also do it the other way round now- Hold the CAD constant while increasing the Budget Deficit. The additional $$s will not necessarily end up in private sector at the end of the day, they may end up as additional CAD leakage (or some portion of them may), as the private sector allocates capital as it sees fit. If there was incentive for additional $$s to be spent into the CAD by the private sector BEFORE the government offsets, the Government underwriting that flow doesn’t remove the incentive. It ‘funds’ the growth in leakage! I am not saying that to not offset the additional leakage would be beneficial, per se. But, a decrease in flow of $ to domestic I would be necessary to ‘fund’ the demand leakage growth. That shows a very real and negative effect of a growing CAD on the private sector. This is sticking a finger in the crack in the dam but doesn’t reinforce the dam to keep the crack from spreading (and I would argue, it allows it to continue in the long term).

          When the CAD grows, the private sector has traded domestic growth for foreign growth. But should the demand leakage continue and the Budget Deficit continue to climb there is the potential for the growth in leakage to outpace growth in domestic I because the government is essentially underwriting the growth in flow form the private sector to the CAD by growing the Budget Deficit. This does not incentivize the private sector to move demand from the CAD to domestic I. I consider this a huge problem with the MMT prescription for Government Budget Deficits to simply ‘offset’the CAD.

          The Budget Deficit *can* be run to offset the CAD, but that is equivalent to government policy reinforcing demand exportation out of the private sector (more specifically out of I and therefore ultimately also S). And isn’t the Government supposed to do what’s best for the private sector? That’s just bad policy to me. Furthermore, what if the demand leakage continues to grow (the budget deficit continues to keep up) continuously? We see less and less growth (and eventually decline) in domestic I (and therefore ultimately S also, which could feed back into future I). We move toward ultimately importing our own economic productivity. This makes it, well, not ours.

          My prescription would be for Gov’t policy should ‘offset’ additional leakage to the CAD in the short term, but policy should tie this offset to an aim to incentivize growth in demand for domestic I so that it outpaces, as much as possible, growing demand for foreign I over the long term. Said another way- If the CAD increases and the Budget Deficit does not, you have a squeeze on the Private Sector where it would need to send $$ that would otherwise go to the foreign sector. So, in the short term, Budget Deficits increase to the dollar per the increase in the CAD. But this should be directly linked to policy that be designed to incentivize $$ flows into private sector I that would outpace the increase in the CAD.

          • Cullen Roche says:

            DCA,

            “I think these are direly important points, which actually play off of and into each other to make one larger idea. ”

            It’s a HUGE point. One that changes the entire way we view this discussion, our goals and our policies.

      • “You can think of funding as supporting assets to which funds have been deployed. The RHS of the balance sheet supports the LHS in that sense.

        4. Banks often refer to equity as capital support for assets. RHS supports LHS.”

        Very useful. Thanks.

  11. Dan Kervick says:

    For me, a big part of this has to do with Tom H’s observation about MMT and how it implies issuing government NFA will cause the private sector to not need to use as much credit.

    I agree that that is definitely an option and can be a very important component of the supply of NFAs to the private sector, especially as a countercyclical move.

    Note that if there were a public system of banks, there would be an intermediate option between direct provision of NFAs via spending or transfer payments, on the one hand, and profitable lending at interest through the private sector banks, on the other hand. It would be possible to advance credit at negative interest for projects of a specific type, or for particularly hard-hit regions. That’s not the same as giving all the money away, but it is equivalent to giving some money away. If you loan somebody $1 million of the government’s money at -10% interest, to be repaid in two years, then two years from now they owe you $900 thousand. That’s functionally the same as if a private sector bank lent them $1 million at 10% interest, and the government printed them a $200,000 subsidy.

    But it might be more effective and adaptable approach to administer subsidies in this decentralized way, by delegating to regional and local bank managers the task of identifying worthy entrepreneurial recipients in their community, people who might be good for the $900 thousand, but due to various disadvantages cannot be expected to turn a profit in the near future. Managers in such a public system, for such specific branches, could be performance evaluated not on the profitability of the branch, but on a requirement that their branch recoups some established percentage of the loaned amount, and thus does not represent a net draw on the monetary system of excessive amount of NFA creation. There would also be caps (and maybe even ceilings) on net credit advancement. Depending on macroeconomic conditions, and regional conditions, these percentages and levels could be adjusted up and down, with money become easier or tighter as conditions require.

    I don’t want to underestimate the challenges of administering such a system with competence and integrity, and making sure it doesn’t become a racket for patronage and permanent interest group set-asides. And if the system exists side by-side with private sector banking, a lot of thought would have to go into determining how to make sure the public system serves those who most need it, while the private system goes about business as usual for most borrowers. But it’s worth thinking about. A mixed system might also provide flexibility in dealing with bursting credit bubbles and liquidity crises on the local, household and small business level – not just at the TBTF financial institution level. The public system could also be used to better regulate the private credit markets and prevent bubbles from arising in the first place, by fine-tuning the volume of activity moving through the two parts of the system.

    • Preventing a subsidy system from degenerating into a patronage system is impossible. If there is anything the current Administration should teach you, it is this. “To the Victors Belong The Spoils” is the essence of politics, and always has been.

    • Dan:

      “how to make sure the public system serves those who most need it, while the private system goes about business as usual for most borrowers”

      SRW’s latest at interfluidity — inflation-protected govt accounts for small savers — seems a promising way achieving that dual goal.

      • Dan Kervick says:

        Steve,

        While I don’t think I oppose SRW’s idea of inflation protected government accounts, that idea seems aimed only at the goal of providing security for small savers. The role I was envisioning for a public banking system was not just to provide savings security, but to provide financing for small business and entrepreneurs whose business ideas are promising, but who face structural hurdles in their economic environment that are more challenging and expensive to overcome than those faced by similarly worthy entrepreneurs who are blessed with a more fortunate economic environment.

        It might be useful for the sake of economic development of hard-hit communities, or to counteract the broader societal effects of recession, to provide public subsidies for small business development. But rather than make the entrepreneurs go to for-profit banks and convince the bankers that they can return some initial bank investment, with interest, in the near future, and then give them subsidy checks through another channel. It might make more sense to use a public, not-for-profit banking system, which would have the ability to make negative interest loans. In that way, the process of delivering the subsidy, qualifying the applicant, and making a loan are more seamlessly integrated and decentralized, and delegated to the community-based expertise of public bank managers and loan officers.

        • this is like Ellen Brown’s Public Banking in some ways? It seems like it.I’ve been trying to follow this and want to see if I am thinking about it correctly.

          I am a decent fan of public banking. You already pointed out some of the possible problems with it, so I wont go into them.

          But it seems to me we’re starting to expand the mental space here about whats possible with credit. Should credit be entirely up to the private sector to allocate? Is there some space for a bank which isn’t acting to maximize profits, but rather acting for some view of the good of the state?

          I’d think so. This shouldn’t be the only option, but neither should it be banned either.

          • Dan Kervick says:

            Michael, yes I think that’s a good way of putting it. There is a trend recently of assuming that there is some sharp world-historical choice to make between government injection of credit-free money from the “center” or private sector creation of credit money in the process of capitalist exploitation of labor. But it seems to me that there are a lot of mixtures and alternatives, and some of them involve government-issued credit.

  12. the accounting is blowing my mind literally

  13. Why do banks settle their accounts with each other with government money?

    • Assuming you aren’t asking a rhetorical question, they do so because the Federal Reserve System makes the Fed the monopoly supplier of reserves. They can, of course, use their deposits but that could only provide a minority of the necessary reserves for clearing payments. If the financial crash has demonstrated anything, I think it’s that a private banking system simply cannot provide the liquidity necessary to keep a modern economy functioning.

    • All US banks are in effect private franchises of the Federal Reserve. Purely private banks were outlawed after the Great Depression.

  14. I hate to bring this up, given the fine efforts already made to change the commenting format, but am I the only one who’s now finding it a bit of a pain to connect to recent comments, without moving laboriously through the entire thread (i.e. particularly when comments are embedded as sub-section replies)?

    • I was also thinking of writing this.

      Definite improvement except this minor thing.

    • agreed…

    • Cullen Roche says:

      You weren’t the only one JKH. I’ve switched it over to the pragcap comment style. Hopefully it’s a bit better even thought it’s clunky…

      • This is looking MUCH better than the first two, thanks.

        Now in striving for MMR benchmark perfection, if only we could get the comment box to appear directly below the comment being replied to.

        (It never ends)

        :)

        • Cullen Roche says:

          Yeah, that’s annoying. Sing kumbaya to yourself. Apparently that makes everything better. Maybe get a guaranteed job while you’re at it? :-)

      • Cullen,

        Embarrassing techno-loser request: How do I display the comments so that all the nested comments are visible without having to click “view” every time? Is there a box I should be ticking somewhere?

        Thanks

      • second Vimothy

        and I retract my first response

        I thought we got rid of those nested response vaults that have to be re-opened every time, but they reappeared again

    • The mind map created by the comment words is difficult to hold in my mind. The comments need to be information data mined in order to produce a high level system dynamics or object oriented model conceptual structure. Some genius here has a excellent mind map of what has been presented in all the comments. Might that genius also know how to model information structures in any of the generally used methods? The math model is the foundation on which to build. The conceptual extension is a mind map. Like math, I can’t do all the math in my head nor can I keep track of all the relationships being built on S= I + (S-I). I am not a genius but I can follow a map. I can follow something like Yamaguchi’s model of stocks and flows.

      Kudos to everyone for this fantastic groupware effort.

  15. This may be slightly off-topic. Have you guys ever thought about saving in the form of land (as in “they’re not making it any more”)?

    Suppose there is an increased desire to save in the form of land. The price of land rises until people stop wanting to buy more. The market value of their stock of savings in land has increased, but there has been no new net investment in land. So, do we call that “saving”? Not if we take the NIA definition of “saving”.

    This is a very old question in economics. It relates to the so-called “Junker Fallacy” (Whether the Junker Fallacy is a fallacy is another question.)

    • Net worth calculations almost always mark stuff to market (e.g. Fed Flow of Funds balance sheet presentations), unless some very specific illustration purpose motivates not marking it.

      Savings when measured in such terms can’t possibly consist of simple NIPA saving additivity. That’s well understood. The general issue there is that of the relationship between income statement book value inputs and balance sheet market value outputs. I’m sure land is an economic issue of separate interest, but it’s certainly not an issue just because of the marking aspect.

      And no, your example is not saving. It’s an asset swap of money for land that would appear on an accounting flow of funds statement. (Which I’ve probably noted many times in comments at your place.) The saving, if it is saving, is from the income that may have originally generated that money position. The saving is not the asset swap. Its the income residual.

      • Also, I should have said that the land in that example is not the investment that ultimately balances out against the NIPA saving at the macro level. As a simple example, a corporation could have sold the land and used the money to finance new investment “I”, and that could have been viewed as the balancing NIPA investment against the original NIPA saving from income. But not the land.

        • Saving is an income residual. It’s not a transaction between itself and some asset.

          Both of the examples you describe are flows of funds transactions.

          Neither represents a relationship between investment and saving as would be evident in NIPA, obviously, at the macro level.

          Both examples are asset swaps that occur outside of the macro NIPA relationship. They’re simply shifting money and existing assets around, whatever the source of that money. Exactly the same transactions could occur with borrowing, also as flow of funds transactions.

          And capital gains are balance sheet revaluations, not income statement value.

          BTW, Alan Greenspan once made a great comment in Humphrey Hawkins, during the era of the problem of deploying the Clinton surpluses.

          He said something to the effect:

          CAPITAL GAINS DO NOT FINANCE INVESTMENT (macro).

          Perfect. And very important to understand.

      • Let me try this another way. Is it *useful* to define “saving” to exclude things like capital gains on land?

        Or, is there any fundamental difference between “saving” in the form of land, and “saving” in the form of government bonds?

        • sorry, 8:26 above belongs here

        • Isn’t “Saving” in the sectoral balances the net total of financial assets (financial assets with no claims against them) existing in the non-government?

          • Paulie46,

            No. From JKH’s saving flow identity,

            S = I + (S – I)

            Saving is equal to investment and net lending to other sectors. Remembering that,

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

            We can break down net lending to other sectors into the sum of net lending to the government and net lending to the foreign sector.

            • That’s not what I was asking.

              In the sectoral balances equation (G-T) is a nominal flow, (X-M) is a nominal flow and by extension the resulting (S-I) is expressed as a nominal flow. It’s my understanding that re MMT the resulting nominal flow represents the increase/decrease in net financial assets (dollars and treasuries) that end up on non-government balance sheets in the aggregate.

              In other words, in MMT “Savings” is a nominal construct and nothing more. There is a relationship between nominal and real/fixed but that is not what MMT is addressing re the sectoral balances (the way I see it, not necessarily speaking for MMT).

              • Right, roughly.

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

                You use the term “nominal flow”.

                I’d say net financial flow or net financial asset flow or something like that.

                The key to it all is the “minus I” term in the (S – I)

                That indicates that it’s netting out the amount of investment and therefore the amount of saving that’s required to fund that investment.

                So for example, if S > I, S is in surplus relative to I which means it can be deployed in “net financial assets”. And, for example, if the government is in deficit and the current account in surplus, that first amount will equal the sum of net financial assets deployed into the government deficit (reserves, currency, bonds) and the current account surplus/capital account deficit (foreign bonds, equities, whatever).

                The term “net saving” refers to the amount of saving net of the amount required to fund investment.

                So (S – I) is net private sector saving.

                It’s not that the above equation is wrong.

                Only that it’s a very marginal one.

                It deliberately leaves out the amount of saving required to fund underlying investment, which is a lot.

                There’s a lot more going on that what’s captured in that equation.

                And it’s deliberate. It’s not that it’s not deliberate, but what in the big picture is being left behind by being netted out.

                The other thing is that MMTers tend to drop the “net” qualifier and just refer to it as saving, which is technically wrong or at least very incomplete.

                But that’s all part of their making net financial asset behavior the center of the universe (no pun intended).

                • @JKH

                  Yes, I understand that, but I’m thinking of “saving” (and I suspect MMT looks at it this way also) as a purely mathematical relationship re the monetary system.

                  To simplify (?), lets assume that dollars are represented in a physical sense as silver-colored tokens, like coins. Let’s further assume that treasury securities swapped for dollars (to facilitate deficit spending) are represented as red tokens. Total national savings will equal all of the silver tokens in existence less claims against them (tokens borrowed from banks) plus all of the red tokens. I use the tokens so we don’t get into a semantic misunderstanding of what money is.

                  So far this is a trivial exercise but it’s useful (to me) in order to understand that the Fed/Treasury must be able to spend dollars into the non-government without selling treasuries to the public, or else dollar assets could not be increased without using borrowed funds (from banks), which in my mind is un-sustainable over the long term. It makes our monetary system work like that of the Eurozone.

                  For example, in 1913 when the Federal Reserve Act was passed the national debt was roughly $3 Billion. The maximum national savings thus possible (in my view) would have been $3 Billion composed of unencumbered dollars plus treasuries or other cash equivalents. Assume for the moment that 100% of that amount was cash. 100 budget cycles (thru 2013) would allow a monetary expansion of only $300 Billion of which $3 Billion would still be be cash (can’t borrow the same money twice) and $297 Billion cash equivalents.

                  We now know that in 2013 the National Debt will be close to $16 Trillion and so will our “national savings” (nominally speaking).

                  Where did the other $15.7 Trillion come from?

                  • Dan Kervick says:

                    So far this is a trivial exercise but it’s useful (to me) in order to understand that the Fed/Treasury must be able to spend dollars into the non-government without selling treasuries to the public, or else dollar assets could not be increased without using borrowed funds (from banks), which in my mind is un-sustainable over the long term.

                    Paulie, what do you think of this way of viewing the situation:

                    Suppose the government taxes X dollars from the public sector on Day 1 and then spends X + Y dollars into the public sector via transfer payments on Day 2. Net result, an injection of Y dollars into the private sector.

                    Now suppose the government borrows X dollars from a private sector lender on Day 1 and then pays off the debt with X + Y dollars on Day 2, in this case representing principle plus interest. Net result: an injection of Y dollars into the private sector.

                    As far as sectoral transfers go, and changes in monetary stocks are concerned, the two operations are identical. A lot of the usual macroeconomic frameworks divide these things up into traditional categories of thought that obscure the pure flows of payments, categories like “taxing”, “spending”, “lending” and borrowing”. But I find it easier for most analytic purposes if I just focus on payments-in and payments-out.

                    That is not to say that there are not important differences between the two combinations of operations lying in other dimensions. In the latter case, the person or entity making the initial in-payment and receiving the out-payment are the same person. This need not be the case in the former case. So that makes a difference if the government’s purpose is to effect distributional changes in private sector monetary stocks and not just quantitative changes.

                    Also, in the latter operation the first step is voluntary while the second is legally obligated. In the former operation the fist step is legally obligated and the second step is voluntary.

                    We think of one of the operations as “taxing and spending” and the second as “borrowing and repayment”. But we could just call both of them “in-payment and out-payment”.

                    So long as there is money in the private sector anywhere, the government could always voluntarily choose to restrict itself to the borrowing and repayment option as a way of injecting more base money into the private sector. It just has to choose the right maturities and interest rates. The reason why we need the government to be able to spend in the traditional sense is because the “borrowing and repayment” option presents tighter restrictions on the distribution of money disbursed into the private sector, and thus presents tighter restrictions on the public purposes that are served.

                    • @Dan

                      I need to digest most what you have written here to make sure I understand what you are trying to say before commenting but this part:

                      “Suppose the government taxes X dollars from the public sector on Day 1 and then spends X + Y dollars into the public sector via transfer payments on Day 2. Net result, an injection of Y dollars into the private sector.

                      Now suppose the government borrows X dollars from a private sector lender on Day 1 and then pays off the debt with X + Y dollars on Day 2, in this case representing principle plus interest. Net result: an injection of Y dollars into the private sector.”

                      Seems to me in either case the government created Y ex nihilo (out of nothing) in order to spend it into the economy (that’s part of my point), and in fact they are both effectively the same. No argument here.

                      In the remainder of the part of my post you quoted I wondered how we got to $16 Trillion in 2013 starting with $3 Billion. I implied that that wouldn’t be possible unless the government could somehow lend money to itself without selling treasuries to private investors.

                      Now, you may be thinking that large amounts of money could have been borrowed from the banking system by private investors and in turn those funds could be used to buy treasuries (ie loan the government money). After all, banks create money out of thin air too. That is of course possible but seems like a bad idea from an investor point of view, maybe not. Still, in this case also, the money borrowed was created ex nihilo by the government and issued through the banking system as a loan.

                      Another thing rarely mentioned is that when the government “borrows” and creates treasuries the asset remains in the possession of the lender and that asset is “money good”, a cash equivalent. All he has given up is the ability to use the money for direct consumer spending. In return he gets nearly absolute safety and protection from inflation. The “borrowed” money is swapped for treasuries and is thus not available for spending by the government. The spending is created ex nihilo.

                      My conclusion is that the whole “borrowing” to fund spending circular operation is an artificial construct created by the financial class to obfuscate the fact that private corporations have control over doling out the people’s money and the ultimate goal is to privatize all money creation. Hell, it’s pretty much a done deal now worldwide.

                • Right, good people always specify – saving net of investment for “net saving”

                  Unlike the post here which gets NIPA-wonkish http://www.neweconomicperspectives.org/2011/07/government-budget-deficits-are-largely.html

                  But then NIPA “net saving” is different from “saving net of investment”

                  I appear in the comments as Tobinesque – because the filter thought I was spam.

        • Putting aside the notion of Saving, which I think JKH addresses pretty well (buying financial assets is not Saving), just some thought on the nature of these assets, bonds vs land.

          It seems that land shares one key attribute with financial assets: it cannot be consumed, used up. So it delivers utility to those holding it, not those consuming it.

          Improvements are otherwise, of course — you get utility by “consuming” your house through use/time-decay (if you don’t invest by cleaning the bathroom mold will grow and you’ll have to rebuild it or evacuate).

          For accounting or conceptual purposes one might consider mineral endowments, natural beauty, and such to be “improvements” undertaken by The Creator.

          So land is perhaps best thought of as (primarily?) a financial rather than a real asset. It certainly plays that role in many people’s minds and financial planning strategies.

          • Steve,

            buying financial assets is not Saving

            Why not?

            • I’m not Steve but buying financial assets is just transferring them from one place to another within the non-government. It hasn’t changed “saving” in the aggregate.

              • Cullen Roche says:

                An Austrian would hate that comment. Tell them their gold isn’t a form of savings. It might be true that we can only “save” in nominal terms in the unit of account the state deems appropriate, but I don’t know if it’s right to say that we can’t save in other things. Money, in my opinion, can be anything. State money is just one specific form of money that is mostly used to accommodate real wealth (resources, time, love, friendship, singing kumbaya, etc).

                • It’s quite possible I’m oversimplifying, but I really think it comes down to a fallacy of construction between two different meanings of savingS.

                  National savings consists of real assets. Kuznets, Capital in the American Economy: “…[fixed] capital formation…represents the real savings of the nation.” (p. 391)

                  Individual savings consist of financial assets — which are ultimately (but not proximately) *claims* on real assets (plus govt leverage of those assets through money issuance/deficit spending? still pondering that myself as well). Yes, I’m saying that the deed to your house is not a real asset. It is a claim on a real asset — a claim against everyone else in the world.

                  • This might help explain the reports you hear of aboriginal people being completely unable to understand how an individual could “own” land.

                  • Cullen Roche says:

                    Blends well with the idea that money is not real wealth. To me, I almost find the word savings to be excessively misleading in every sense. I don’t live my life to save money (though most people think that’s what they’re supposed to do). I live my life to accumulate real wealth. I do that using many tools, of which ” state money” is one.

                    I didn’t mean to imply that gold is real wealth by the way. But it is perceived in our society as a possible medium of exchange allowing the accumulation of what I would call real wealth. And in some cases, people even think of it as real wealth (mistakenly in my opinion, though I do consider gold to be “money”).

                    I have to digest a lot of this. The whole new ideas driving MMR combined JKH’s accounting work has left some loose ends for us to tie up before we have anything really cohesive.

                    • “Saving ” in the MMT sense is money not spent. Spending is a transient state so “saving” is the rest state of financial assets. National savings is the net amount of all financial assets less all claims against them.

                    • Cullen Roche says:

                      Yes, the MMT sense is specific to state money. I am merely pointing out that state money is not the only form of money that exists in the world. But I gather you fully agree there. The other comment wasn’t aimed at you so sorry about that.

                    • Ah. “Wealth.” Another definition needed. Here’s a stab at that:

                      Let’s constrain it to “individual wealth.”

                      I would say (in keeping with my previous definitions) that it consists of financial assets.

                      Those financial assets are claims (of different degrees of proximity, specificity, and enforceability) against others, on real goods/assets.

                      Real goods/assets are those that can deliver human utility through being consumed.

                      So wealth is the power to gain utility through consumption in the future.

                      ??

                    • Cullen Roche says:

                      Now this is a conversation we could really get bogged down in. :-) I would argue that the ultimate form of “wealth” is time. That’s why I harp on production so much. It’s only through production that we give ourselves more time. With more time, man can choose to do whatever he wants. Maybe wealth to you is sitting in a ditch drinking beers. To another man it might be sailing around the world. “Wealth” is different things to different people. Money is the tool we utilize to acquire wealth. This is why I believe the MMT view on many things is so deeply flawed. In the end, money, even state money, should be primarily used to increase production. WE can utilize it for many other things that increase our living stds and even give us more time (healthcare arguably gives us more time, a strong military gives us time by allowing us to live without fear of being killed by foreign threats, etc), but the ultimate form of wealth is time. And we primarily obtain time through production and innovations that enhance our lives and make us more efficient. Not that wealth IS time, but it’s probably at the top of the hierarchy if I were to rank forms of wealth….

                    • Cullen,

                      The proper definition of saving is an accounting issue.

                      The following may seem tedious and trivial, but it’s the source of a lot of bad thinking in economics, so I’m not talking down here. Follow this and you’re 5 years ahead of some of your fellow bloggers.

                      Here’s a very quick and short cut way to think about this.

                      Think of your personal balance sheet with various assets on the left side.

                      Suppose you have no personal debt.

                      So the right hand side of your personal balance sheet is entirely equity.

                      That may or may not reflect a marked to market valuation of your assets. That’s up to you as your own chief accountant.

                      But it does represent some measure of your cumulative saving – i.e. your savings.

                      How you’ve deployed your savings is separate from what they are as an accounting record.

                      So then you manage your asset mix etc. according to your investment strategy.

                      And presumably you try and improve your net wealth or equity on a marked to market basis in doing so.

                      If your house is one of your investments, fine.

                      If stocks are part of your financial asset portfolio, fine.

                      If a bank account is part of it, fine.

                      But those are real and financial assets respectively.

                      They are not your savings per se.

                      Savings is an (marked) accounting record of cumulative saving, which is a residual of income.

                      Keep them separate.

                      And as a counterexample, you can replicate the asset portfolio you have by borrowing, which has nothing to do with saving, so how can your asset portfolio be savings?

                      Accounting is the start of clear thinking in portfolio management.

                      And it all works the same way on the corporate side, with some adjustments for things like paid in capital, etc, but retained earnings works exactly the same way.

                    • Cullen Roche says:

                      You’re right of course. I approach all of this from the perspective of someone who is not an economist or an accountant, but has picked up most of what I learn because I’ve thrown myself into a world where I either learn it or I don’t eat dinner.

                      This venture with MMR is forcing me to realize that you have to conform to conventional thinking, in fact embrace it. All this fighting amongst economists is bad for everyone. I want MMR to embrace as many people as possible. This also all shows that things like accounting matter much more than I would like to think. Validating the ideas in this conventional way is incredibly important as your comments have proven. Saying things like “savings is a misleading term” is stupid, because it’s not at all misleading to most economists. It’s not just an abstract and vague term as I sometimes view it, but a term with a very specific meaning to specific people…So thanks as always.

                      Btw, since you’re one of the founders of MMR’s foundational accounting, can we start calling you an MMRist? :-)

                    • I very much agree with this sentiment. I do think many people will fight this tooth and nail. We’re approaching the accounting without politics, which is actually dangerous to many economists.

                    • “Btw, since you’re one of the founders of MMR’s foundational accounting, can we start calling you an MMRist?”

                      Absolutely.

                      Provided I have the understood option of splitting off to my own site, particularly if you end up running a net reality deficit by my measure.

                      :)

                    • It’s an implied option, but yes! :)

                    • Cullen Roche says:

                      Your own site would not only be approved, but probably a necessity. Of course, the door is always open to a platform here. Hell, you can sit head of the table. I’ve never wanted the recognition for MMR anyhow….

                    • “I would argue that the ultimate form of “wealth” is time.”

                      I actually like this.

                      Looks consistent with the foundations.

                      Approved.

                      :)

                    • “I’ve never wanted…”

                      My strong instinct from the start was that you were the right guy to be driving this sort of thing. Happy to be along for the ride in some way to be determined, even if not much different from so far. But I’ll be in touch.

                    • Cullen Roche says:

                      Well, that’s flattering so thanks. But I was serious during the JG debates when I said that I thought some of the MMT ideas had become too much about specific people’s opinions, politics, personal recognition and not enough about giving the world this great gift of understanding how modern money really works. These ideas are SO much bigger than a small group of people. And I think we all know that no single person is to credit for them. I am dead serious when I say that I don’t sit around hoping to be recognized for things I work on (though yes, some certain level of appreciation and payment is certainly nice!). I have an ego, don’t get me wrong, but I view money and wealth in a sort of weird way, and recognition or fame or anything of that sort doesn’t really fit into my personal definition of wealth. So in a weird way, I badly want these ideas to get out, but I don’t need to be directly attached to them. Besides, I probably don’t have the credibility to generate the academic attention this stuff needs. It would have to be someone or some people with an accounting background, maybe an MBA or PhD and some banking experience. Gee, I wonder if anyone like that exists around here. :-)

                    • It seems like some part of this discussion is coming down to the fact MMT forgot the Private sector can also create something out of nothing through initiative, and then issue valuable equity against that something, which can then show up on a balance sheet somewhere with a nominal value in the unit of account.

                      Those claims are also debt free, as much as government issuing money is debt free. And they are claims against real wealth.

                      You need some level of government issued NFA to give the unit of account meaning so we’re not just randomly assigning value to that equity, and you need even more of those NFA to meet the total demand for the risk free assets desired.

                      But the savings is an accounting term which is the value of the assets in the unit of account, not the assets themselves. So S = I becomes meaningless without some (S-I) behind it to give it perspective. It’s the link between the nominal and real world, all right there.

                      And the horizontal banking component does net out to zero as MMT claims, but once you add in that interest, then you have a residual which doesn’t net out. Some part of the private sector owes some other part of the private sector some dividend, which is the interest. There isn’t enough money to pay it back.

                      But if the loan actually helped to create value in the world, it’s entirely possible the net position of the private sector can be greater than zero.

                      For example, Steve points out if he does useful work, it increases the “value” of the firm. It doesn’t even matter if this equity is paid out or stays in the firm. That firm is worth more and it’s value is higher.

                      This shows up in the “real world” balance sheet.

                      If the company used a loan to employ steve, eventually the money will flow back and the firm will be able to pay off the loan. The horizontal nets to zero.

                      But there will still be that dividend which can’t be paid.

                      Enter the government issuing NFA. All of a sudden, there is extra unit of account floating around, enough for the company to extinguish its dividend liability. This allows people and firms to make this illiquid but real world valuable dividend payable.

                      Of course this is a valuable service to provide to the world of private citizens, and of course this has value even without someone coercing citizens to pay taxes.

                      I don’t know if this helps anyone but it’s just how I see much of this shaking out…government issued NFA gives meaning to the savings and investments of the private sector by providing a common accounting framework and extra NFA for liquidity.

                    • JKH,

                      I have a comment on your definition of saving. Perhaps this is not something that you consider particularly significant, or perhaps this is already factored in somehow.

                      There is a complication arising from defining savings as the cumulative sum of prior income residuals. The units of measurement are different for different times of the series, because the price level is moving.

                      I think that, in general, a real stock cannot be said to arise out of a sequence of nominal flows. (Although of course this is not true for a nominal stock).

                    • “I have a comment on your definition of saving.”

                      Sorry, that should read,

                      “I have a comment on your definition of savings.”

                    • “There is a complication arising from defining savings as the cumulative sum of prior income residuals. The units of measurement are different for different times of the series, because the price level is moving”

                      Let’s take the household sector. The net worth increases due to saving and it also does so due to holding gains, if that is what you mean by price level being moving.

                      On the other hand, if you mean price such as a basket of goods – CPI etc – then true and one needs to do a more careful real accounting analysis because stocks of assets are depleted in the real sense due to inflation.

                      But still, net worth increases due to saving.

                    • Ramanan,

                      On the other hand, if you mean price such as a basket of goods – CPI etc – then true and one needs to do a more careful real accounting analysis because stocks of assets are depleted in the real sense due to inflation.

                      This.

                      But I think there’s also a “deeper” point in there about the relationship between real and nominal variables…

                    • Vimothy,

                      Even Richard Stone made a mistake on this in 1973, when he didn’t take into account the erosion of wealth due to inflation ;-)

                      But not a case for worry. In general, even after we make a connection between real and nominal, the fact remains that real wealth has been increasing and that the flow of saving adds to the stock of net worth. The extra term in real accounting for real wealth (after deflating the two by the price) is the one with a negative sign and erosion in wealth due to inflation.

                    • Ram,

                      the fact remains that real wealth has been increasing and that the flow of saving adds to the stock of net worth.

                      Agreed.

                      But it’s an important distinction from the point of view of theory.

                    • Vimothy,

                      What I am saying is that the flow of saving adds to the stock of wealth even in theory. But as I mentioned, there is a third term (except capital gains) which is erosion.

                      I guess your point is that a qualifier is needed for that.

                    • R.,

                      I understand what you are saying and and I agree with it. In practice, it is not hard to scale savings for ex post changes in the price level (using the CPI or GDP deflater or whatever).

                      The issue as I see it is that the real value of savings depends on real output and other real factors and can’t be pinned down in a theoretical model by simple linear transformations of a nominal variable.

                  • Steve, don’t forget that national saving can include a current account surplus, which results in financial claims via the capital account deficit.

                    Not sure I see the difference between the claim of a household on its house and the claim of a manufacturer on its plant. Neither is a financial claim.

                    • Yes I’m getting pretty ethereal here: an owner’s deed is a LHS equity claim against God, or the Universe, or everyone else on the planet… (not sure which).

                      See what you’ve created???

                    • SR,

                      well, you’re thinking big, which is good

                      just a little more precision on the nature of the claim…

                  • also, investing is not saving

                    any more than buying financial assets is saving

                    flow of funds versus income residual

                    broken record, I know

                    :)

                    • investing is not saving… broken record, I know

                      Hahaha–you will never win, JKH.

                      :-)

                    • Cullen Roche says:

                      Yeah, investing is not saving, but both involve claims on real wealth. I think this might be part of the confusion (maybe I am wrong!). Money is the tool that settles debts/payments and gives us claims on real wealth. Investing gives you the potential to grow real wealth whereas saving allows you to accumulate wealth that already exists.

                    • V,

                      Agree with JKH. What do you find wrong?

                      Take a loan to purchase a house. It’s not saving.

                      Because saving is YDisposable Minus C.

                      And if there is a purchase of financial assets, its not an act of saving either. Because the saving has already occured as YDisposable Minus C. Purchasing financial assets is just swapping deposits for the securities.

                    • Ram,

                      No disagreement. More of an ironic commiseration :-)

                    • “investing is not saving… broken record, I know

                      Hahaha–you will never win, JKH.”

                      The reason people *think* of investing as saving can be seen from an example:

                      Suppose …

                      Person A earns $1,000,000, pay taxes of $300,000 and consumes $100,000 and purchases a home (no loan in this example) for $400,000.

                      Now, his saving was $1,000,000 minus $300,000 minus $100,000 which is $600,000. He bought a home worth $400,000 and so during the accounting period his saving takes the form of $200,000 as deposits and $400,000 as the home.

                      His saving is $600,000

                      His net accumulation of financial assets is $200,000

                      which is S-I = $600,000 minus $400,000 = $200,000

                      If he had bought shares worth $200,000 with his deposits, saving would be in the form of $200,000 in shares and $400,000 as the house.

                      But that is different from saying investing is saving or saying purchasing a financial asset is saving. (which is incorrect)

                    • “But that is different from saying investing is saving or saying purchasing a financial asset is saving. (which is incorrect)”

                      I meant, both are incorrect in that statement.

                    • Ramanan,

                      To clarify, I agree with it, and recently spent an epic 100+ comment thread at Asymptosis arguing it with various people. Saving is not investment, obvs–two different words, two different things.

                    • Vimothy,

                      OK. Misunderstood your comment.

                    • “Ram,

                      No disagreement. More of an ironic commiseration ”

                      Ok – just saw this :)

                    • Ramanan,

                      “I meant, both are incorrect in that statement.”

                      Right.

                      Now, for your weekend assignment, please proceed directly to WCI, and convince Nick Rowe this is the right way to view the world.

                      :)

                    • But I still think:

                      National saving (for simplicity, closed, or could use global saving) consists of creating and not consuming new real (consumable) goods — some of which derive their value from their utility in creating future real (consumable) goods while being consumed.

                      Individual saving consists of collecting claims on those real goods — a.k.a. financial assets. What SRW’s worker did in receiving the equity claim in return for work.

                      This is basically adopting my imputed aboriginal world view: that individuals can’t “own” real goods, only claims on real goods.

                      Or alternately:

                      The only way to tally a nation’s (globe’s) savingS is as the sum of existing real goods.

                      The only way to tally an individual’s savingS is as the sum of their financial assets, aka claims on real goods.

                      So does govt money/NFA creation (which adds to individual savingS) create more claims than there are claimable real goods? Seems like. There’s your leverage?

                    • Steve,

                      “The only way to tally a nation’s (globe’s) savingS is as the sum of existing real goods.

                      The only way to tally an individual’s savingS is as the sum of their financial assets, aka claims on real goods.

                      So does govt money/NFA creation (which adds to individual savingS) create more claims than there are claimable real goods? Seems like. There’s your leverage?”

                      A few different things there.

                      OK. You’ve closed it off via the global assumption, so that gets rid of international NFA.

                      Then the issue of the difference between the Fed Flow of Funds view of net worth via the household lens – which can also work at the global level – versus the look through to real asset values across sectors, which is the SNA approach. It can be done either way. I prefer the Fed way, which represents corporate real assets through the financial asset/liability lens.

                      You categorization of individual claims isn’t doing it for me.

                      Yes, government generated NFA creates non government saving, without claimable real goods, as you put it. Yes, that’s one entree to the leverage issue.

                      Have you now trademarked my savingS?

                    • @jkh: “Have you now trademarked my savingS?”

                      I would never dream of being so presumptuous. I’m just violating your trademark shamelessly.

                    • Any discussion on going in WCI on something related?

                    • Sorry, R. – nothing in particular there, having a bit of fun, not meant to be at your expense. Nick has a general tendency not to be concerned with accounting foundations when constructing monetary theory. It makes it difficult to track his language use and meaning as a result. Sumner trumps him by full out abandoning banking as well.

                      P.S. latest radio interview from WM at CotU – currency is shredded in the first 20 seconds (didn’t get any further than that).

                      :)

                    • Cullen Roche says:

                      The MMT backlash against S = I + (S-I) begins. Neil Wilson says we’re just using the veil of money argument…. http://www.winterspeak.com/2012/02/sii-s.html

                    • yeah, that’s the ticket! The veil of money argument. If anything we’re doing more to make the linkages between the real and nominal world clear and pragmatically useful. As though we idealize some world without money as being the ideal place and want to drown the government in a bathtub! Like I never wrote articles about how humans demand government and create it every time there are more than a few dozen people getting together consistently.

                      I was a frackin’ market maker on the floor. I know the value of liquidity in my bones. Not only that, I designed futures contracts and have a patent application on one. The acceptance of a futures contract relies so heavily on trust and it being just barely good enough to use for nearly everyone but not a fraction better. It’s so much like money in this way, and the futures market isn’t a veil over the real spot market. It’s an essential part of a well functioning economic silo, because the liquidity provided by futures contracts unlocks value AND decreases volatility.

                      It’s mostly in Chap 17, but…

                    • Oh shredding again.

                      :)

                  • Steve,

                    I don’t know if that’s quite correct.

                    IMO, you’re thinking about the nature of macroeconomic savings in the appropriate way (i.e., like me ;-)). If you take the nation, considered as a nation, then what are its assets? Well, its chief asset is obviously the productive capacity its economy.

                    That said, a nation qua nation can hold (some of) its savings in the form of financial assets–if it buys them from the foreign sector. (Alternatively, it can borrow from the foreign sector against its assets.)

                    S = I + (S – I)

                    If you let S equal the sum of public and private saving and I equal the sum of public and private investment, then (S – I) can still be nonzero if the country is a net lender to or borrower from the rest of the world.

                    A good way to view this dynamic is (per JKH) that macro savings are like macro shareholder’s equity, which is to say, total sector assets less liabilities. If you as a sector “lend to yourself”, your assets increase, but your liabilities increase pari passu, and the increase in your equity is zero. But if your assets increase but your liabilities do not (e.g., investment, net lending to the rest of the world–acquired assets can be thought of as arbitrary in this (strictly limited) sense), then your savings have increased.

                    • @vimothy:
                      “That said, a nation qua nation can hold (some of) its savings in the form of financial assets–if it buys them from the foreign sector.”

                      Right, and I understand that excluding that — thinking in terms of closed/balanced national, or global — can make the whole thinking model not work. But I *think* you’re just distinguishing here between different measures — national savingS vs domestic savingS. If a U.S. citizen/resident has a (ultimate or proximate) claim against real goods that are outside the country, you can include that value in the country’s “savingS” or not, depending on how you want to measure/account for things.

                      ??

                • Colin Sugioka says:

                  Okay, if you really mean that last sentence, I’ll forgive the earlier snark.

                  (One of the best investments a parent can make is to send their kids to Camp Celo. Sundays, the kids attend the local Quaker Meeting for about 15 minutes – partly spent singing songs they request. Kumbayah, one of their favorites, lends itself to great bass harmonies, and when I get bored with supplying those, I can pretend I’m a countertenor and do descants).

                  I approve the latest format: shy of adding a dimension, the date/time in the header, along with indents, provides the most help in following the threads.

                  • Colin @ 1:54 PM
                    Can’t tell who you are responding to but my post below yours is in response to Cullen @ 12:48
                    Getting confusing.

                • “I don’t know if it’s right to say that we can’t save in other things”

                  I can’t tell if your comment is re my post above yours but if it is – That’s not what I said.

    • Cullen Roche says:

      Nick,

      It’s an interesting thought experiment. “Money” can be so many different things to different people. Of course, it can only be denominated in the unit of account that the state deems it to be, but that’s a very specific type of money. I think real estate is an interesting example here because it’s not really an investment even though a lot of people think of it like that. Real estate is like your personal bank in some ways. It’s a real asset that you can save through and it likely won’t lose out to inflation and it will offer you all sorts of benefits in the meantime. When you sell it you’ll take settlement in the form of USD’s and someone else will save in the form of your house. For most Americans with a mortgage this is ongoing savings. The error of the last few years was that people began to think of a home as an investment. But a home is never an investment because it doesn’t produce anything for you (unless you’re commercial, farmland, etc of some type and generating income, but that’s a bit different imo). I’m not sure saving is the right term, but the definitions are messy in the fuzzy world of econ….Hell, most of us can’t even explain what money is….

      Cullen

      • Cullen: “most of us can’t even explain what money is”

        Agreed, but I’d go farther. Even those who can provide a decent definition of money can’t provide one that everybody else will agree to use.

        My current favorite: “exchange value *as embodied” in financial assets.” And per the above re: consumability (with the caveats re improvements/endowments) I would consider land to be a financial asset using that definition. Ditto gold.

        Now if the whole world would just adopt my definition… ;-)

        • This is where I stand with MMR and not MMT, in that I’ve had MMT adherents (and I use the word adherent with emphasis) flat out deny some basic propositions, one of them being my ability to create wealth. Using a very basic timeless artisan sort of example, I would posit that by the simple act of taking a raw material like a felled tree and transforming it into chairs, tables or other useful implements that people want, I have created wealth–wealth that is apart from any easy money valuation but ‘valuable’ in the sense that people desire to sit on things. Such wealth might indeed be hard to valuate in accounting terms were I not felling trees and cranking out chairs for the general marketplace using the coin of the realm and doing so with some regularity, but the point-in-fact of the example is that I can create an object and inject it exogenously into trade if someone finds value in it. He might then trade me for it–using anything from a trout (which makes accounting a bit more amusing) or by using the unit of account of the realm, and in theory he might rely on a bank that created the unit of account for the transaction to occur. I would then take that newly created unit of account to buy needful things in an economy now altered by the resultant increase in flow of funds and outstanding claims. I’ve been told by MMT adherents that the situation is impossible, because the government did not create more money, to which I replied CORRECT! they did not, I created ‘money’ (as defined in my viewpoint looking at the trade) in the form of a chair, and the example bank created ‘money’ to facilitate the private trade. I further added that while the sale of the chair included a future tax liability that makes the trout look desirable in comparison, this liability is outweighed by the benefit of accumulating a claim of my own as well as the tangential benefit of having a valuation I can point to for future possible chair sales to other market participants. The MMT adherents’ reply that was I was somehow harming the economy by depriving someone of a job, which struck me as so laughably insouciant of logic that I simply stopped participating in the conversation. To be fair, I think such people don’t understand MMT themselves, but they certainly were enamored with what Steve in the article described as rhetorically bad arguments that upheld and called for government and by extension the JG, and they seemed really down on me for the temerity to create things. Or perhaps it was the temerity to posit that we can create things of value by our own volition. I guess what I’m saying is that some of these people seem to rely, depend, and even champion government being the alpha and omega of all things economic, and I think MMT attracts them because of its leaning in that direction and as Sankowski put it above, it’s apparent forgetting of the private sector. This has all turned into a much long comment than I intended but I will sew it up by saying I think money IS hard to define AS IT SHOULD BE, because as a tool of our minds and innovation it should be necessarily fluid. We can instead agree on the accounting terms where we need to. First comment here. I hope it doesn’t appear too whack.

  16. Question for JKH (or anyone that may know for that matter)

    What do you estimate would be the composition of net financial assets ie between dollars and treasury securities?

    • Very quick and dirty:

      First, a lot depends on exactly how the question is asked.

      Any defined sector has a net financial asset position. The major sectors usually considered are government, business, household, and foreign (or business and household combined as private sector).

      So when you ask the question about NFA, you have to be sector specific. It doesn’t necessarily have to be the NFA position of the government.

      But assume here we’re talking about the NFA generated by the US government.

      That’s further complicated by the fact that you have internal accounts that interact with government generated NFA – most importantly the Fed and Social Security and other accounts.

      Leaving the Fed to one side, the approximate NFA issued by the US Treasury net of internal accounts such as Social Security is about $ 10 trillion.

      That’s an NFA liability from Treasury’s perspective.

      Now, some of that is channelled through the Fed.

      So you have to look at Treasury liabilities held as assets by the Fed.

      That looks to be about $ 1.7 trillion now.

      Then you consider this in turn is channelled through the liability side of the Fed as currency and reserves.

      The “assignment” of $ 1.7 trillion to liability channels becomes somewhat arbitrary.

      But it’s reasonable to consider currency as a primary channel, and that’s $ 1.1 trillion right now.

      So consider the remaining $ .6 trillion as reserves.

      So you can look at it either as $ 10 trillion from the Treasury’s primary perspective, or $ 8.3 bonds, 1.1 currency, and .6 reserves as described.

      The second is probably better, because Fed profits are remitted to Treasury, so the effective consolidated cost would reflect Fed liability costs for its portion.

      • You answered the right question because at this point any question I ask or argument I try to make is re the nominal accounting of financial assets created by the federal government, in other words money, and specifically money that exists in the non-government realm without claims against it (including cash equivalents). Unencumbered financial assets. For the sake of argument I ignore other kinds of “financial assets” and I suspect this is how MMT looks at it. You may think that MMT is wrong in this approach and I may be full of it, but in order for me to move forward I need to know how MMT looks at it. Would like to hear from Scott Fulwiller or Randy Wray on this issue.
        Thanks for your response.

  17. The old one was confusing, but I’m completely lost with this new comments system.

  18. Cullen,

    In the previous format, one had to click “View Replies” to see the comments. Else it was nice. This one’s nicer but here too we have to click “View Replies”.

    :-)

  19. Colin Sugioka says:

    I may be in over my head here, but this clarification might help the less advanced:

    S = CE + I where CE equals Cash + Equivalents (ie currency and treasuries). Then

    (S – I) = (G – T) + (X – M) becomes (CE + I – I) = (G – T) + (X – M)’ or

    CE = (G – T) + (X – M). I drops out and its value does not factor in the equation.

    It then seems like much of the discussion revolves around what constitutes CE; ie can this include anything other than currency and treasuries.

    As an example,Henry spends his last $100 to import some steel from China. Initially this ‘I’ would reasonably be valued at $100. However, using materials he already has on hand (gas or coal; a fully equipped forge) and his labor, he makes 10 knives of a kind that he has been able to sell for $100 each. Now, it would be reasonable to value this ‘I’ at $1,000. An internet marketer buys the 10 knives for this amount, but they agree that it would be simpler to send her 10 certificates, each entitling the bearer to receive a knife, which she can then sell to individual customers (who could in turn resell them). The question would then be, at some point, could or should such certificates be considered as ‘Cash Equivalents’?

    (An added detail: just after the initial sale, ‘Fine Cuisine’ does a feature article on Henry; custom-made knives become a rage, and a ‘Knife by Henry’ becomes a prized item.)

    • This is the crux of my question above re the composition of C and E. It has been my understanding that MMT is referring to your definition of “savings” in the appeal to the sectoral balances to show the relationship between government spending and financial assets.

      The discussion lately seems to be trying to find a relationship between another definition of “savings” that includes things in the real economy other than money.

  20. Proposed convention for this amazing and amazingly complicated thread:

    Precede your comments with

    @name
    “quotation you’re responding to.”

  21. @Steve R
    good idea because this is all getting very confusing, and I don’t mean the discussion.

  22. Cullen Roche
    Now this is a conversation we could really get bogged down in. I would argue that the ultimate form of “wealth” is time.

    Its like James Brown said, money won’t change you but time will take you on.
    :o)

  23. @Michael Sankowski at 5:27 PM

    “…the fact MMT forgot the Private sector can also create something out of nothing through initiative…”

    I think this is wrong. I don’t see MMT forgetting anything just because it is focused mainly on where money comes from. There’s no doubt that value is created by initiative but I suspect initiative would be stifled if the government wasn’t there to fill the tank.

    Much of our economic success results in “gas” (money) being siphoned from the tank. This includes wealth accumulation in the form of cash and cash equivalents as well as economic rents and profit-taking. When the hourglass runs down activity stops until something re-sets it. Wealth accumulation is the end of the line for a lot of financial assets. One can only spend so much money.

    That is what MMT is focused on. Money (spending) is simply fuel to get the car (or economy over the hills.

  24. No, MMT actually gets this 100% wrong. For instance, read this piece by Stephanie Kelton from last year. It’s full of errors claiming that the only thing driving private savings is deficits.

    http://www.neweconomicperspectives.org/2011/06/what-happens-when-government-tightens.html

    What MMTers do all the time is assume that S > I is good, and I > S is bad. They do this because they start with the government deficit and work backwards without realizing that it’s better for I to be large rather than smal. They say the government has to spend in order for the private secotr to save. But that’s just wrong. If the MMT position has changed on this then it’s a contradiction to years of research.

    • I’ve actaully seen Fullwiler claim that I is business investment only. I’ll have to find the comments. Even an amateur knows residential RE falls into investment.

      • @fdo15: “Even an amateur knows residential RE falls into investment.”

        To be fair, AFAIK most residential investment is by businesses, who rent or sell the residences. (Pre-sold residences would fall in a gray area…) But there remains a portion of households paying to build/remodel their own residences.

        There’s also the difference between this type of “business investment,” producing goods whose utility is derived from being consumed (though slowly), and “productive” business investment, whose utility is derived from producing more goods, that can be consumed.

      • Be kind to Scott. He’s a good guy, and comments sections aren’t everything!

    • That last paragraph is quite good. A bit of a simplification, and the MMTers no doubt would reject it, but it sort of nails the nature of the bias they exhibit in their analysis.

    • There’s a lot of reasoning by accounting identity in that piece, though.

      • There is. But the key part (S-I) is totally ignored. And that’s where the real magic in an economy happens. MMT says the magic happens in (G-T). Writing an article like that without mentioning specifically how the S-I component works is horrible economics and very misleading.

      • lol – I was trying a first draft at making one small part of this conversation understandable by non-meganerds, and also getting it straight in my own mind on how it might fit together in story form.

        We can have S = I + (S-I) and this thread on the front page, but we need to tell my mom how it works too.

    • Kelton even writes,

      Equations [2] and [3] above are not based on economic theory. They are accounting identities that always “add up” in the real world

      And then proceeds to completely ignore this signal fact for the rest of the post–a mere two paras later, the identities have become causal.

      • Yeah you’re right. This is what MMT usually does. They say “G-T is going down and that means S is going to go down so that’s bad”. This is definitely true during a debt deflation and maybe true during a CAD, but they take it way overboard. Probably because they never thought of S = I + (S-I).

        • Come to think of it. We’re seeing this happening right before our very eyes. The government’s budget is shrinking, tax receipts are rising and the economy appears to be gaining momentum. Why? In large part because private domestic investment is soaring again for whatever reason.

      • @vimothy

        Causal maybe in the sense that (G-T) is the only part of the equation that can be controlled.

        • paulie46

          @vimothy

          Causal maybe in the sense that (G-T) is the only part of the equation that can be controlled.

          I don’t think this is the case. I think there are ways to impact the foreign sector. Buffett’s import certificates are one way. And lets face it, monetary policy does a pretty good job of getting people out of bed to make homes and houses.

          We are not entirely helpless in these areas. It’ a matter of how much we want to do and what’s actually helpful.

          • @Michael

            What you say is true but I was thinking in relative terms – net spending is the simplest and most direct way to stimulate aggregate demand. I’m not implying that this is always necessary.

  25. Cullen Roche
    I would argue that the ultimate form of “wealth” is time.

    So shall we call this the Cullen Roche Leisure Theory of Value? Love it!

    I hesitate to, but can’t resist, subsuming that into my definition of wealth, saying that one of the things wealth gives you the power to consume is leisure.

    That would imply, by my definitions, that time (or at least leisure time) is a real good.

    This goes conceptually snakey very quickly (in what sense does one “consume” time?), so I’ll just leave it there. For the moment.

    • Cullen Roche says:

      Steve, I don’t think that’s far off at all. Now, I would argue that there’s much more to life than leisure, but that’s a whole new discussion….

      • Dunce Cap Aficionado says:

        That’s the whole point! Having more time allows us to allocate it as we see fit! Proving it’s the ultimate definition of wealth…

  26. Jeezus fellas I haven’t enjoyed a headache this much in a long time.

    Questions:

    1) Was MMT ever really denying that real value could be created in the economy? I don’t think so. I think they were simply talking about “savings” in terms of the standard monetary households usually think of it in.

    2) Cullen, If we import time-saving assets do we really need production? Obviously, the sustainability of buying consumer products from other countries is a valid issue, but just as a general point, we can save time by buying time-saving products (like a car)… we don’t necessarily need to invest in the auto plant, do we?

    3) I tend to simply look at all the private-sector-denominate contracts that exist denominated in the USD as something that COULD be a financial asset denominated in gold or services or beaver pelts, but because those are inefficient, unstable, and non-expanding, creating a fiat system is much more conducive to a productive, prosperous, free, interconnected society. I view it as being that simple. The net financial assets printed by our government really have no value in and of themselves, but when they act as claims on real assets, simply allow us to more efficiently spend our time creating real value instead of bartering. Please point out any flaws in my thinking.

    Thanks, gentlemen.

    • @dan m:

      “The net financial assets printed by our government really have no value in and of themselves, but when they act as claims on real assets,”

      I’d expand that to financial assets in general. Can’t consume them. Their only ultimate value is that they’re agreed-upon claims (more or less proximate) on real goods. Credits.

      ” simply allow us to more efficiently spend our time creating real value instead of bartering.”

      Or to easily monetize the value we’ve created, which money we can exchange for time.

  27. Colin Sugioka says:

    I am still seeing major confusion over what constitutes S and I. For example, Ramanan’s example above:

    “His saving is $600,000

    His net accumulation of financial assets is $200,000

    which is S-I = $600,000 minus $400,000 = $200,000

    If he had bought shares worth $200,000 with his deposits, saving would be in the form of $200,000 in shares and $400,000 as the house.”

    Would the $200,000 in ‘shares’ be part of I (leaving S – I = 0) or is it still S – I = $200,000 (ie are the ‘shares’ a Cash Equivalent or an Investment?)

    Ramanan also refers to the $400,000 house as a ‘home'; ie a primary residence, and considers this an Investment (I); whereas Steve Roth’s 6:47 pm comment implies that he would consider as Investment only a house purchased to rent out or resell.

    Similarly, I treated the steel purchased by my knife maker as an Investment, but I suppose it could be considered as C – ie ‘consumed’ in the making of the knives.

    Some definitive agreement on meanings for these terms would clarify this discussion.

    • “Would the $200,000 in ‘shares’ be part of I ”

      I is always the economic concept. Even though the whole financial world, media etc use the phrase “investment”, what they really mean is different – it’s more right to call it asset allocation.

      The double usage of the phrase “investment” is unfortunate.

  28. Can everyone please read the following two articles by Alfred Mitchell-Innes, if they haven’t already. They are extremely important. At the very least please read the first one:

    ‘What is Money?’ (1913)
    http://www.ces.org.za/docs/what%20is%20money.htm

    ‘The Credit Theory of Money’ (1914)
    http://www.ces.org.za/docs/The%20Credit%20Theoriy%20of%20Money.htm

    (P.S. whoever typed these articles up to put them online has made a few typos here and there).

  29. Not sure about this idea of time as wealth. There’s a guy in my area that has far more free time than most of the other locals. He spends most of it sitting on the pavement with his hand out or drinking beers in a back alley, strangely enough. But he has SO much time, never in a hurry to get anywhere. He must be the wealthiest guy around here.

    • Cullen Roche says:

      To him, he might be extremely wealthy. Wealth is different things to different people. But the universal truth is that if you have more time, you can do more of whatever it is that you feel makes you “wealthy” (even if that’s just using paper to buy useless crap). MMT has part of the puzzle right in that demand is vital, but production makes more future demand possible (hence why I believe some of the principles MMT is founded upon are flawed). They’re two sides of the same coin, but one plays a more influential role in making the coin bigger over time….And ultimately, that’s where MMT and MMR really diverge.

      • You can only use your extra time to do what you want if you have a) the freedom to determine how to use that time and b) the money or other resources to be able do what you want with that time.

        If a factory worker becomes more productive, the time he saves will simply be filled with more factory work. He may be awarded with a wage increase, but he still won’t necessarily have the freedom to determine how to use the time saved or enough money to quit his factory job and pursue other interests.

        A person may wish to have the time to sail around the world on a yacht, but if they don’t have enough freedom or money to do so, then they won’t be able to.

        A penniless unemployed guy may have plenty of time to spare, and may fill some of that time by dreaming of sailing around the world. Despite being ‘time-rich’, he still lacks both the money and the freedom to fulfill that dream.

        So it would seem to make more sense to say that wealth is ‘having that which you want’. If you want time, and you have it, then you can consider yourself wealthy.
        If you have loads of time but not enough money to pursue your ambitions, then you can consider yourself to be poor.

        A millionaire might have all the time and money in the world, and be free to do what he likes. But if he was for some reason despised by everyone whilst all he really wanted was friendship and love, then he’d probably feel pretty poor too.

        • Cullen Roche says:

          This sounds similar to the Austrian myth that the dollar has fallen 95% over the last 100 years so we live worse lives. Ill explain why I think you’re misinterpreting later. I’m busy doing awesome stuff today that would have been unimaginable 100 years ago. :-)

          • “I’m busy doing awesome stuff today that would have been unimaginable 100 years ago. :)

            Me too! :)

            Somehow we are about 30X as rich as we were in real terms.

            And let’s always remember The greatest event in human history happened when the debt to GDP ratio in the U.K. was greater than 150%. Perhaps that’s even what caused the greatest event happened. When there is enough money floating around, stupid things get funded, and some of these stupid things have lottery like payoffs which far outstrip any costs. Was it an accident the first 40 years of computers happened during WWII, the cold war and space program?

          • I get the point that higher productivity and efficiency means we spend less time doing basic stuff and can move on to better things. The simple point I was making is that productivity and time savings are not an end in themselves, but a means to an end. Achieveing that end, which is greater wealth and higher living standards (ideally for all), involves other factors, not just gaining additional time.

            • Cullen Roche says:

              Sure, but ultimately it is time that sits atop the wealth hierarchy….

              • You can have all the time in the world but if you don’t have the other means to gain or achieve the things you really want (or need) then what’s the point? Time is an important factor but not the most important – it’s up there with others too.

                • Cullen Roche says:

                  Then I guess you won’t mind dying tomorrow. That’s called running out of time. If you don’t have time then you don’t have anything. I’m not sure why anyone as bright as you would bother trying to refute that point. It’s rather obvious….

                  • You guys have to see In Time (2011). Time literally is money. Tyler Cowen (or other GMUer?) did a post on it a while back. Won’t link to his cause I don’t like to give google love to Koch proxies.

              • Unrelated point, but I really recommend that you give the articles I posted by Mitchell-Innes a read. They offer a view of money as credit which could serve to bolster your attempt to construct alternatives to Knapp’s state theory of money.

                • Cullen Roche says:

                  I’ll have a read today. And thanks for posting them. I’ve read the money one, but the other one I have not….

                  I can’t tell with you. Are you a die hard MMTer just protecting the theory or are you open minded to MMR? You seem to fight me even on the most obvious of points.

                  • I’m actually relatively a newbie even though I’ve done a fair bit of reading on the subject and on MMT in particular. I’m not a die hard MMTer but I’ll defend it when I think people have got the wrong end of the stick. I’m interested in these new developments and MMR, though don’t agree with everything that’s being said. I only argue on a subject if I think there’s an argument to be made. Regarding the ‘time as top of the wealth hierarchy’ idea, I’m pretty sure this is up for debate, it’s not suddenly set in stone as absolute truth, is it?. Does everyone here accept this idea? Where does it come from? Maybe a straw poll might help to identify whether this is now an accepted MMR fact or still a debateable subject.

                    Of course time is crucial, if you have zero time you’re dead. But you can live for a hundred and ten years in dire poverty, or without the use of your sight due to some easily curable infection that you couldn’t afford to fight, etc.

                    • Increased productivity and efficiency means people longer have to do certain things, but this doesn’t necessarily give them more time as such. Those who used to plough the fields their whole lives then became those whole worked in factories their whole lives, who then became those who worked in offices their whole lives. No more time, just doing different things, with hopefully higher pay and better working conditions.

                    • Cullen Roche says:

                      Well, I wouldn’t say it’s “set in stone”, but it’s a concept I’ve been developing for some time now. I think I can make a pretty strong argument that all goals are secondary to creating more time. But I guess I have some convincing to do, huh? :-)

              • Other articles that might be of interest are:

                ‘The Primacy of Trade Debts in the Development of Money’
                by Geoffrey W. Gardiner

                ‘The Emergence of Capitalist Credit Money’
                by Geoffrey Ingham

                Both articles are included in the book ‘Credit and State Theories of Money: The Contributions of Alfred Mitchell Innes’ which can be read as a word document online if you search for it on google (it’s the link put up by arno.daastol.com)

        • Cullen Roche says:

          Phil,

          I think you missed my point. I explain this concept of adding time here. http://pragcap.com/the-role-of-the-entrepreneur-in-a-capitalist-economy

          In essence, production and innovation allows us to consume MORE in the future than we previously could have. Things like the washing machine mean we don’t have to waste time washing a load of wash all day. Instead, I throw a load of wash in, press a button and I go spend the next hour doing whatever I want. There’s no need to send 5 people to the river to scrub clothing, haul it back, hang it out to dry, etc. This doesn’t mean you don’t still have to work hard to achieve a certain living standard. But these sorts of advancements allow us to live much fuller lives than we did 100 years ago. They allow us to consume a great deal more than we did 100 years ago. The very fact that the US economy has evolved into a service economy is proof of this. Golf is an industry? Entertainment is an industry? Ha. The USA is a fabulously wealthy country in this regard (as are many others).

          I would even argue that this capitalist component of any economy makes socialism acceptable. It’s the cornerstone of our lives and our pursuits. Without evolution through production we are not the species we are. It’s inherent in us to improve, to advance and to become more efficient. We do this primarily through the desire for real wealth, which is ultimately TIME. We are finite creatures keenly aware of this at every moment of our existence. And we have an innate need to utilize time as wisely as we can (not that we always do, but generally speaking). And don’t get me wrong, govt, if used properly, can help big time in this department and has.

      • You seem to be going from claiming that MMT doesn’t emphasise production or productivity enough to apparently claiming that MMT considers production/ productivity to be irrelevant. I really don’t know where you got this idea from.

        Warren Mosler:

        “…the full range of fiscal policy options should be considered and evaluated based on their economic impacts rather than imaginary financial restraints. Current macroeconomic policy can center around how to more fully utilize the nation’s productive resources. True overcapacity is an easy problem to solve. We can afford to employ idle resources.

        …Only a misunderstanding of money and accounting prevents Americans from achieving a higher quality of life that is readily available.”

        (Soft Currency Economics) http://www.gate.net/~mosler/frame001.htm

        Bill Mitchell:

        “We need to entrench a high real wage- high productivity culture which has been undermined by the neo-liberals.”

        http://bilbo.economicoutlook.net/blog/?p=13411

        “The wage share was constant for a long time during the Post Second World period and this constancy was so marked that Kaldor (the Cambridge economist) termed it one of the great “stylised” facts. So real wages grew in line with productivity growth which was the source of increasing living standards for workers.
        The productivity growth provided the “room” in the distribution system for workers to enjoy a greater command over real production and thus higher living standards without threatening inflation.”

        http://bilbo.economicoutlook.net/blog/?p=18048

        • Cullen Roche says:

          I NEVER said any such thing….

        • I am 100% sure MMT considers real world production is a big deal. It’s one of the things that attracts and attracted me to MMT.

          In fact, Mosler’s semi-claim (I can’t find the thread with this statement) that if we get the policy right we can have 15% real growth is part of the reason I started thinking about the TC rule. Just looking at the basic math of the JG showed me we needed “more” to get policy right, and then looking at the deficits in WWII made me think we could in fact get 10% real growth.

          I think MMT looses sight of the fact the private sector can use equity in a money-like way, and that people find this sometimes useful.

          • @Michael
            “I think MMT looses sight of the fact the private sector can use equity in a money-like way, and that people find this sometimes useful.”

            Can you be more specific here? I’ve read this whole thread and I’m still not sure what you mean here and how this relates to MMT (I mean I’m not getting it – not that no one is explaining it properly). Can that statement be condensed into another TC rule?

          • “In fact, Mosler’s semi-claim (I can’t find the thread with this statement) that if we get the policy right we can have 15% real growth is part of the reason I started thinking about the TC rule”.

            He was referencing Treval Powers book Leakage (what Ray Canterbury would call Seepage), which Randy Wray has mentioned in a couple of interesting papers.

            In his book, Leakages, Treval Powers makes the outrageous claim that without leakages, the US economy could grow at a sustained rate of 13% annually. According to his calculations (based on empirical evidence), normal leakages of 7.4% reduce the rate of growth to 5.6%, leaving the economy operating at only 92.6% of its capacity. Periodic restrictive policy by the Federal Reserve adds another layer of leakages, which can reduce growth to zero, causing the economy to operate at only 87% of potential.

            http://www.cfeps.org/pubs/pn/pn0501.html

            I will also provide an alternative interpretation of the constraints that have been in operation in the US since the 1970s. I will make two main points: 1. the US economy suffers from chronic inadequate demand, and has rarely been subject to any significant supply constraints—whether of productive capacity or of labor; 2. and leakages have been the cause of the demand constraints.
            http://webcache.googleusercontent.com/search?q=cache:-z-Ypsnxb_cJ:cas.
            umkc.edu/econ/economics/faculty/wray/papers/cambridge%252005%2520paper%2520irae%2520final.doc

  30. Colin Sugioka says:

    I think my confusion in this instance may be between the ‘micro’ example and the ”
    macro’ accounting identity. The $200k used to purchase shares could be considered an ‘investment’ by the individual, but would still ‘exist’ as ‘cash’ for some other entity, so macro S – I would be unchanged – at least as long as the seller was a domestic entity.

    But this raises another question: my suggestion that S -I = CE (Cash Equivalents) was predicated on the assumption that the Current Account Balance (X=M) is always constituted by USD’s (which as the global reserve currency and with a continuing US CAD seems to be the actual case). However, could a surplus be constituted not only by foreign currencies/bonds but even equities? (This would make my suggestion incorrect.)

    In a world of multinationals and a global equities market, this makes my basic point that I does not really factor in the macro accounting identity even stronger (the same basic point I think JKH makes above). In addition C is not included in the identity, while it seems like the real impact of the US CAD depends on its relative effects on Consumption versus on Investment.

    • I suggest you first ignore open economy considerations.

      ” S -I = CE (Cash Equivalents) ”

      I do not think such an identity exists. For, CE is a stock and the left hand side is a flow. For the private sector as a whole, S – I = G – T and hence S – I is equal to the government deficit. The composition of the financing of the government’s deficit can be anything.

      “but would still ‘exist’ as ‘cash’ for some other entity”

      Possible the one who gets the cash from you reduces his indebtedness to the banking system thereby reducing the amount of excess cash.

      Here’s an alternative direction – assume no investment in the current year for this individual. Similar story:

      Person A earns $1,000,000, pay taxes of $300,000 and consumes $100,000 but no house purchase in the current accounting period. He prepays $600,000 (principal) of his $xyz home loan taken last year. The bank simply reduces his deposits by $600,000. The bank has $600,000 less of deposits in its liabilities and this person has $600,000 less as liabilities and $600,000 less of deposits as assets. The money stock has reduced by $600,000.

      He has still saved $600,000. Why? because his disposable income is $1,000,000 minus $300,000 and his consumption is $100,000.

      The cash is still there somewhere is a dangerous assumption. The correct intuition is income = expenditure.

      The general point being most of us think of saving in some physical form but saving itself is an abstract concept (rather than a “thing”) which shows itself as investment and/or increase of assets and/or reduction of liabilities.

      • Colin Sugioka says:

        @Ramanan at 11:56 pm. “CE is a stock and the left hand side is a flow.”

        Good point. I was actually thinking of the increment in ‘horizontal’ money injected by the government’s ‘deficit’ for a given period, but that should really be expressed as delta Cash Equivalent (‘dCE = S – I’?).

        In any case, I’m not sure the macro Sector Accounting Identity is of much use in addressing Investment in relation to productivity, and the effect of the CAD on these.

        I don’t view this as a criticism of MMT. It is ‘Modern Monetary Theory” not ‘Modern Investment/Productivity Theory’ – although ideally such a theory would address the role of the USD as the global reserve currency, and its relationship to the US CAD.

        • ” It is ‘Modern Monetary Theory” not ‘Modern Investment/Productivity Theory’ – although ideally such a theory would address the role of the USD as the global reserve currency, and its relationship to the US CAD.”

          Yes, very much so. This hasn’t been stated as clearly as you just did. Nice. MMR is all about using those accounting identities to help us identify where and when to push, and how much is really possible.

          I say this is part of what we’re trying to accomplish with MMR, is to make the insights of Mosler and Eccles and others into something which is not just about the fact the state can make money, but also incorporates the money creation ability of the different sectors into something which can push our real growth into WWII territory with WWII inflation, in perpetuity.

          We are reaching the point of awareness about our world where future growth will be far more planet friendly, far more globally aware. Part of this is simply because we’re so much richer, we can afford to care about the quality of air, and making things look beautiful as well as being extremely efficient and productive.

          This is the goal, and I think just exploring the relationships with candor and pragmatism can take us there. But I’d be overjoyed to move from 3% real GDP growth to 5% real GDP growth. Instead of doubling every 25 years or so, we’d be doubling every 15 years or so. In 1 human life time of 80 years, it means everyone on the planet is 2.3X richer in real terms at the end. That’s a huge deal.

          • “but also incorporates the money creation ability of the different sectors into something which can push our real growth into WWII territory with WWII inflation, in perpetuity.”

            Yeah, but between now and then there needs to be a new price stability tool (naturally I think William Vickrey’s anti-inflation market is the way to go). As Vickrey’s old grad student David Colander once said:
            “The lesson most economists learned from World War II was that Keynesian aggregate demand policy worked. The fact that the expansion of aggregate demand had been accompanied by major controls over wages and price … was lost on the majority of the profession”.
            http://webcache.googleusercontent.com/search?q=cache:VSDU0wX0sOMJ:www.franciscovergara.com/PriceControls.doc+&hl=en&gl=us

            • Very true. I keep coming back to Colander’s ideas about making good contracts. It’s not the inflation that matters, its the volatility of inflation.

              If we had 100% inflation with zero variance of that inflation, we could make fair contracts easily. It’s when the volatility gets high relative to the level of inflation those contracts get messy and less certain.

              • I’m not sure high inflation is a price worth paying for high growth. Perhaps in a time of national emergency (WW2) it’s acceptable, or unavoidable, but otherwise, I can’t see people being happy with it, to say the least.

            • Having to buy the right to raise prices strikes me as being extremely anti free trade. Are you suggesting everytime someone wants to pu up the price on their product they have to buy the right to do so? That doesn’t sound anything like a free market to me.

          • Dan Kervick says:

            The accounting identities can’t tell you where and when to push, Michael. They are just identities. To get an argument about where and when to push you need causal models.

            • Of course, Dan, but to even start considering causality, we need some accurate thinking about the plumbing. That’s why I think this MMR thing has legs, we’re building on Godley for how it all fits together, adding in some insights from MMT where appropriate, and then starting to think about relationships like JKH’s identity.

              • Dan Kervick says:

                So far I’m not seeing anything new, Michael. JKH’s identity is a logical triviality; it tells us nothing.

                • Cullen Roche says:

                  It tells us nothing? Except that the entire goal/policy structure of the MMT framework is wrong? That the foreign sector approach is wrong? That the balance of consumption vs production is wrong? That the driver of money is wrong? That the state theory is wrong? That the horizontal level matters a lot more than MMT emphasizes? You call these points “trivial”? Wow. They are something totally new. I think MMTers want to trivialize these developments because they are worried we’re right and that it means pieces of MMT have been wrong….I think MMTers should be embracing these ideas and accepting the fact that maybe everything they’ve been working on has not been right. There are other options out there….They don’t have some holy grail….But we are, importantly, all working from a very very similar foundation of understanding how the system works and we agree on an enormous amount. I don’t know why we’re being portrayed as the bad guys here. The bad guys are still the neoliberals. Let’s not forget that and let’s refocus our energy on defeating them because the world very badly needs them to lose….

                  • It’d be good to see how those conclusions necessarily derive from JKH’s equation, spelt out in layperson’s language.

                  • Dan Kervick says:

                    I’m sorry Cullen, but I think you are set on some kind of a vendetta and are now throwing out a half dozen or so babies with the bathwater you don’t like. You started off with some perfectly reasonable, localized criticisms about whether the government could effectively stabilize prices with a job guarantee program. And that issue does depend on the degree to which tax obligations underpin the demand for the government’s money.

                    But I think you’ve gone pretty far overboard in the massive number of things you now think are implicated in that dispute.

                    • Cullen Roche says:

                      Vendetta is the wrong word Dan and you know it. I am on a personal mission to portray the truth to those who read my work. If you think the truth is a policy proposal embedded inside of a macro understanding of the world then you believe in MMT. I’m not going to tell you you’re not allowed to believe that, but I will point it out to those who are misled about it. So when MMTers present their theory as “macroeconomic reality” I will gladly point out to readers that they’re actually learning a macro theory that is not necessarily “reality”. It’s nothing personal. It’s about getting things right. As an MMTer, you believe in a specific macroeconomic theory with very specific political and policy prescriptions. I am not going to tell you you’re not allowed to believe in it, but don’t expect to portray it as “macroeconomic reality” and not get called out for being misleading and in some cases, just flat out wrong about your attempts to validate those politics.

  31. Now here’s a juicy tidbit on MMT. Has Mosler ever mentioned that one of this funds got wiped out by the Russian default? Haha. Kind of an important detail when you constantly talk about how right MMT has been about everything.

    “But MMT’s own relationship to real-world cases can be a little hit-or-miss. Mosler, the hedge fund manager, credits his role in the movement to an epiphany in the early 1990s, when markets grew concerned that Italy was about to default. Mosler figured that Italy, which at that time still issued its own currency, the lira, could not default as long as it had the ability to print more liras. He bet accordingly, and when Italy did not default, he made a tidy sum. “There was an enormous amount of money to be made if you could bring yourself around to the idea that they couldn’t default,” he says.

    Later that decade, he learned there was also a lot of money to be lost. When similar fears surfaced about Russia, he again bet against default. Despite having its own currency, Russia defaulted, forcing Mosler to liquidate one of his funds and wiping out much of his $850 million in investments in the country. Mosler credits this to Russia’s fixed exchange rate policy of the time and insists that if it had only acted like a country with its own currency, default could have been avoided.”

    http://www.washingtonpost.com/business/modern-monetary-theory-is-an-unconventional-take-on-economic-strategy/2012/02/15/gIQAR8uPMR_story_4.html

  32. Nice try FD. Once again you demonstrate that you just dont get it.

    Russia CHOSE to default. Mosler bet they would never voluntarily default.

    Keep reaching.

    Your walking around here with an erection, thinking that this site is a refutation to MMT. The giddiness in your comments is palpable. These guys are simply trying to refine and further target the insights of MMT in order to push for different policy prescriptions than a JG.

    Is the 015 in your moniker your age?

    • Hear hear

    • Cullen Roche says:

      Greg, I know its easy to think that MMR only started because of the JG, but the reality is that I had always been MMR. My primer was always different with a different driver of money….my whole starting point has always been different. I just never realized how much it mattered til the JG debates.

      • Sure Cullen, I understand that. But you yourself have stated that until you saw how imbedded the JG was with some MMT “ists”, you didnt feel the need to start your own paradigm so to speak. My point was I dont see you as trying to discredit MMT in a large way. You have some differences of opinion on some matters but there are those (FD015) who are giddy at the thought that you are somehow exposing Mosler and putting him in his place.

        I totally support what is going on here. It CAN be healthy. I also think you, Michael and Beowulf are all stand up guys and WANT it to be healthy. I wish Warren, Randy, Scott, Bill Mitchell, Marshall and others (like Winterspeak) would come here and chime in. I know they are all busy and dont wish to spend all day discussing this stuff, but I wish they could. A guy can dream.

        I want to see where you guys take this because Ive become used to reading your articles at TPC, Mikes at TC and Beowulfs (sometimes cryptic) comments all over these blogs. I find myself agreeing with much of what you guys say and learning a heck of a lot, so Im a supporter.

        • Cullen Roche says:

          I think that’s a really great comment Greg. I have zero desire to discredit MMT. It would be self defeating. I think we’re trying to make a healthy contribution. But it’s not entirely MMT. I really never had any desire to branch off, but people literally started telling me I couldn’t call my work MMT….So I stopped….

  33. Posted this at Winterspeak

    http://www.winterspeak.com/2012/02/sii-s.html

    —–

    The point is that one has to specify the problem well.

    A household, an entity or a sector as a whole can have a positive saving – such as 4% of its income and yet be a deficit spender because saving net of investment is negative.

    So we see the title of our post http://bilbo.economicoutlook.net/blog/?p=10384 which is not only misleading but WRONG because deficit is saving net of investment, not saving alone.

    The best way is to actually check the national accounts data.

    Both in the United States and the United Kingdom, the household sector (at least) had positive saving and its net worth kept rising before the crisis because of saving (and accumulated savings) and due to capital/holding gains.

    On the other hand, due to its deficit spending (in spite of having positive saving), an entity or a sector as a whole (such as the household sector) runs into higher indebtedness and its stock/flow and flow/flow ratios may run into an unsustainable territory as interest payments begin to hit or due to some exogenous shocks for example.

    which is very different from saying “…If the government continued in this vein, accumulated private savings would equal the cumulative budget deficits.” which is wrong as an accounting identity.

    Another example of the repeat in mistake.

    “this also means it is impossible for the aggregate saving of the nongovernment sector to be less than (or greater than) the budget deficit.”

    http://www.neweconomicperspectives.org/2011/10/mmp-blog-20-effects-of-sovereign.html

    (Aggregate saving is different from net saving – where net saving is saving net of investment).

    Example: Closed economy. Budget deficit is 2%. S of the private sector is 10% and investment is 8%. “aggregate saving” of the private sector is 10%. Net saving – saving net of investment is 2%.

    Agreed the MMTers sometimes use saving net of investment but one wrong and one right doesn’t make a right!

    • @Ramanan: “A household, an entity or a sector as a whole can have a positive saving – such as 4% of its income and yet be a deficit spender because saving net of investment is negative.”

      Here’s how this might (does) get confused, I think. You can’t make that statement about the household or the firm sector if you’re talking inside the NIPA model, because households don’t invest, and firms don’t consume or save. So you can only make that statement about the private (non-bank?) sector.

      I’m totally not saying you’re wrong on the key concept, QTC. Just that that NIPA assumption makes it hard to think about and discuss within NIPA accounting.

      Does this make sense? If yes, we need an easy, clear way to explain that to people.

      • Yes, NIPA somehow strangely does not include investment for household or does something confusing.

        But the Z.1 Flow of Funds Accounts includes it, isn’t it? Check Table F.8 and F.10 here:

        http://www.federalreserve.gov/releases/z1/current/z1.pdf

        However, if you consolidate the private sector, then the NIPA complication does not arise. Isn’t it?

        • @Ramanan: “However, if you consolidate the private sector, then the NIPA complication does not arise.”

          Exactly right. But when you do so don’t you make invisible the very thing that you’re trying to put across — the nexus of households and firms (and the net effect on bank loans outstanding)?

          Suppose you consolidated:

          Nonfinancial corporate business
          Nonfinancial noncorporate business
          Households and institutions

          And looked at an S-I time series for that consolidated (non-bank private) sector.

          As usual I’m having a lot of trouble doing this in my head, so any thoughts welcome.

          Interesting but not sure if it’s important or why: F.8 doesn’t include noncorporate nonfinancial biz for Saving (is it hidden in another category, or are they, NIPA-like, assuming those can’t “Save”?), but does include it for CFC, investment, capital account, and lending/borrowing.

          • Hadn’t observed your point about F.8 earlier – will check.

            What I am saying in general is that similar to what JKH has been saying. Saving and saving net of investment are different things.

            Given that the government can be in surplus and the private sector can save (as different from saving net of investment), there is a tendency IMO, to blur this because it makes the case for deficit spending by the government a more involved one!

    • Ramanan,

      I think MMTers always mean ‘savings net of investment’ when they talk of savings, but don’t think they are always explicit enough about this. Bill Mitchell often has questions along this line in his Saturday quizzes where he makes a clear distinction between households and businesses.

    • I’m not sure how you can consider yourself to have net savings if you’re deeply in debt.

      • “I’m not sure how you can consider yourself to have net savings if you’re deeply in debt.”

        Well, that’s conflating two things for the sake of conflating.

        In fact, during the mid 2000s, there were some who by doing some kind of balance sheet analysis argued that the household balance sheet is strong. Of course, superficially they are right because just looking at the household balance sheet (as opposed to flows) gives one the impression that they are strong.

        Because … even though household debt levels are high, they have enough assets.

        That is not my argument but just pointing to the direction of detailed analysis.

        “I’m not sure how you can consider yourself to have net savings if you’re deeply in debt.”

        Well, that’s again mixing saving and net saving again!

        • Surely that’s kind of the point. Your savings aren’t really savings at all if they can all go up in puff of smoke as a debt bubble explodes. Surely this is why MMTers emphasise net savings and net financial assets, because we have seen what happens when you have an economy built on private debt and so-called ‘assets’.

          • sorry I’m not very good at the technical stuff, not an economist, still a newbie

            • That’s OK but remember that the private sector can save even if the government is in surplus (closed economy for simplicity)!

              But as a result of the accounting identity, the private sector has net incurred liabilities so the analysis shifts to whether how big, how long etc.

              • Ok, so the real isue is how sustainable this is, for how long?

                • Yes, I understand the point you are making. And unsustainable trends sometimes run longer than one expects.

                  But to make the point, one doesn’t need to change definitions around. This discussion is not about the last thing you asked. It is about precise usage of the phrase saving because in these matters one has to be precise and it doesn’t help being imprecise.

        • “Because … even though household debt levels are high, they have enough assets.”

          Dont you really mean that the PRICE of those assets is high enough to make the debt look “worth it” If I owe 200,000 on a million dollar house I look pretty good. Take that house to 400,000 I dont look so good.

          Maybe what we all need to do is simply put our houses up for sale and declare they are selling for 5x what they were last appraised at. That will make our balance sheets 5x better looking!

          It seems to me on some level this is what Sumner and his ilk are essentially proposing.

          • Okay, according to the latest Z.1, the US households have assets (financial and nonfinancial both included) of around $71.1 trillion and liabilities of $13.8 trillion.

      • Bingo!

  34. Regarding MMT backlashes, winterspeak bewilderment, and “logical trivialities”:

    On the issue of S = I + (S – I), and the MMT post in question, those who are puzzled about this should really explore the extended discussion that’s already taken place, and think about it some, if truly interested. It’s sort of like somebody who hasn’t read any history indignantly asking you what the point was about the Second World War, because he doesn’t “get it”. If they don’t appreciate the discussion, they should at least take their cue from the opening Waldman comment at Asymptosis, which is grist for the equation in question:

    http://www.asymptosis.com/how-accounting-constrains-economics.html#comment-3725

    And here is a similar quote from the original classic Interfluidity post critiquing MMT,

    (From http://www.interfluidity.com/v2/1357.html):

    “MMT-ers sometimes blur the distinction between “private sector net savings”, which is necessarily backed by public sector deficits or an external surplus, and household savings, which need not be. In doing so, MMT-ers rhetorically attach the positive normative valence associated with “saving” to deficit spending by government. This is dirty pool, and counterproductive. The vast majority of household savings is and ought to be backed by claims on real investment, mediated by the liabilities (debt and equity) of firms. There is no need whatsoever for governments to run deficits to support household saving. When household savings increases, an offsetting negative financial position among firms represents increase in the amount or value of invested assets, and is usually a good thing. Household savings is mostly a proxy for real investment, while “private sector net financial assets” refers to a mutual insurance program arranged by the state. It is a category error to confuse the two. Yet in online debates, the confusion is frequent. Saving backed by new investment requires no accommodation by the state. It discredits MMT when enthusiasts claim otherwise, sometimes quite aggressively and inevitably punctuated by the phrase “to the penny”.

    And here is the recent Interfluidity response where Waldman expressed his enthusiastic support for the meaningfulness of the equation in question:

    http://www.interfluidity.com/v2/2874.html#comment-22596

    Winterspeak should cut his teeth on those references, and the background discussions here and at Asymptosis, before requesting wheel re-invention on the matter. My own blogosphere comments on just this one aspect of conceptual saving obfuscation probably go back several years. This is a conclusion that Waldman and I reached independently. But it’s only recently I translated the idea to simple algebra/accounting terms, and Waldman has agreed with this representation wholeheartedly. If Steve Waldman sees fit to repeat a fundamental observation about MMT in the way he has on this issue, I’d say it’s at least worth considering rather than dismissing it as a “logical triviality”. He tends not to do trivial analysis.

    Oh, and Dan’s clever permutation game completely misses the point. The point that Waldman hones in on and that I agree with is the difference between S and (S – I), as per the references above, not the backward image in I terms. And I’m not really concerned with which one is the backbone. That’s also not the main point of this. But desperate analysis usually changes the subject in such ways.

    The particular aspect of terminological obfuscation is just one of many stylistic aspects that are concerning about MMT. Lavoie has touched on a number of them. My own first prize award goes to MMT’s habitual submersion of existing institutional realities in the interest of promoting a fictitious view of existing government account consolidation, as in “the government neither has nor doesn’t have money”. Ramanan can point to the famous shredding example as one where dramatic flair is positioned falsely as truth, in order to appeal to “the masses”. And he can no doubt point to numerous others. And of course, there is Cullen’s tipping point of big picture description/policy conflation, with the mandatory absorption of JG economics into a “modern monetary theory”.

    MMT is not a necessary condition for understanding the monetary system. It has no right to hijack any claim to a unique understanding of it. The fact is that MMT is covered with stylistic barnacles that actively convert what should be an objective description of the monetary system into a normative policy couching of some strange contortion of what actually exists. It doesn’t take a monetary genius to know a central banking function can be the conduit for deficit financing in any amount desired. That fact doesn’t require the distorting lens of make believe monetary system arrangements and a biased policy framework.

    There’s significant mutual confirmation of the S = I + (S – I) point in the Waldman analysis. And I’ll value Waldman’s formidable analytical powers (but not his politics) over a thousand non-researched drive-by’s any day. I like Winterspeak, and have enjoyed a personal history of interesting idea exchange with him, but he should be more circumspect about his subject matter. There’s more to understanding the financial system than the rote transmission of Mosler-isms. The subject matter of monetary operations and finance can’t be occupied intellectually by a closed minded policy cult. The result can be generally embarrassing at times – what Waldman has adroitly referred to as “pop-MMT”. References abound everywhere for how the MMTers make themselves look silly in their habitual defensiveness of their carefully chosen language, lashing out at critics of their style. Lavoie’s article and numerous Waldman references beyond those here are benchmarks for those. Even today’s excellent Washington Post article alludes mildly to this sort of defensiveness. There’s no need to communicate the facts of the monetary system from a position of weakness. It only suggests the position is wrong. The facts are the facts. How does the system work? How could it work? The facts suffice, with explicitly specified counterfactuals as possible options and policy choices. Style shouldn’t obscure the facts. Leave MMT reality contortion at the door. It’s neither constructive nor charismatic. It requires undoing, and it’s frequently nasty.

    BTW MMR, congratulations; you’ve already attracted enormous traffic for a new blog (albeit with an established “parent” brand). It must be some sort of record. That tells you something. You’ve already got 265 comments on this post alone, and that compares to … oh, I really shouldn’t do that.

    • Cullen Roche says:

      Tremendous post JKH. Your contribution to MMR is equally tremendous. So thanks.

    • @JKH (or SRW, if you’re around, or anyone else for that matter): ““private sector net financial assets” refers to a mutual insurance program arranged by the state.”

      I would really like a fuller explanation of that, especially vis-a-vis the notion of state money “leveraging” real assets.

      • SR,

        That may be the most enigmatic phraseology in his comment, but perhaps not central to it, IMO. It’s a descriptive sidebar, I think. He may be analogizing NFA capitalization in the form of a mutual insurance company structure as opposed to a stock structure. I’m not sure. But the important thing is that you can rest assured IMO again that he’s thought through the concept of NFA as deeply as any MMTer.

        Insofar as the leverage language is concerned, that’s a separate issue. And it’s really only about language and logical structure. I’m not sure I’ve seen SRW even touch on this. My own view is that the MMT positioning of horizontal money as the leveraging of vertical money is backwards. I’d say that the government should leverage an (S = I) component with an (S – I) NFA injection according to decided policy response to apparent demand for (S – I), until aggregate demand gains traction. That’s no different than standard MMT meaning (or non-MMT standard interpretation that deficit spending is expansionary in nominal and/or real terms), but the language is totally inverted from apparent MMT paradigm.

        And this subtle point on language, which was at your request, will no doubt bring forth more MMT critics from the wings, questioning the point of the point. They’re good at ankle biting in that way, notwithstanding somebody else’s interest in it.

        • @jkh: “you can rest assured IMO again that he’s thought through the concept of NFA as deeply as any MMTer”

          Oh, you sure don’t have to convince me to pay lengthy attention to anything SRW says, and absent some damned good thinking to the contrary, accept it as deeply, cogently, and coherently thought-out. SRW for President. (We just have to let him run the whole shop via email — without revealing his identity of course.)

          @vimothy: “much of our motivation in “lending to the government” is not to capture growth, bit to self-insure against idiosyncratic risk…””

          Right, thank you. I loved that statement and your reminding me of it makes many things gel.

      • Steve and JKH,

        Re the “mutual insurance policy”, SRW elaborates on this theme later in the post:

        “I claim that realistic models, which incorporate consumers who face liquidity constraints and idiosyncratic risk in an economy subject to systematic risks of production shortfalls, do not conform to an intertemporal government budget constraint of remotely the conventional form. I’ve already described half of such a model here. I should add the other half, and write the math down in a way that economists can understand. The key insight is one that both quasimonetarists like Rowe and MMT-ers accept but rarely state explicitly — much of our motivation in “lending to the government” is not to capture growth, bit to self-insure against idiosyncratic risk…”

        Final para in the “update” to the original post.

    • Excellent comment JKH.

      Agree with everything.

      MMT has done a disservice to the economics profession because right kind of ideas will be seen as “like MMT” and since the MMTers are popular (or infamous whichever is the case) in the blogosphere, the ideas are likely to be dismissed. And this is not necessarily fully bad on the part of the policy makers and economists who are open to give up their dogmas because MMT comes out as an advocacy group and will be seen with a different kind of suspicion (other than academic kind of skepticism which every academician has in every field). MMTers stand between the policymakers and the right ideas – none of which are really original to them – and hence a barrier to solving the world’s problems.

      Moreover, unlike the image they paint of themselves as knowing it all and counting on finger tips how many people actually “get it right”, MMTers are still “Learners” ;-)

      Cullen has taken the brave step of breaking up.

      • very good, Ramanan

        brave step, indeed, and most worthy of support

        • Dan Kervick says:

          I can understand that perspective. But with a world of battles out there to be waged for a saner approach to monetary and budget matters, isn’t there also something to be said for staying together for the sake of the children?

      • Ramanan says:
        Tuesday, June 9, 2009 at 17:50

        No Regrets Bill. Have read most of your blog and lot of papers of Randall Wray and it has really helped me think about monetary and fiscal policies in the correct way!

        http://bilbo.economicoutlook.net/blog/?p=381

        • h y p o c r i t e

          • “h y p o c r i t e”

            Nice try Phil.

            That was a while back – when I hadn’t started noticing these things. No hypocrisy.

            • If you’re standing on someone’s shoulders then maybe you shouldn’t shit on them, even if you disagree with some of their arguments.

              • “If you’re standing on someone’s shoulders then maybe you shouldn’t ”

                No, I am not standing on their shoulders. MMT itself stands on Post Keynesian Economists’ shoulders and good ones do not go around mixing saving and net saving.

              • Ok in mmt blogs the word ‘net’ is sometimes left out before the word ‘savings’ but from what I’ve seen, more formal articulations of mmt make the distinction. If the point is that mmt writers are sometimes a bit sloppy in their writing then it’s not a great revelation.

                “… the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save (financial assets) and thus eliminate unemployment is the currency monopolist – the government. It does this by net spending…”
                “The non-government sector can create financial assets (including bank deposits – which we think of as “money”) but not net assets. Because in the non-government sector for every asset created there is a corresponding liability.”

                http://bilbo.economicoutlook.net/blog/?p=332

                “… when an external deficit (X – M < 0) and public surplus (G – T < 0) coincide, there must be a private deficit. While private spending can persist for a time under these conditions using the net savings of the external sector, the private sector becomes increasingly indebted in the process.”

                http://bilbo.economicoutlook.net/blog/?p=17637

    • Dan Kervick says:

      JKH, suppose for the time being we get rid of all of the loaded terms like “investment”, “savings”, “taxes” and the like – each of which has its various positive and negative connotations and is loaded up with competing traditional definitions, and just used the simpler terms “payments” and “receipts”. And suppose we determine to focus entirely on the monetary dimension of the economic world, viewed in light of a single currency such as the dollar. Let’s think for now only about dollars moving around in the economy, and changing possession from one person or entity to another.

      Leave out every other kind of economic activity or transfer. If a cow or apple changes possession, even if part of an exchange in which the cow is purchased with for dollars, leave out the cow. And if a promise for dollars changes hands, leave that out too. If I write out an IOU for $1000 and give it to you in exchange for a cow, I haven’t yet given you dollars; I’ve given you a promise of dollars. And if a dollar is exchanged for a Euro, leave out the Euro. Juts focus on the dollar.

      Now obviously, the movement of dollars in the economy isn’t the whole economy. It leaves out the majority of economic activity and value creation. But it’s a useful just to track the dollars. You can draw a few important conclusions.

      Let’s divide up the economy of the entire world into any arbitrary sectors, a, b, and c, and use “Rxy” to stand for receipts by sector x from sector y, and “Pxy” to refer to payments of sector x to sector y. Use “Rx” to refer to the receipts of sector x and “Px” to refer to the payments of sector x. We have, where variables range over a, b and c,

      For any x and y, Pxy = Ryx

      For any x, Px = Pxa + Pxb + Pxc

      For any x, Rx = Pxa + Pxb + Pxc

      Now let’s use “Bx” as an abbreviation for “Rx – Px”, the balance of receipts over payments. Using a little logic with all of the above, we have:

      Ba + Bb + Bc = 0.

      Now each of these terms is a flow: it refers to receipts and payments over some time period from t1 to t2. At the start of that time period, everyone has some stock of dollars, and at the end of the time period everyone has some (possibly changed) stock of dollars. Let’s use “DELx” to refer to the change in dollar stocks in sector x during the indicated time period. Here is something that is not in general true:

      DELa + DELb + DELc = 0

      It’s because the total sum of dollars might change over time. Now here’s a definition: say that sector x is dollar constrained if , for any times t1 and t2, Bx over the interval t1 to t2 equals DELx over that interval.

      And now here is a substantive descriptive claim or conjecture: In the real world, where the three sectors are the US government sector, the US domestic private sector, and the sector consisting of everything external to to the US government sector and domestic private sector, both the domestic private sector and the external sector are dollar constrained while the US government sector is not dollar constrained. The government sector manufactures dollars. But the other sectors do not, and so their changes in dollar stocks depend entirely on receipts of dollars from other sectors and payments of dollars to other sectors.

      I believe this claim is true, because while the private sector can manufacture liabilities for dollars, more or less at will, it cannot manufacture dollars. Liabilities for dollars can be very useful; you can trade IOUs for dollars for other goods, and use them to finance production. In times of expanding credit IOUs proliferate and people can almost forget that they are not dollars. But when credit tightens people demand redemption of their IOUs, and if the government sector has not supplied the private sector and external sector with additional dollars, debtors default and networks of cash flows are disrupted and fail.

      Also, even in optimistic times the expansion in IOUs demands an ongoing expansion of dollars to ensure the smooth functioning of the payments system, because when a depositor commands that some dollars be paid to the order of a depositor whose deposits are in another bank, the payment must clear through the dollar reserve accounts held by the Fed. As deposits (IOUs) increase, dollars must increase as well, and these are all supplied by the government sector.

      This does not mean that the government drives the creation of IOUs by first supplying the dollars. Rather the causation typically goes the other way. Banks create IOU’s in response to the desires of consumers and producers for an increase in exchange media to finance their activities, and these customers are willing to issue their own IOUs pledging future payments of dollars in return for these bank IOUs’. The government then mostly accommodates those desires by supplying the additional dollars needed to support the expansion of payment flows. It doesn’t have to work this way. But that’s the way things actually seem to function given the system that we have currently constructed. This picture of the direction of causality in the bank lending channel appears to be common property of a large number of folks in the post-Keynesian camp of economists, including MMT, and differentiates them all from most monetarists.

      I haven’t incorporated any hypotheses here about what accounts for the demand for dollars in the first place, or about what sustains the demand for dollars over long stretches of time. I haven’t said anything about how the current system evolved and how we ended up using dollars as the universal medium of exchange in the US domestic economy. I haven’t said much about whether money drives production or production drives money or whether both money and production are driven by the truth fairy, whatever “drives” means anyway. I have only claimed that

      And it doesn’t matter how many sectors there are. If we use the government sector and divide everything else up into 17 additional sectors, equivalent claims still hold.

      • Dan Kervick says:

        Damn, what a lot of typos in the previous post. For most the interpretation is obvious. But near the end where I said,

        “I have only claimed that”

        I meant to write:

        “I have only claimed that the government has a dollar monopoly, and not said what forces underpin that monopoly.”

        • Dan Kervick says:

          God what a mess.

          For any x, Rx = Pxa + Pxb + Pxc

          should be

          For any x, Rx = Rxa + Rxb + Rxc

          Sorry about all those errors everyone.

      • I like that Dan. Seems very clean

  35. I just want to mention that some tone of catty tribalism is arising here. I’m voting that we assiduously avoid same, for both practical* and aesthetic** reasons. No offense intended.

    * Maintaining what in rhetoric is called a strong and admirable “ethical position,” from which arguments are best won, others are best convinced. Ridiculing those who don’t seem to “get it” doesn’t seem to get them to get it. As one who’s trying to figure out what I think, I feel myself being somewhat contra-convinced by it.

    ** I just personally find it unpleasant (though like others I can’t seem to resist doing it myself at times, especially when I turn up what I self-admiringly find to be a particularly clever and biting witticism…).

  36. JKH: “My own first prize award goes to MMT’s habitual submersion of existing institutional realities in the interest of promoting a fictitious view of existing government account consolidation, as in “the government neither has nor doesn’t have money””

    It is clear that you have no experience to science. Yes, you *can* conflate the Fed and the Treasury, if you are talking about the govt relationship with the rest of the world. The same is true of a firm – nobody cares how departments do internal accounting. Nobody in MMT says it is true, but it makes sense to think in terms of this model, because it simplifies the situation and allows you to understand the relationship of the combined govt with the rest of the world (models don’t have to be perfect to be useful, actually no model is or can be perfect). Saying that you found this “error” in MMT, is like saying that you just overthrew Quantum Nuclear Physics because it treats protons and neutrons as if they had no structure, gasp, how wrong! Overthrow Copernicanism with is circular orbits while you are at it (they are elliptical!). This is totally ridiculous, sorry.

    Your another “profound” find of S=I+(S-I) is a trivial consequence of understanding what “saving” is in terms of accounting, something very well known to Mosler and the rest of MMT, and probably most of econ.

    • “Saying that you found this “error” in MMT, is like saying that you just overthrew Quantum Nuclear Physics because it treats protons and neutrons as if they had no structure, gasp, how wrong! Overthrow Copernicanism with is circular orbits while you are at it (they are elliptical!).”

      OK, there is one small, slight minor difference— The powers and duties of Tsy and the Fed were created by Congress and can be amended by Congress. The laws of physics, I’m sorry to have to tell you, cannot be amended by Congress.

      • Dan Kervick says:

        That’s true, beowulf. But the issue here is that the fact that MMT sectoral balance analysis treats the entire domestic private sector as a unified sector, without analyzing it further into the household and non-household sector, is being treated as some big oversight.

        Yes, it’s obvious that the balance of financial flows for one sub-sector of the domestic private sector can be positive even if the balance of financial flows for the entire sector is negative.

        But I don’t know why we should accept the idea that it is only when we are looking at the household sector that the net growth in financial assets has positive valence, as JKH describes it. Financial instruments are the tools we use to transfer and transform real non-financial value in the economy. I take it that’s why they are called “instruments”. In a growing economy, increasing amounts of real value are being generated and exchanged constantly, and to avoid the distorting effects of price instability, we therefore need corresponding increases in the quantity of financial instruments for making and moving value. The assets held by firms engaged in the process of producing and selling real goods and services for consumption, and buying, producing and selling real goods and services as part of the investment process, are just as important, aren’t they.

        If we want the volume of real economic value creation in the private sector to be growing, then the total volume of financial assets in the private sector should be growing as well, shouldn’t it?

        If we look at the whole universe of financial assets, which includes not just bank reserves and physical currency in circulation, but also IOUs for these things, and IOUs for the IOUs, etc. then certainly the quantity of financial assets can grow endogenously. People can issue IOUs whenever they like, subject to whatever legal restrictions exist on IOU creation.

        But at the bottom, these IOUs and their redemption represent a hierarchy of promises of payment flows that rests on the ability to make payments cleared through bank reserve accounts. If the government doesn’t supply the additional reserves, the system of financial promises becomes more leveraged and more fragile, and will eventually fail.

    • Dan Kervick says:

      Given the way we currently do government accounting, then even if we consolidate all the government sectors we get the result that the government definitely has money.

      But my proposal is that if we did away with that accounting approach and instead instituted an approach on which (i) every case of a private sector payment to the government, either via taxation or as payment for some government good or service, was regarded as the destruction of money on the relevant private sector account, with no corresponding crediting of money to a government account, and (ii) every case of a government spending into the private sector, either via transfer payment or as payment for some private good or service, was regarded as the creation of money on the relevant private sector account, with no corresponding debiting of money from a government account, then everything would continue just as before, with no changes in the bearing of these government operations on the real economy.

      The crucial number in any given fiscal period of interest would be the size of the gap between government money creation and government money destruction. This is what we now call the “deficit”. But if we were to cease to view the government as possessing money, we would probably call it something else, even though its functional role would be the same.

      Government bond issues would still exist, but they would no longer be seen as instruments for “funding” the government. Rather they would be seen just as contracts for extinguishing and creating money on private sector accounts, used for regulating the volume and schedule of monetary level adjustments in the financial channel.

      The government would still have debt obligations, but it would be understood that the government meets its debt obligations by creating money, not by transferring money from its stock of funds to the recipient. Similarly, the government would still hold the debt obligations of others as well. But those obligations would not be seen as an “asset” of the government, but rather as instruments requiring the destruction of private sector money at some pre-determined time.

      This doesn’t mean the private sector would then have a free lunch. But it would be clearer than ever that the whole idea of the central bank going bankrupt, or needing to maintain some capital ratio and balance of assets over liabilities to satisfy a solvency constraint, would be absurd. The question would shift away from whether the government’s funding and solvency was in order to the question of whether the government had undertaken a schedule of net money creation commitments that would be inflationary.

      • Not sure why you want to reinvent the wheel, given national accountants have an excellent method of accounting.

        Here’s a simple question for you.

        Assume a closed economy.

        Government runs a surplus of 2% of GDP. Would you say the private sector saving is minus 2% of GDP?

        • Dan Kervick says:

          I would say that private sector net dollar payments are 2% of GDP.

          • Appeared at the wrong place:

            “I would say that private sector net dollar payments are 2% of GDP.”

            Well yeah but the private sector saving can be 8% of GDP.

      • Dan, you’re making the right argument – keep it up.

    • PeterP,

      “Your another “profound” find of S=I+(S-I) is a trivial consequence of understanding what “saving” is in terms of accounting, something very well known to Mosler and the rest of MMT, and probably most of econ.”

      Okay now read this:

      “this also means it is impossible for the aggregate saving of the nongovernment sector to be less than (or greater than) the budget deficit.”

      http://www.neweconomicperspectives.org/2011/10/mmp-blog-20-effects-of-sovereign.html

      • It’s such a trivial point to say the savings of the nongovernment can’t expand without the government’s spending. If I build a farm tomorrow investing my own personal savings into the farm, then I create real wealth. That real wealth can expand in value over time whether the government spends money or not. My one cow could turn into 10 cows. The 100 gallons of milk per year from 1 cow could turn into 1,000 gallons of milk per year. I don’t need the government to spend money to help me build wealth through the farm. If I want to monetize the farm then I need government money to exist, but I don’t need more spending. I just have to know that someone in the private sector has taken out debt to buy my farm or that the government has accommodated the growing wealth of my farm to ensure there are enough dollars in the economy for the sale to occur.

        Obscuring these accounting identities is incredibly misleading and too often used to bolster the MMT argument that we need government deficits to help grow the economy. That’s BS.

  37. Dan,

    Perhaps I’m badly misreading you here (apologies if so), but I don’t understand why you think that the government increases the money supply by deficit spending. The central bank increases (and decreases, of course) the supply of base money (perhaps passively). But this is via sale and repurchase of assets—it’s not current govt expenditure. The supply of base money doesn’t increase just because the government runs a deficit.

    In your model, the difference between the receipts of sector x and payments of sector x is the difference between its income and its expenditure–i.e., its “net saving” or “net dissaving”.

    Given that you have assumed that,

    Ba + Bb + Bc = 0,

    We must also have

    delta_Ba + delta_Bb + delta_Bc = 0,

    Where “delta” is the change in the variable over the period of analysis–otherwise the first identity would not necessarily hold at all times.

    The impact of these income-expenditure flows does not necessarily result in changes in the money supply. This depends on whether the sectors in question finance their net expenditure by issuing new liabilities that circulate as money. For example, say that one sector contains a financial industry that finances a portfolio of loans by issuing liquid deposit liabilities.

    It’s also clear from a moment’s reflection that private credit (broad or “inside” money) can grow in this case even if all the balances and their differences are set to zero at all times. In other words, we can have delta_Bx != DELx, for any arbitrary sector x, if it contains private banks.

    If we imagine one sector to be the government, then the implication of the above is that its deficits will only increase the supply of money if it finances with new loans from the financial sector, or if it finances through central bank money issuance.

    However, governments do not, as a general, rule finance their expenditure by ordering their central banks to issue new money (for proof, compare the size of your central bank’s balance sheet to the size of your country’s national debt).

    It’s also worth remembering that even if we define all money as base money or (reserves and) notes and coin, the private sector can hold whatever quantity it desires, regardless of its receipts from the government, simply by withdrawing it from the bank.

    So that the private sector does not depend on net govt spending for its supply of dollars in either the broad or narrow sense, and that the first-order impact of net government spending is not to increase the supply of money in either the broad or narrow sense, assuming it is financed through bond issuance to the non-financial private sector, as far as I can see.

    • Vimothy,

      Good points and agree in general.

      It is possible Dan means stocks of assets and liabilities as opposed to the money stock, but in that case the following statement is not true:

      “Let’s use “DELx” to refer to the change in dollar stocks in sector x during the indicated time period. Here is something that is not in general true:

      DELa + DELb + DELc = 0″

      because that is untrue in the case of a closed economy. The net increase in financial assets less net increase in liabilities of all sectors combined is zero.

      At any rate, Dan’s comment is a bit of digression when the whole point is about making the distinction between saving and saving net of investment. Dan is arguing for deficit spending which I agree with but in my opinion, the case for making the argument should not go into treating the two as the same and temporarily changing the definition of saving within an argument.

      • Dan Kervick says:

        Ramanan and Vimothy,

        I’m talking only about money stocks.

        Payments and receipts must sum to zero as a matter of logic.

        But change in money stocks need not sum to zero because the government sector can produce or destroy money. So the sum of the DELs need not be zero.

        The same is true of anything. Use cows. Consider every time a cow changes hands from x to y as a payment of a cow from x to y. Clearly that always represents a receipt of a cow by y from x. In the economy as a whole, the payments and receipts of cows must sum to zero. But the total stock of cows can increase or decrease.

        Yes, I am using “dollars” in the above to refer to base dollars. The broad money aggregates, which include not just base dollars but bank promises of base dollars, can change over time without an increase in base dollars. And for for most purposes broad dollars are just as good as base dollars. But not for all purposes.

        If we do use broad dollars rather than base dollars, we get different accounting, since the private sector is not “broad dollar constrained.” But then we miss the important foundational role base dollars play in the growth of the dollar economy. If the government does not routinely validate the growth in broad money with proportional increases in base money, the payments system would break down.

        I used “receipts of the government sector” and “payments from the government sector” instead of “taxes” and “spending”, because the latter have more specialized meanings. The government receives more base dollars during a given period than it receives from taxes. These receipts include dollars received:

        – Every time someone purchases or repurchases a government security.
        – Every time someone makes an interest payment to the Fed for discount borrowing.
        – Every time someone buys a stamp at the post office.
        – Every dollar collected in federal taxes.

        And the government makes payments of base dollars than are involved in what we usually call spending. These include:

        – Every time the government pays interest on a security
        – Every time the government supplies some dollars at the discount window
        – Every time the government purchases or repurchases some security, including previously issued government securities.
        – Every time the government buys a good or service from the private sector
        – Every transfer payment to the private sector.

        We know that the sum of these receipts and payments over some period of time is not zero, because typically the stock of base dollars held by the private domestic sector and external sector increases or decreases.

        If we focus only on the “deficit” as traditionally defined, we miss much of the process by which the stock of base dollars changes, because taxes and treasury spending are only a portion of total federal government dollar receipts and dollar payments.

        • “I’m talking only about money stocks.

          Payments and receipts must sum to zero as a matter of logic.

          But change in money stocks need not sum to zero because the government sector can produce or destroy money. So the sum of the DELs need not be zero.”

          Thanks for confirming you were talking of money stocks.

          Yes payments and receipts cancel each other

          “But change in money stocks need not sum to zero because the government sector can produce or destroy money.”

          When the Government spends or taxes, it doesn’t necessarily destroy some of the money stock, it creates/destroys financial assets.

          It’s a holdover of the silly cash shredding argument.

          Also, remember loans make deposits – so when a bank lends it adds to the money stock. No government needed in that step.

          Let us suppose the government raises funds by borrowing $10B from non-banks. When it spends the funds raised it just brings back the money stock at the level it began with in these transactions!

          These things require some practice and I suggest you clearly think through what you want to say.

          • @Ramanan

            Dan is using the term “money stock” in reference to the quantity of unencumbered dollars that exist in the non-government. The net left if all credit transactions were wound down. Financial assets are simply that number plus treasuries issued. In MMT that is “Savings”. You seem to be implying that MMT says otherwise.

            • paulie46,

              There seems to be an effort to just shift the discussion.

              Money stock has a specific meaning and it doesn’t help changing the definition.

              Savings is usually used as a plural of saving, though in common language savings is used as a stock – i.e., for wealth.

              Wealth includes real estate etc as well.

              The argument/discussion/debates are not about such stocks. It is about Saving versus Saving Net of Investment.

              Do you understand the difference?

              • @Ramanan

                Yes I understand the difference. And I think Dan is just trying to narrow the discussion for the moment. Once agreement is reached on the narrow argument then one can move on to the next level if need be.

                A lot of the confusion here is caused by different meanings attributed to definitional terms by the various commenters. There doesn’t appear to be any consensus on what these things mean. Hence we temporarily define our terms in order to make our argument assuming others will grok what we are talking about.

                When MMT refers about National Savings it is financial wealth. Dan is talking about financial wealth and it’s relationship to the economy. We are just trying to make a point, not tying our arguments into NIPA data or anything else.

                It’s the MMR proponents here that have introduced non-financial wealth into the sectoral balances relationship and muddied the waters, MMT does not address non-financial wealth (directly) and as far as I can tell makes no claims regarding it.

          • Dan Kervick says:

            When the Government spends or taxes, it doesn’t necessarily destroy some of the money stock, it creates/destroys financial assets.

            Yes, not necessarily Ramanan, but sometimes. And as I said, I’m not just talking about taxing and spending, but all government base dollar payments and base dollar receipts. If the total stock of base dollars increases, total payments must exceed total receipts.

            • “Yes, not necessarily Ramanan, but sometimes.”

              Strange. When and when not?

              “but all government base dollar payments and base dollar receipts.”

              What is a base dollar payment and a base dollar receipt?

              It’s simply payment or receipt.

              “If the total stock of base dollars increases, total payments must exceed total receipts.”

              Okay, the identity connecting G and T and dM and dB (assuming consolidation with the central bank)

              G – T = dM + dB

              If total payments exceeds receipts, dM can shrink as well ! (and dM is money stock only in the narrow sense)

              As I said earlier none of this has *anything* to do with the difference between saving and saving net of investment.

              • @Ramanan
                “As I said earlier none of this has *anything* to do with the difference between saving and saving net of investment.”

                MMT makes no claims re saving and saving net of investment. MMT is focused on the stock and flows of financial wealth and how that effects the greater economy.

                • “MMT makes no claims re saving and saving net of investment. MMT is focused on the stock and flows of financial wealth and how that effects the greater economy.”

                  Paulie and Others …

                  To really understand the debate you have to get into a bit of history around MMT.

                  You also have to understand MMT and the MMTers.

                  Clearly what I quoted from your comment is flat out wrong.

                  • @Ramanan
                    “MMT makes no claims re saving and saving net of investment. MMT is focused on the stock and flows of financial wealth and how that effects the greater economy.”

                    This is where we disagree. My exposure to MMT has been through Mosler, Wray, Mitchell and Fulwiller. From that the quote above is what I take away regarding MMT, history notwithstanding. If history somehow proves that MMT does make such claims then I am not an MMT’er, I’m something else. My arguments still stand as a matter of arithmetic. The laws of arithmetic place constraints on the greater economy and the mechanics of money creation. When your arguments appear to violate those laws or veer off into some vague tangent I will take exception.

                    • “The laws of arithmetic place constraints on the greater economy and the mechanics of money creation.”

                      No! They place constraints on what we can logically *say* about the greater economy and the mechanics of money creation, without contradicting ourselves.

                      I really think that’s a crucial distinction, and being clear on it is important to avoid the kind of confusion we (or at least I) often run up against — confuting ex-ante, causative assertions with ex-post “inevitable” results.

                      Do government deficits “cause” private saving?

                    • paulie46 February 20, 2012 at 9:36 am

                      My comment was in response to your point that “MMT makes no claims re saving and saving net of investment.” What do you mean?

              • Dan Kervick says:

                Why do you want to keep talking about G and T? The whole point of my payment-based analysis was to get away from these categories and focus on the fact that spending and taxes, as traditionally understood, are not the only ways that payments are made by the unified government and made to the unified government.

                Forget about all these traditional categories of national income accounting – taxes, savings, investment – which are built up of layers of other traditional subcategories, and just focus on the three sectors, the dollars-in and the dollars-out.

                The private sector can create IOUs for dollars to its heart’s content, and more often than not, people accept those IOUs, and also accept various other IOUs in payment of the original IOUs. But the IOU’s are ultimately IOUs for the government’s dollars, and they are therefor not as good as the government’s dollars. People can refuse to accept the IOUs in payment of a debt. But as a matter of law, they can’t refuse the government’s dollars, which are the legally established instrument of final payment.

                Treasuries are even better than private sector IOU’s. But they are still IOU’s. When you have a treasury, the government still owes you something. When you get the dollars they owe you, they don’t owe you diddly. That’s the end of the line on the debt train.

              • Ramanan

                G – T = dM + dB

                This doesnt seem correct to me. If a bank refinances an ABS for instance, then the monetary base is expanded, with no change in the other variables (B are bonds, right?). CB actions (which do not influence G-T) can expand the monetary base and are not necessarily based on bonds. Or am I missing something (didnt follow the whole discussion)?

                • Or do you redefine G for the consolidated gov to include refinancing ops (or any CB action for that matter), where for instance a repo of an ABS is seen as a consolidated gov expenditure?

                  But in that case it should be clear that G-T does not represent the traditional government deficit.

                  • Sorry should have specified that M in that was the monetary base since Dan was talking of this stock only. Should have rather written H – the standard terminology instead of M.

                    • Yes, I understand it is the monetary base. But the equation seems incorrect as long as G does not incorporate CB actions like refinancing ops. In other words, what will happen if a bank repo’s an ABS for reserve balances with the Fed? M increases, but not G-T, or B (unless G incorporates the acquisition of the ABS).

                    • MFN,

                      There s nothing wrong with what Ramanan wrote. It just means that we can write the possible sources of finance for the budget deficit as debt issuance and money issuance. Obviously, we could make this identity more complicated if we wanted to.

            • Dan,

              If the total stock of base dollars increases, total payments must exceed total receipts.

              Not true.

              Here’s an even easier way to see it.

              Assume for contradiction that when the government spends, this increases the stock of base money by the same amount, and that when the government taxes, this decreases the stock of base money by the same amount. Then the change in the stock of base money equals the govt’s deficit.

              This is true if and only if the nominal stock of base money equals the nominal value of the government’s debt. But this is false.

              • Dan Kervick says:

                Sorry, but you lost me vimothy. If actual currency and reserves increase – not just assets promising future delivery of more reserves or currency – then where does it come from. Somewhere, somehow, the government must have injected more reserves into the economy than it extracted from the economy.

        • Dan,

          Thanks for clarifying.

          IMO, what you are claiming is not something that academic MMTers would claim, but I may be wrong about that. I see it rather as a common “folk hypothesis” or meme amongst MMT advocates, which has arisen because the conflation by academic MMTers of central bank and treasury functions is not easy for “non-specialists” (bad phrase, but I’m sure you know what I mean) to parse.

          Yes, I am using “dollars” in the above to refer to base dollars.

          That’s problematic given the dynamic you’re trying to explain, for reasons that I might try to shed some light on later. For now, let’s go with this assumption.

          Payments and receipts must sum to zero as a matter of logic.

          But change in money stocks need not sum to zero

          Total payments and total receipts must sum to zero. Payments and receipts represent income and expenditure flows. The change in the money stock need not sum to zero. Money is an asset. Changes in the money stock represent flows of funds—asset acquisition and sources of finance. The sectoral capital account budget constraint implies that asset acquisition for any sector must equal its sources of finance (i.e., that’s what sums to zero–not “the change in the money stock”, which would be akin to saying that total payments sums to zero).

          The (base) money stock does not increase because the government spends more than it takes in taxes. The money stock increases because the central bank buys assets from the private sector. Changes in the stock of base money have nothing whatsoever to do with government expenditure or net expenditure in any direct sense.

          Here’s a monetary base time series for the US:

          http://research.stlouisfed.org/fred2/series/AMBSL?cid=124

          Notice that pre-crisis the graph is essentially smoothly continuous with modest upwards time trend. It is not bouncing around discontinuously as a function of net govt expenditure (note in particular its behaviour at the grey bars, which represent recessions).

          Now, why do I think that MMTers would not make the same claim? Well, because I’ve read (some of) their output. In my experience, MMTers are well aware that the central bank fixes a horizontal supply curve at its chosen policy rate and then lets the quantity float according to demand. I’m pretty sure that this is all in Wray’s book, for example.

          • IMO, what you are claiming is not something that academic MMTers would claim, but I may be wrong about that.

            Am I, in fact, wrong about that? Anyone?

          • Dan Kervick says:

            The (base) money stock does not increase because the government spends more than it takes in taxes. The money stock increases because the central bank buys assets from the private sector.

            The central bank is part of the government, Vimothy! That’s why I want focus on total government payments and total government receipts, not just on what are traditionally called “taxes” and “spending” – conceived solely as Treasury operations. When the Fed buys an asset, that is government spending. When a bank makes an interest payment to the Fed, that is a government receipt. MMT is always talking about the unified government – Fed included – when it describes the actions of the government sector.

            And so I think the point still stands: the stock of base money does not increase unless the government inserts more base money into the rest of the economy than it receives. Reserves and currency are augmented and drained by government actions and government actions alone.

            And here’s something that is also true: the whole, unified government doesn’t need to first “have” base money bore spending it.

            • During QE I, the fed purchased MBS. This is a fiscal activity done under the feds power. This action would clearly be a fiscal action if done by the treasury. Because it was done by the fed, people consider it to be a monetary operation.

              • it’s a distortion of the fed’s role, brought about by the fed’s own inept policies in the face of a complete misunderstanding of the role of the treasury, government, and fiscal policy. It’s a perversion – the fed is giving privately created assets the status of publicly created assets. It shouldn’t happen and it wouldn’t have happened if the people running the show weren’t so stuck up their own ideological sphincters.

                • Dan Kervick says:

                  Yes, but open market operations a routine part of the Fed’s business. And every time they purchase an asset, they have engaged in government spending.

                  • Dan,

                    And every time they purchase an asset, they have engaged in government spending.

                    This is not correct. Government spending is (very broadly) composed of government consumption, government investment and transfer payments. CB operations do not contribute directly to government expenditure. In particular, when the CB buys a bond, government spending does not increase.

                    As a point of fact, the non-government sector does not require the government to spend in order to acquire base money. Government expenditure or net expenditure has no direct impact on the stock of base money. What it requires is for the central bank to expand its balance sheet, because base money is a central bank liability. When the stock of base money held by the public changes, it will be reflected in changes in the central bank’s balance sheet. It’s the central bank that’s important here, not the government.

                    If on the other hand you want to (idiosyncratically) redefine “government spending” to mean “CB OMO”, then yes, the public requires “government spending” to increase its stock of base money. But what do you gain by equivocating in this fashion? It strikesa me as a confused and confusing semantic argument in the best case.

                    And it’s not easy to see how your argument relates to the sort of criticism of MMT that various commenters have articulated on this thread.

                    • Dan:

                      “And every time they purchase an asset, they have engaged in government spending.”

                      Assuming you’re talking about financial assets, I agree with vimothy, don’t think it’s useful or in keeping with widespread and effective practices, to think of that as spending. Confusing. Rather as an asset swap.

                    • Dan Kervick says:

                      vimothy and Steve,

                      I think in order to understand what is going on from the sectoral point of view, it is not sufficient to use conventional accounting terms in the way you might encounter them in a standard handbook on corporate finance or government finance.

                      If one only counts the dollars the Treasury spends into the private sector, or that Treasury receives from the private sector in the form of taxes, then one leaves out a large portion of the processes by which the government adds to or subtracts from from net financial assets of the private sector. The MMT perspective only makes sense when “government” refers to the unified government sector, which includes the Fed, not just the Treasury portion of that sector. You need to look at every dollar that moves in the economy, and account for each one that crosses a sectoral boundary. The Fed clearly makes payments to the private sector, and the private sector makes payments to the Fed, however those payments are traditionally classified by accountants.

                      That’s why I tried to refocus on the payments-in/payments-out model, and avoid using larded terms like “spending”, “taxes”, “saving” and “investment.”

                      There was a debate in the blogosphere recently among economists on whether savings = investment. the debate revealed that those are contentious terms used by different people in different ways.

                    • Dan Kervick says:

                      Steve, “asset swap” is reasonable enough as long as we don’t assume it always means an exact 1-for-1 exchange of value. Value is subjectively measured, and people are willing to sell their assets to the Fed for a reason: because they believe they are coming out better in the exchange – just like in any other willing exchange both parties believe they have improved their position.

                      If the Fed buys an asset, that’s a purchase, and the former owner of the asset has made a sale. Presumably the former owner has made the sale because they prefer to get more liquidity now in exchange for the interest payments they would have received later. And they probably aren’t getting everything up front that they would have received later. That all depends on the outcome of the auction and the terms of the sale.

                      Warren Mosler and other MMT writers have recently emphasized that these Fed asset purchases represent a net drain of interest income from the private sector.

                    • Cullen Roche says:

                      1. The Fed doesn’t overpay for assets. I showed this last year. http://pragcap.com/is-the-fed-overpaying-for-bonds

                      2. The PD’s are required to serve as the counterparties to the NY Fed. Via the NY Fed:

                      “The primary dealers serve, first and foremost, as trading counterparties of the Federal Reserve Bank of New York (The New York Fed) in its implementation of monetary policy. This role includes the obligations to: (i) participate consistently as counterparty to the New York Fed in its execution of open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed’s trading desk with market information and analysis helpful in the formulation and implementation of monetary policy. Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.”

                    • Dan Kervick says:

                      What it requires is for the central bank to expand its balance sheet, because base money is a central bank liability.

                      The central bank is part of the government. When it expands its balance sheet it is making loans to the private sector, or buying assets from the private sector. A loan is a contract for payments moving in two directions. A payment goes from the creditor to the borrower when the loan is made, and in return the borrower makes another (usually larger) payment to the creditor at some time or times in the future. So the process of changing the stock of base money involves some combination of payments from and to the government sector. If more is paid out than is paid in, base money expands.

                    • Dan, I may be wrong but I think you and I agree on almost everything. There’s government spending, which is profoundly valuable (though not always and within limits of course), and there’s government deficit spending, with its positive “accomodating” effect on NFAs hence real activity (within limits, those being inflation [which excepting the oil-shocked 70s, we haven't seen since WW I]).

                      I don’t think financial-asset purchases are of the same order as real-goods purchases (which are consumed), which deplete inventories so force/encourage actual production and hiring, with direct, demand-driven inflationary effects.

                      The real-economy effects of financial asset purchases (swaps) — “goods” that are never consumed (and rarely produced) and just travel in circles — are second-order, via interest rates, wealth effects, whatever.

                      So I think it’s confusing, not conceptually helpful, possibly just wrong, to think of government real-good purchases and government financial-asset purchases as being the same.

                  • re Dan Kervick February 21, 2012 at 2:18 pm

                    Dan, base money includes reserves held in the banking system. Reserves are never part of the private sector money supply. Banks don’t lend reserves, they create money out of thin air when they make loans, and that money is matched by a corresponding liability. The money and liability may move independently through the economy but the net as far as the economy as a whole is concerned is zero.

                    Base money has no direct relationship to the quantity of money plus money things (state money) that exists in the private economy.

                    • Dan Kervick says:

                      Paulie, I don’t think that’s correct. The banks are part of the private sector, and what is in a bank’s reserve account is an asset of the bank and a liability of the government. If I’m a bank, and I own a bond, I can sell that bond to the Fed. I give the Fed the bond and the Fed gives me reserves.

                    • Dan Kervick February 22, 2012 at 10:43 pm
                      Paulie, I don’t think that’s correct. The banks are part of the private sector, and what is in a bank’s reserve account is an asset of the bank and a liability of the government. If I’m a bank, and I own a bond, I can sell that bond to the Fed. I give the Fed the bond and the Fed gives me reserves.

                      Dan,
                      I agree with everything you wrote here, but reality is more nuanced.

                      This is somewhat of an abstract concept and it causes a lot of confusion. This is the way I view it, from a system and accounting perspective (I’m an engineer not an accountant but I stayed at a Holiday Inn Express once so…)

                      Banks are a quasi-government institution that “straddles” the government and the non-government, just as the government does. So every transaction between the government and private sector occurs on the non-government side of the ledger. Employee wages, operating expenses, etc.

                      Banks are similar, except the only money they can inject is credit money, ie money split into an asset and offsetting liability so that it adds no net money into the economy. Credit money can only create velocity, it can’t increase the stock of financial wealth in the aggregate (I’m sure you already know this). When a loan is extinguished it eliminates the borrowers liability to the bank and the banks liability to the Fed simultaneously.

                      Banks reserves exist only on the government side of the ledger. This is where money gets created out of thin air. I think of reserves as a kind of credit limit, although the limit is infinity because the Fed will always provide reserves on demand. It’s a number on a government balance sheet.

                      So, from my perspective reserves are invisible to the private sector and aren’t counted as part of the private sector money supply. That’s why the QE’s haven’t and will never cause inflation.

                      Here’s a graphic I put together a while back to illustrate…

                      https://img.skitch.com/20120105-d842xw24pnnm2ju5sufq31bhc2.png

                    • @Dan: “the banks are part of the private sector”

                      I’ve been pondering a post lately, called “Looking at the Fed,” which would analyze what the monetary system looks like depending on what the Fed looks like:

                      o As an independent entity separate from government and banks

                      o As part of an entity consolidated with the Treasury

                      o As part of an entity consolidated with all its reserve-holding banks

                      o As part of an entity consolidating Treasury, Fed, and the banks

                      I think a lot of confusion arises from us discussing things from these different views, and sometimes shifting views within our discussions.

                      They’re all useful ways to understand things. But you have to be really rigorous about stating which way you’re looking. Accounting assertions that are undeniably true in one aren’t necessarily true at all in another.

                    • Steve Roth
                      I’ve been pondering a post lately, called “Looking at the Fed,” which would analyze what the monetary system looks like depending on what the Fed looks like:
                      o As an independent entity separate from government and banks

                      That would be a useful exercise but this item will create quite a lot of disagreement I expect.

                      Politically, the Fed is independent (in theory, obviously not the reality) but as far as the accounting goes (my view) the Fed is part of the government. Transactions between member banks and private sector are functionally money/anti-money transfers. Essentially banks have one leg in the government and the other in non-government. A firewall exists between the two sets of books.

                      It seems to me that the ultimate goal of neoliberalism is to have banking under the control of private interests – the ultimate privatization.

                      This would spell doom for the 99%.

                    • “this item will create quite a lot of disagreement ”

                      Agreed. ;-) Because each view does or at least can embody a view of how things *should* be, or can provide rhetorical leverage for claiming same.

                      But it really shouldn’t. I’m thinking of going at it from a strictly accounting viewpoint — X (defined) equals Y (defined) in this accounting view, but not in this one. Or, we have to redefine clearly what we mean by X and Y in each view. Such like that.

                      But I’m not sure I have the chops to pull it off.

                    • Steve R.

                      This is how we learn. If we aren’t making mistakes we aren’t doing anything.

                    • @Paulie: “This is how we learn. If we aren’t making mistakes we aren’t doing anything.”

                      Roger that. I try to make a public fool of myself at least once a week. ;-)

        • George Melillo says:

          I just want to give a thumbs up to Dan’s work in this section of the thread. I’m on board.

      • Deficit spending creates an increase in financial wealth (cash and cash equivalents) in the non-governmentsector in the aggregate. It is the only way this can be accomplished under current institutional design. That is the basic argument Dan appears to be making and if so he would be right.

        This of course is assuming for the moment we ignore the external sector, but even in that case the argument holds re the definition of deficit spending, which is at it’s root money creation to the non-government with no strings attached. Banks don’t have that ability.

        • Cash and Cash Equivalents have a specific meaning in Accounting. It is a bit counterproductive to conflate this with Treasury securities.

          At any rate, yes, the private sector net accumulates financial assets as a result of government deficits.

          But for people involved in the discussion, what’s new?

          • @Ramanan

            You’re saying that treasuries aren’t cash equivalents?

            • “You’re saying that treasuries aren’t cash equivalents?”

              Yes, a corporation does not count a 30 year Treasury security as cash equivalent.

              The market for Treasury securities are highly liquid and hence it has qualities equivalent to deposits but that is an entirely different matter!

              It is bit counterproductive to use “Cash and Cash Equivalent” for Treasuries when the former has a specific meaning.

              • @Ramanan

                Now you’re splitting hairs to prove your point. Just like much of the discussion here that goes down the rabbit hole rather than entertain the main argument.

                BTW what is the portfolio breakdown of the the various treasury instruments? Take a look at Apple Computer’s balance sheet – Apple holds what is often reported as about .$100 Billion in cash, most of it in marketable securities.

                • No, not really splitting hairs.

                  Why conflate the whole issue by defining a 30 year bond as Cash and Cash Equivalent?

                  You said “Deficit spending creates an increase in financial wealth (cash and cash equivalents) ”

                  which is not really the case because a 30 year bond does not count as cash and cash equivalent.

                  At the risk of sounding like a fool by repeating:

                  If the government’s budget balance is in deficit, it means the private sector has accumulated financial assets but that does not justify mixing saving and net saving.

                  • @Ramanan

                    I never claimed that 30 year treasuries were cash equivalents. I said:

                    “Deficit spending creates an increase in financial wealth (cash and cash equivalents) ” – your quotes

                    If 30-year treasuries are not cash equivalents then no problem. My statement is stil ltrue.

                    • “Deficit spending creates an increase in financial wealth (cash and cash equivalents) in the non-governmentsector in the aggregate. It is the only way this can be accomplished under current institutional design.”

                      That is your full quote.

                      Deficit is not the ONLY way to increase “cash and cash equivalents”

                      Yes deficit spending creates an increase in financial wealth but see my previous statement.

                      The way you presented it isn’t an accurate way of presenting it.

                    • Cullen Roche says:

                      “Deficit spending creates an increase in financial wealth (cash and cash equivalents) in the non-governmentsector in the aggregate. It is the only way this can be accomplished under current institutional design.”

                      This is the crux of the discussion here and it’s patently false. Deficit spending does not necessarily increase our “wealth”. Obviously, Zimbabwe figured this out. Deficit spending CAN increase our wealth. But we need to be very precise about these comments. It’s this sort of loosey goose terminology that gets MMTers in trouble and hurts their cause.

                      And it is certainly not the only way to increase the private sector’s net wealth. Clearly, this can be done via current account surpluses as well as the aforementioned Waldman critique. MMTers use the sectoral balances to try to justify their belief that money is driven by the state when the reality is that money is driven by the private sector’s desire to increase their own living standards, primarily through production. When you get the causation wrong you get the whole conclusion wrong and you start saying really silly things like “exports are a real cost”….

                    • @Cullen at 12:57
                      “This is the crux of the discussion here and it’s patently false. Deficit spending does not necessarily increase our “wealth””

                      I specifically said financial wealth. Only one source for that.

                      “…Clearly, this can be done via current account surpluses…”

                      We have been ignoring the external account in this discussion – at least that has been my understanding. Still, in the external account case, currency would have to be acquired by the foreign entity before any spending could take place. This requires the government to “print” money to exchange for the foreign currency that is then spent into the economy. Not a lot different than deficit spending except no bonds are involved.

                      Of course, if we accumulated foreign currency in large amounts via net surplus(s) then I suspect we would prefer an option to keep that cash in a savings account instead of our checking account at the foreign central bank.

                      @Ramanan
                      “Deficit is not the ONLY way to increase “cash and cash equivalents””

                      See above.

                    • Cullen Roche says:

                      On point 1 – I misread. Apologies. But the point is still relevant. We shouldn’t refer to things as “wealth” when they are not wealth. Wealth has a very specific meaning (at least in the MMR world it does). Deficit spending does not necessarily add to the wealth of a nation, but terms like “financial wealth” blur the lines there so as to give the appearance that the govt can add to the wealth of a nation by spending money into the economy.

                      On point 2 – MMT refers to this sort of central bank deficit spending as “off balance sheet deficit spending”. They don’t talk about it in public very often because it throws a big stinky wrench in a lot of the core theory. But when you understand that the central bank can off balance sheet deficit spend via FX markets then you begin to step over a certain MMT line that they would prefer you not know exists.

                    • @Cullen

                      “We shouldn’t refer to things as “wealth” when they are not wealth”
                      You’re making this hard. I used “wealth” for lack of a better term. You tell me what we should call money that shows up on balance sheets as cash net of any liabilities. Liquidity? Cash/cash equivalents? I’m open to whatever. Wealth expressed as dollars is the metric we use to measure wealth. It is at least one side of every transaction that involves spending. What do corporations announce their earnings as?

                      On your point #2 I’m not sure if you are describing the operation where the Fed increases the reserves of primary dealers who then buy treasuries at auction which in turn are swapped back to the Fed for reserves – the Fed ends up holding the treasuries. Is that what you are referring to?

                      Finally I leave you with this from Scott Fulwiller (which I suspect you have seen before):

                      “First is the accounting logic of real-world transactions. Every transaction in a real-world economy affects financial statements of those engaged, and if an economic theory or a posited model is not consistent with how real-world financial statements are affected, then the theory is inapplicable. A typical example used by MMT’ers is a framework used in mainstream economics, the so-called loanable funds market. It posits a demand for loanable funds and a supply of loanable funds available for the macroeconomy, and contains classic supply-demand curve assumptions from goods markets, that higher prices (in this case interest rates) will elicit more “supply” (as in investors will divert more funds from other uses, such as risky venture investments, and make them available for lending). This model is simply inapplicable to our current monetary system in which empirical studies have demonstrated that banks create loans “out of thin air” without the requirement of prior reserve balances or deposits to “fund” the loan’s creation. Completely contrary to the loanable funds model, in fact, the vast majority of bank liabilities have been created by banks simply growing their balance sheets through loans and asset purchases. Similarly, there are macroeconomic accounting identities, such as the often-cited sector financial balances equation in which the domestic private sector’s net saving of financial assets is by definition equal to the government sector’s deficit and the current account balance (see here, here, and here for further discussion). MMT’ers understand very well that an accurate understanding of accounting is not in itself a theory.”

                    • Cullen Roche says:

                      I’m not trying to make things difficult so sorry. But I am stingy about the term wealth because these sorts of misunderstandings are central to why MMR even exists. Much of MMT is used to imply that we can increase the wealth of a nation by spending pieces of paper into the economy or by exporting pieces of paper out of the economy. This is a dangerous obfuscation and much of the accounting in MMT is central to this.

                      When I refer to off balance sheet deficit spending I am referring to central bank ops in FX markets. This adds to net financial assets (generally), but is rarely discussed in MMT circles because it goes against so much of what the theory stands for. I believe you’re referring to QE2, which, if you’re familiar with my work, is something I spent an inordinate amount of time trying to debunk myths around….

                      And yes, I have read the Fullwiler quote. I got on this little MMR kick in large part because I believe MMT starts from a false understanding of why monetary systems exist, what drives money, and what the ultimate goal of a society should be. So I would argue that MMT is not grounded in reality, but rather fills in a very specific (and generally excellent) description of the monetary system with an even more specific set of policy proposals. To me, MMT is a policy proposal masquerading as an understanding of the monetary system. It’s why MMT is a theory and not a reality. IMO.

                    • “When I refer to off balance sheet deficit spending I am referring to central bank ops in FX markets. This adds to net financial assets (generally), but is rarely discussed in MMT circles because it goes against so much of what the theory stands for.”

                      Cullen,

                      I have seen Mosler use that phrase “off balance sheet deficit spending” and I think he is completely wrong on that because it is neither off balance sheet not deficit spending.

                      Mosler even goes on to argue that it is functionally equivalent to deficit spending.

                      Deficit is equal to the difference in income/expenditure flows. Purchases of foreign exchange by a central bank is not an income flow.

                      The reason you see “it goes against” is because calling it off balancing sheet deficit spending is incorrect to begin with!

                    • Cullen Roche says:

                      Yeah, I don’t know what you call it honestly, but I’ve spoken to Warren privately about it in some detail because it really bothered me when I first saw him discuss it. It is against much of the MMT grain.

                    • “We have been ignoring the external account in this discussion – at least that has been my understanding. Still, in the external account case, currency would have to be acquired by the foreign entity before any spending could take place. This requires the government to “print” money to exchange for the foreign currency that is then spent into the economy. Not a lot different than deficit spending except no bonds are involved.

                      Of course, if we accumulated foreign currency in large amounts via net surplus(s) then I suspect we would prefer an option to keep that cash in a savings account instead of our checking account at the foreign central bank.

                      @Ramanan
                      “Deficit is not the ONLY way to increase “cash and cash equivalents”

                      We can keep complicating the discussion. Let’s stay in a closed economy.

                      It was completely unnecessary to bring “cash and cash equivalents” in the discussion.

                    • February 20, 2012 at 10:06 pm was for Paulie46

                    • @Rananan February 20, 2012 @ 10:06

                      Ramanan
                      We can keep complicating the discussion. Let’s stay in a closed economy.

                      To be fair that was brought up only in response to a comment to me made by Cullen. I agree that bringing the external account into the discussion doesn’t add anything.

                      <blockquote
                      It was completely unnecessary to bring “cash and cash equivalents” in the discussion.
                      </blockquote
                      In my world "cash and cash equivalents" are the portfolio composition of "net financial assets" if they were injected into the non-government by the Treasury in the act of deficit spending. Also by my definition "net financial assets" can only be introduced into the non-government by the Treasury in the deficit spending operation.

    • @vimothy
      “…I don’t understand why you think that the government increases the money supply by deficit spending.”

      He’s referring to the “stock of dollars” not money supply per se. If one were to add up the net cash position (cash and cash equivalents) on all balance sheets in the non-government it would equal the “stock of dollars” or “net financial assets”. Most of that would be treasuries.

      It is impossible to increase the stock of dollars (excluding treasuries) in the non-government by “borrowing” from the non-government in exchange for treasuries. This can only increase the stock of treasuries. The stock of dollars remains unchanged. The “stock” of dollars created by credit issuance can be ignored because that is netted out by off-setting liabilities.

      The government can increase the stock of dollars by increasing reserves in the banking system whereby banks buy treasuries instead of investors using non-government dollars using their reserve balances. The Fed then swaps reserves for the treasuries. I don’t know to what extent this has been done but if as JKH says the stock of dollars is around $2 Trillion then that is probably pretty close.

  38. “I would say that private sector net dollar payments are 2% of GDP.”

    Well yeah but the private sector saving can be 8% of GDP.

  39. Here’s the source of confusion – on the part of MMTers

    The “net” in net financial assets is different from the “net” in net saving :-)

    • how so?

      • Phil,

        “how so?”

        The net in net financial assets is netted across assets and liabilities. So if I claim that the Net Financial Assets of the US households is $34 trillion, what I mean is that Financial Assets Minus Liabilities is $34 trillion.

        I can use the same across the private sector as a whole and there is netting across sectors.

        There is also netting with respective to previous stocks. Say the US Treasury runs a deficit of $1T but it can have a gross issuance of much higher than $1T but net issuance of $1T.

        So consider the flow NAFA – Net Accumulation of Financial Assets in some definition of it. I as a person in one accounting period have a surplus of income over expenditure of $80 and purchase assets worth $100 and incur a liability of $20 and NAFA would be $80.

        Net Saving – in the sense used around here – is not a netting between saving and some kind of dissaving. It is saving *net of* investment.

        • @Ramanan
          “The net in net financial assets is netted across assets and liabilities. So if I claim that the Net Financial Assets of the US households is $34 trillion, what I mean is that Financial Assets Minus Liabilities is $34 trillion.

          If you are claiming this my next question is how can that be possible? The government has only issued ~$15 Trillion in financial assets and the non-government can’t manufacture them. I doubt that all (or even a significant portion) of these treasuries are held by households so where did they acquire these assets from?

          • “– [Household] Financial Assets Minus Liabilities is $34 trillion.

            If you are claiming this my next question is how can that be possible? The government has only issued ~$15 Trillion in financial assets and the non-government can’t manufacture them.”

            You need to consolidate households with firms (and banks) to get to private sector/”non-government”.

            • (Assuming closed economy in the preceding.)

              • @Steve R. at 10:50 AM

                “You need to consolidate households with firms (and banks) to get to private sector/”non-government”.”

                A closed economy at the root level is (I-S) = 0. No government, no foreign sector. I assume that’s what you mean.

                Financial assets introduced through the banking system cannot change the stock of net financial assets (unless there is a default written off by the Fed.). What consolidation?

                When one says “net financial assets” he/she has eliminated the banking system (as far as contribution to the stock) from the equation. Only government spending in excess of taxation can do this.

        • @Ramanan: “Net Saving – in the sense used around here – is not a netting between saving and some kind of dissaving. It is saving *net of* investment.”

          *Excellent* distinction.

          • @Steve
            “Net Saving – in the sense used around here – is not a netting between saving and some kind of dissaving. It is saving *net of* investment.”

            *Excellent* distinction.

            I’m sure that’s the case. What does that have to do with MMT? Seems like you guys are making an entirely new argument, not one that nullifies or discredits anything the MMT community says.

    • apologies for calling you a hypocrite btw.

  40. This really is the best discussion of this subject Ive seen in my three years on the web. Thanks to all for helping to elucidate some areas of contention so we all can get our “language” in the same place. We are not quite there but we are getting there.

    Here is a thought Ive had that sums up my impression of this subject.
    Governments can ONLY make monetary investments to acquire real things,while the private sector usually is trying to simply acquire money either from the govt or from other private sector agents. They are chasing different things usually. Govt needs real assets private sector wants CASH. Yes the private sector buys things (with money they dont need to simply survive)that they hope to sell for more cash later (can we call this investment? saving? both?) but in the end private secotr is looking for nominal wealth… to acquire real consumption goods or “investemtns goods”……. The govt is NEVER seeking money…… they dont need to seek it because they create it.

    Someone smarter than me might be able to put my story into some sort of algebraic equation and allow us to truly analyze it but I think my story is undoubtedly true.

    • @Greg

      I think you are on the right track. This discussion has made the argument much more complicated than it needs to be. Much of it is like trying to find the beginning of a circle.

    • Greg,

      That’s okay at an informal level but doesn’t help mixing up saving and saving net of investment. These two are separate.

    • Greg, I kind of like this thinking. Taking your “private sector” down a level, to break out households and firms, cf my notions of net worth:

      http://monetaryrealism.com/?p=192#comment-702

      Suppose households only want to collect financial assets — claims on real goods/assets that they can consume today, over decades, or starting thirty years hence. (This is assuming that a fully-paid-off land deed is a “claim” on that land — a financial asset.)

      Suppose firms only want to create shareholder equity, the RHS representation of their real assets. (Some of which is periodically siphoned off to households via cash dividends.)

      This is how each entity increases its net worth. It really seems to represent how people and firms think about “getting ahead.”

      I’m having trouble extending this thinking to banks and government, but I think there’s a path there. How do banks and government increase their net worth?

  41. Dan (February 19, 2012 at 7:20 pm)

    The Lavoie, Waldman, and other criticisms concern style. I’ve never said the government doesn’t play a useful role in increasing the supply of non government saving. That’s definitively a straw man – of the same genre that Cullen battled earlier against the charge that he didn’t think taxes were important. But the government isn’t the only one increasing the supply of saving. It’s a simple point that shouldn’t be submerged, and the observation that it is submerged is one on stylistic presentation.

    One reason I’ve included the Waldman references is that it’s a useful way of partially de-personalizing this – for me. I’m not making the point alone. Many have made it, but in this case, you have examples of (at least) two people making it in a different way. I’ve yet to see a good rebuttal anywhere to the Waldman version of this particular issue. What’s your response to the two Waldman quotations? If you think he’s wrong, can you be specific on why? That’s not going to change minds necessarily, because the question is about the presentation of X as seen by Y. I’m not sure that X is going to change Y’s perception by denying that Y’s perception exists, particularly when there are multiple Y’s, but feel free to give it a go.

    This specific issue of saving can be posed as the question of what is primary and what is marginal with regard to the development of saving in an economy. I just don’t see how anybody can deny that the primary source of saving in a functioning capitalist democracy is the non-government sector. That means horizontal money in the MMT sense of that word. So if that is not denied, why present the case as if the government is the persistent primary provider? At a technical level, this obscurity is galvanized by consolidating the household sector and the business sector as one. How silly is it to think that a corporation would regret generating retained earnings because it had produced a negative contribution to MMT horizontal measurement? How silly is it to think that a household would have the same regret because the value of its equity claim would be negated by the same subtraction on the corporate side?

    Within horizontal money and related horizontal components as MMT depicts them, lies the record of primary saving and investment. Why would one systematically galvanize the obscuration of that fact through such persistent intra-private sector netting, as if money generated by the commercial banking system and all other forms of broadly defined money finance had net zero effect? This obscurity by conceptual design is sealed by the fact that such consolidation nets horizontal money forms to zero. That’s very convenient arithmetic with which MMT can position the marginal effect of vertical money as the driving force of the monetary system. That convenience is the deliberate mathematical product of a paradigm that is constructed just to make it so.

    Thank you for your example, which is for the most part a model replication of vertical and horizontal money operations as per MMT. We’re familiar with that, thank you. It features the same aspect of private sector consolidation and conflation of horizontal money measurement that is the core issue under discussion here. Once more, this is the very point that Waldman has made, if you want to use his examples instead. You’re responding to a point of technical and stylistic criticism by emphasizing the point of the criticism itself. You’re not really responding to the core issue, a point I think Ramanan has made in his comments as well.

    If agent X desires to save, that desire is expressed in the sense of saving, not net saving – which in itself is yet another species of the stylistic problem. Nobody thinks: “I must save more, and therefore I must save more NFA.” The fact that the government may respond with the production of net saving doesn’t mean X specified net saving as the form of demand. A corporation’s board of directors isn’t going to reject the CFO’s financial report of record earnings on the basis that horizontal money netting of retained earnings will leave the private sector vacuous of net saving.

    Net saving is just a marginal channel through which overall demand for saving can be met, taking into account that the primary channel is the saving that in amount corresponds to I in the S = I + (S – I) sense. Nobody has denied the marginal channel isn’t important, just as nobody has denied that taxes aren’t important. But if you build a paradigm for the entire economy as if the overall result were a function of marginal activity alone, you come to the silly logical implication that marginal vertical saving is valuable and core horizontal saving isn’t. It’s a matter of presentational inference, as clearly as Waldman described it.

    Somewhat aside, although related, the desire for net saving is not the same thing as the desire for safety, or liquidity; i.e. as in the demand for stuff at or near the top of the Kelton money hierarchy. That’s a conflation. The demand for safe and/or liquid forms of money can be met by swapping non government assets for government ones – as is done through central bank activity for example. The central bank can always fund the private sector in order to create reserves and currency. That doesn’t require net saving. So the hierarchical demand for safety is not the same thing as a hierarchical demand for net saving. Risk and saving can be orthogonal characteristics, at the intersection of monetary and fiscal characteristics.

    And in all of this, just in attempt to keep straw man attacks at bay, I’ve not denied that net saving is fundamentally useful. So are the accelerator and the brakes of a car, but those aren’t the engine. If I buy a car, I want to know something about the engine, and not have the salesman deflect me away from an awareness of what range it’s capable of before considering acceleration and braking potentials as well.

    I’m not sure why you are persisting with MMT primer type material in your comments in general, or in your example here in particular. Some of us have known what MMT says for quite some time. Cullen Roche wrote the book that Krugman used as an accessible reference document, for heaven’s sake, reaching a much wider audience in doing so. You don’t need to revisit the basics of horizontal and vertical money and sector balances and the rest. We know that – some of us pretty much to the penny, I might add.

    We know what vertical money means, and we know what a balance sheet recession is, and we know that the government can be helpful in providing additional vertical money when times are normal and when times are tough. We know that people like to carry around a certain amount of central bank notes. We know that reserves are used to facilitate interbank payments. We also know for a fact that a reserve system can operate under a zero requirement, and that the central bank can provide daylight overdrafts for such things as tax payments and bond purchases and a zillion other non government transactions. All of those things are useful. None of those things has anything to do with the point in question here. It’s a straw man fiesta.

    The point here is that private sector, horizontal, asset-liability money conflation is an analytical device of great convenience in MMT’s depiction of the normal operation of the monetary system – as if horizontal money growth and economic activity in general were leveraged off vertical money. The fact that banks are driven in lending by privately supplied capital and not vertical reserves should be enough to put a stop to this general train of thought. You may as well say instead that not only does commercial banking depend on reserves to make loans, but that the entire economy depends on government money to operate. Both are patently false at the operational level of the monetary system.

    This strange paradigm of heightened operational dependence on vertical money may be the case in some contorted, frighteningly socialized monetary platform, but it’s a distortion of the commercial operation of the monetary system and economy we actually have as it is intended to work in normal times. Yes the government can use its balance sheet for strategic purposes in supplying “net saving” as a supplement to primary saving, when times are tough, or when times are normal. There should be no straw man in that regard either.

    But apart from the relatively minor quantitative role played by the stock of reserves and currency, there is no operational requirement for the remainder of vertical money in the normal monetary system, as it functions in a capitalist economy. And the reserve and currency requirements, being elements that correspond primarily to safety and liquidity, don’t even require a deficit for that purpose. They can easily be supplied by central bank operations without a deficit. The fact that they are routinely channeled in conjunction with a central bank asset portfolio that consists primarily of Treasury liabilities is a matter of convenience for channelling accrued net saving – not a necessity for the purpose of net saving. And before the subject gets changed there, and in the continuing interests of straw man pre-emptive deflection, I’m not saying that deficits aren’t desirable at the strategic level of providing supplementary saving. But that’s entirely separate from the issue of monetary operations efficiency, as it concerns safety and liquidity.

    It seems to me that in your analysis you are confusing the idea of the strategic desirability of supplementing core saving with net saving, with the separate idea of desirable monetary operating system architecture. The necessary system architecture has minimal liquidity requirements in terms of reserves and central bank notes in the normal course of operations. The technical feasibility of a zero reserve requirement system and the relatively small and stable proportion of central bank notes within total financial system aggregates demonstrates this. The provision of safety and liquidity is routinely proportionate in a relatively small way. This is because the private sector capitalist economy has advanced to the degree it has in the supply of bank money. Straw man watch is necessary here again to remind us that systems can break down in a major way, but such break down in the form of balance sheet recessions is not the intended routine operation of the system we have.

    The key phrase above is “supplementing core saving”, an idea captured in the form of the addition sign that comes before (S – I) in the equation that is partly in question. The causal function runs from core to net as a function of the behavior of core – not net to core. (I’ve yet to see an MMTer respond to my general observation on Mosler’s leverage paradigm, with the charge that what I’m saying is incorrect and why.) Capitalist enabling operating tools such as clearing systems for banks, central bank reserves and notes, and commercial bank regulations and supervision are essential elements of the operating system. But they do not drive the full nature of money in a fully functioning capitalist system. Bank money comes about as a result of commercial bank capital allocation as a functioning part of broader private sector real capital investment. Straw man watch acknowledges that banking system regulation and supervision require dramatic improvement. But the basic irony and contradiction here is that MMT has positioned this leveraged dependency of horizontal activity on vertical activity, as if it were nicely parallel to a dependency of bank lending and money expansion on vertical bank reserves, which of course we know is patently false and acknowledged so by MMT at its core belief level. Private capital allocation is the core driver, in the case of banks as well as more broadly throughout the real economy – not marginal government net saving provision.

    • @JKH: “the entire economy depends on government money to operate. Both are patently false at the operational level of the monetary system.”

      But isn’t it true in the ultimate sense, just not the proximate? At least as our financial system exists?

      Or: An adequate stock of government money is necessary, but far from sufficient?

      • Or: The “insurance” or “leverage” provided my government money provides the crucial lubrication. It is definitely not the fuel. ??

        • @Steve
          “…definitely not…”?

          Nobody has proved that yet. It is certainly the carrot at the end of the stick.

        • Yes. I think that’s good.

          Note also that you may be getting into the area of the distinction between the saving dynamic per se, and the desire for liquidity and risk free assets, as I touched on. These are potentially separable issues.

          BTW, I’ll also note that MMT “no bonds” shows no desire to “lubricate” market term structure.

      • Steve,

        You’re cherry picking one phrase. I think you have to look at the entire paragraph as well as the full piece in context. I think its clear enough what I’m saying there. The analogy is between reserves as required for lending, and NFA as required for monetary system OPERATIONS and economic operations more broadly. The strategic desirability of NFA is acknowledged. I’ve never contradicted that.

        • “The analogy is between reserves as required for lending, and NFA as required for monetary system OPERATIONS and economic operations more broadly”

          Right. Got it.

    • JKH @ February 20, 2012 at 8:42 am

      Great comment.

    • Dan Kervick says:

      JKH, we just seem to be viewing these issues from such dramatically different angles that I have little idea how to respond in detail.

      I don’t regard MMT as a theory of value, or a theory of wealth creation or a theory of the economic production cycle. It is an account of the nature of the monetary system, which in turn is only one component of the economy. It’s not a Theory of Everything, nor does it pretend to be.

      Every economist in the world knows that wealth is generated by people doing things with their own labor and resources they possess, and that most of these resources are non-monetary resources. And Warren Mosler has emphasized about a thousand times that our only real economic constraints are our real resources.

      I learned MMT mainly from Bill Mitchell’s blog, and was always led to understand that the sectoral balances model as deployed by MMT was a flow of funds model tracking monetary transactions.. It’s not a flow of value model, or a flow of real wealth model or a flow of everything model.

      If somebody gives me three tons of finished lumber, and I use one ton to build a house, one ton to burn in a pretty bonfire and one ton to lock up in my warehouse for a rainy day, then I have consumed 1/3rd of my lumber income, invested 1/3rd in capital development and saved 1/3rd. Those big, global macroeconomic frameworks of the macroeconomics textbooks are supposed to encompass all of these processes, classify them into some category or another and integrate them into a model. MMT like every other school of economic thought recognizes that such processes are the stuff of our economic life, but it has little directly to say about those processes, so far as I understand it, beyond what it shares with the the various economic schools of thought in its lineage. MMT supplements a whole bunch of post-Keynesian thought with some independent thinking on the nature of the monetary system and payments system.

      Sticking to monetary transactions, obviously one part of the private sector can borrow money from other parts of the private sector; one part of the private sector can receive monetary wages from other parts of the private sector; one part of the private sector can receive monetary gifts from other parts of the monetary sector. Why is this important with respect to the basic MMT framework? How does it affect the fundamental point that if one private sector entity enters a monetary debt relationship with another part of the private sector, the monetary liabilities and assets net to zero? So what if the household sector accumulates assets because firms accumulate liabilities?

      You and others keep suggesting that MMT is somehow cheating because it uses stylistic tricks to provide tricky hazy valences to misleading claims, and insinuates more than is born out than what it literally says. Maybe. You guys have been around longer than me, and part of the debates longer than I have. But at least show me the statements.

      I’ll try to look into the SRW discussions and the Asymptosis discussions and everything else, but you guys are getting as bad as Warren with his “Go look at the mandatory readings” instructions! :) Can’t you guys present a few terse and precise statements about exactly what it is you are trying to show? Something less vague than “production drives money.” Something more interesting than a logical tautology combined with the assertion that you have to have read all the background stuff to know why the logical tautology is important?

      Are you just pointing out that whatever anyone saves, as the economist understands it, consists of both they have invested and what they have stored up? Was that a point of contention?

      When it was all about the job guarantee I thought I understood what was going on with MMR. You rejected the full-scale version of the taxes-drive-money component of MMT, and consequently doubted the MMT claim that a JG program could succeed in stabilizing prices throughout the economy by setting the price of labor. Fine. But I can’t figure out where you are going beyond that.

      • Dan Kervick says:

        And this JKH,

        Private capital allocation is the core driver, in the case of banks as well as more broadly throughout the real economy – not marginal government net saving provision.

        Could you explain to me how this differs, if at all, from the picture presented in Scott Fullwiler’s “Modern Central Bank Operations – The General Principles”?

      • Dan,

        Thanks for the response.

        “I have little idea how to respond in detail”

        I’m feeling a little tapped out myself.

        :)

        Just a couple of observations:

        “always led to understand that the sectoral balances model as deployed by MMT was a flow of funds model tracking monetary transactions”

        I wouldn’t describe it as a flow of funds model per se. Flow of funds modelling covers comprehensive changes in balance sheets by definition and objective. It’s intended to reconcile changes in complete balance sheets between different points in time. SFB is a netting model that covers only marginal changes. Furthermore, it covers flow of funds changes that correspond only to changes in marginal income effects. That again is less than the functional scope of a true flow of funds model. FF models are intended to cover that and fill in the rest of the gap as well. That’s their purpose and why they’re created in the first place. Otherwise, you can get the same marginal information pretty much from an income statement – or in the macro case, NIPA. For example, the NIPA current account component gives you the current account and its automatic corresponding identity driven net capital account offset. That net capital component is only a subset of the capital account flow of funds. So SFB is useful in building a story that interprets marginal change, but it doesn’t build a story that describes total change – in terms of flow of funds or otherwise. And one of the points here around this debate concerning the “Waldman effect” is the relative positioning of marginal versus total, as far as an explanation of monetary system dynamics is concerned. The “I” in SFB is entirely netted from existence. The “I” in the equation you don’t like is central.

        Second general observation, related, is that MMT seems to be centrally based on the marginal analysis of the government effect in nearly all its aspects – SFB, monopolistic pricing power, etc. I find it natural to want to understand the dynamic nature of what it’s marginal to, and how the margin relates to the whole in that context. I find it unsatisfying to construct a theory entirely around what’s happening at the margin, without cohering reference to the whole. In this case, that would be how (S – I) relates to I. You can’t do that with SFB alone, because SFB excludes I (and the part of S that corresponds to I), by deliberate construction.

        Regarding this focus, I think the two Waldman quotes and what else has been written on this so far is enough for now. As far as the background reading issue is concerned, there’s no reason why insight into a particular impression of MMT held by somebody or some group who have considered MMT quite carefully for a few years (possibly with longer prior exposure to the raw material itself) should be that much easier than is the case for somebody coming into MMT cold turkey and trying to form an impression of it directly for the first time. MMT is a translation of “monetary realities” by its own claim. But it’s not necessarily the only translation of those realities, whether thinking individuals exposed to it have second thoughts about it, or have had exposure to the raw material that MMT processes and have a somewhat different view of how it might be processed. The desired framing of those realities in some preferred conceptual framework is not necessarily unique.

        Perhaps we should give this one a rest for a while. Maybe it’s part of some longer term assessment. If it disappears as an aspect for MMR consideration, so be it. If not, it will evolve as part of the difference between MMR and MMT. It was mostly an observation for the record, at this early stage of MMR. Separate from that, I see no reason for too much concern about this right now, or why it’s productive for you to be puzzled by where this “is going”. Let’s drive on.

      • George Melillo says:

        Dan is speaking for me, which is why I’m glad I valued my time differently and disappeared for a few days.

        The irony of this whole discussion is that MMT cleared up for me the distinction between real and nominal. It’s because of MMT that I understand more clearly that piles of dollars are not real wealth.

        MMR, when it isn’t busy trying to convince me not to call piles of dollars any kind of wealth, financial or otherwise (which I’m happy to do if it’ll make people happy), seems to me to be muddying the waters between real and nominal. Exports are in fact a real cost. But the capacity to produce what we export, i.e. productivity, is a real second-order good. Those two statements are completely logically compatible.

        Now I’ll keep reading through the comments I missed…

        • George Melillo
          It’s because of MMT that I understand more clearly that piles of dollars are not real wealth.

          Exactly. Piles of dollars are “claims” on real wealth.

  42. Ramanan,

    Good comments in general.

    The subject shouts out for that type of clear headed thinking.

    • Thanks JKH.

      Excellent comment again in reply to Dan.

      Moreover, there are some who do not know the history of this so one has to be patient.

  43. Peter P. (February 19, 2012 at 10:21 pm),

    I never said the equation was profound.

    But some people have definitely found it useful.

    So I’ll say it now – it’s useful.

    I didn’t use the term “error” in my comment.

    Waldman used “category error”.

    You have to understand his point, in order to understand how he is using the term “category”.

    Since you’ve jumped on the triviality train, I’d been grateful if you could direct me to some specific sightings in the blogosphere of how this identity has been previously referenced by MMT, or anybody else. If it’s trivial, somebody must have noted that opinion before – along with the identity itself, obviously – in some context. I’d be interested to see in what context they did that, so I can respond.

    If you can’t find such evidence, and it’s just you and a couple of others that have engineered this train out of the station in recent days, then I’d be tempted to redirect as to what’s trivial here.

  44. Isn’t all of this covered in Mitchell’s ‘Deficit Spending 101’?

    What exactly is wrong with, or missing from the following? The wording seems pretty clear.

    “At the heart of national income accounting is an identity – the government deficit (surplus) equals the non-government surplus (deficit). Given effective demand is always equal to actual national income, ex post (meaning that all leakages from the national income flow is matched by equivalent injections), the following sectoral flows accounting identity holds

    (G-T) = (S-I) – NX

    where the left-hand side depicts the public balance as the difference between government spending G and government taxation T. The right-hand side shows the non-government balance, which is the sum of the private and foreign balances where S is saving, I is investment and NX is net exports. With a consolidated private sector including the foreign sector, total private savings has to equal private investment plus the government budget deficit.

    In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending. In a closed economy, NX = 0 and government deficits translate dollar-for-dollar into private domestic surpluses (savings). In an open economy, if we disaggregate the non-government sector into the private and foreign sectors, then total private savings is equal to private investment, the government budget deficit, and net exports, as net exports represent the net financial asset savings of non-residents.

    It remains true, however, that the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save (financial assets) and thus eliminate unemployment is the currency monopolist – the government. It does this by net spending (G > T).”

    “The non-government sector can create financial assets (including bank deposits – which we think of as “money”) but not net assets. Because in the non-government sector for every asset created there is a corresponding liability.”

    http://bilbo.economicoutlook.net/blog/?p=332

    Complimented by:

    “when an external deficit (X – M < 0) and public surplus (G – T < 0) coincide, there must be a private deficit. While private spending can persist for a time under these conditions using the net savings of the external sector, the private sector becomes increasingly indebted in the process.”

    http://bilbo.economicoutlook.net/blog/?p=17637

    ?

    • Ah .. I now see the confusions even more!

      “In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending.”

      Bill Mitchell claims he is consistent with national accounts. However, I am reasonably sure that there is no such thing as “net savings of financial assets”.

      “It remains true, however, that the only entity that can provide the non-government sector with net financial assets (net savings) and thereby simultaneously accommodate any net desire to save (financial assets) ”

      When net saving is defined as saving net of investment, how is this statement logical to the penny? I

      In the other case where net saving is not defined as the above, then clearly it means MMTers do not define it as per standard definition. In that case, why use “S” in the sectoral balances at all ??

      If I get the time, I can go through this patiently.

      JKH,

      Can you check this http://bilbo.economicoutlook.net/blog/?p=14867 my question in the quiz and the discussion.

      I believe the discussion extends to not just the usage of saving instead of net saving but something more involved. :)

      Do you see what I mean? Or maybe you have already figured this long back.

      • @Ramanan
        I am reasonably sure that there is no such thing as “net savings of financial assets”.

        I think this is unlikely so maybe you could expand on this claim…

        • “I think this is unlikely so maybe you could expand on this claim…”

          Because a simple Google search brings me just MMT websites !

          Saving in national accounts is defined to be a flow. It is a residual.

          Now, savings – which ends with an s, can be used as wealth as well as a plural of saving.

          In what you quote, savings is used in both sense!

          i.e., compare the two statements:

          “With a consolidated private sector including the foreign sector, total private savings has to equal private investment plus the government budget deficit.

          In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending.”

          So which sense should I use?

      • Ramanan,

        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.”

        I see the “correct” answer is true, so I assumed you answered false.

        You are right and Bill Mitchell is wrong, which doesn’t surprise me.

        He needed to specify “the private sector is net saving overall”.

        Here’s a proof:

        Start with a balanced budget and balanced current account.

        Assume the private sector saves in the amount S.

        Then S = I.

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

        And suppose S moves to .99(S).

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

        So you’re right and he’s wrong.

        It’s a good case of the Waldman observation, a clear instance of ignoring the vast bulk of the saving that’s taking place.

        I can’t believe that he attempted to defend this in his response to you.

        Oh, wait… I guess I can… given the pervasiveness of the “Waldman effect” in MMT positioning on saving.

        You seem to suggest there may be more to it than that.

        If so, what area were you thinking of?

        • JKH,

          Yes that’s it. I believed that the MMTers were just using saving instead of net saving for the effect but realize there is some vagueness in their definition as well.

          I think they tend to think that the net is as if it netting against some kind of dissaving – i.e., the possibility of their definition of saving as a surplus but in that case (for the closed economy case)

          S – I ≠ G – T

          In that definitional scheme,

          S = G – T

          • Yes, but you see how perilous that is.

            The sectoral framework that is the basis for these sorts of discussions is entirely a derivation of national accounts definitions.

            So there is no such definition scheme that S = G – T on that basis. It can’t be allowed.

            If they do it in words, that’s one thing.

            But venturing into the same symbols as the national accounts and sector balances is suicide.

            I know you only did it for illustration, but you see how untenable the whole idea of conflating saving and net saving becomes on that basis.

            There’s no excuse.

            And one reason there’s no excuse is that its a massive waste of people’s time trying to sort out such inconsistencies – like Ground Hog Day.

          • Let me repeat.

            There’s no excuse for that answer he gave you.

        • Dan Kervick says:

          It’s a good case of the Waldman observation, a clear instance of ignoring the vast bulk of the saving that’s taking place.

          Even if the sector as a whole is in deficit, there can be gobs and gobs and gobs of savings going on within the sector. Many folks can be increasing their stock of net financial assets. But the net financial assets of the sector as a whole will be diminishing. MMT ignores this observation?

          But consider a US private sector in balance. Now suppose during some period of time, each man, women and child in America sends Megacorp $10 and receives in return a bond from Megacorp for $100. Awesome. Our assets have all increased by $90, and if there are X people in the country, the non-Megacorp sub-sector of the private sector has increased its assets by $90X. That’s some investment for you, the backbone of savings. Meanwhile Megacorp’s liabilities have also increased by $90X. Wow.

          Now maybe Megacorp is doing some awesome production of nano-widgets that is going to generate $90X in additional real value, which can then be sold on the market all across the land. Great. But the government then better supply a lot of additional money so the private sector can monetize that value and exchange it, and so that Megacorp can they pay off the nominal values of the bonds. Otherwise you get deflation and default.

          • Cullen Roche says:

            You’re seeing (one of) the key points now. “But the government then better supply a lot of additional money so the private sector can monetize that value and exchange it”

            Resources precede govt money. Or as I like to say, govt money accommodates private sector production. The conclusions you reach from this foundation of understanding are totally different from the MMT approach. State money becomes flawed, taxes drive money becomes flawed, the JG becomes flawed, the emphasis of consumption over production becomes flawed, the foreign sector approach in MMT becomes flawed….

            Are you beginning to see how MMR is pushing this forward? They’re not small differences. They’re colossal changes….

            • Not wanting to be an rude little sh!t but have you actually read Knapp’s ‘The State Theory of Money’?

              • Cullen Roche says:

                Actually, your comments have been getting increasingly offensive so yeah, don’t be a rude little shit or your privileges will be revoked. This site is going to adhere to the same standards I impose at pragcap so let’s stop with the rude comments. I don’t warn people twice.

            • Dan Kervick says:

              Resources precede govt money. Or as I like to say, govt money accommodates private sector production. The conclusions you reach from this foundation of understanding are totally different from the MMT approach.

              That’s where I disagree with you, Cullen. MMT is perfectly consistent with the government taking a mostly passive role with respect to economic production, and supplying net financial assets primarily in response to the demand for such assets driven by consumption and productive investment in the private sector. However, MMT does argue that the government should step in to cover demand shortfalls when the private sector has a high desire for increased saving.

              People like me, of course, want the government to be much more active in the field of production itself, and get busy doing a lot of public investment. But that’s a personal social and economic policy preference that I think MMT only shows is possible. It’s not a deduction from the MMT framework.

              The JG proposal is a different matter. Bill Mitchell and others who have written about the JG emphasize that it is completely separate from whatever choices the government might make in the area aggregate demand support. In fact the government could run a JG even while it it was carrying out a contractionary policy. The point of the JG is supposed to be the achievement of the policy goals of price stability and full employment, not the goal of demand stimulation.

              The taxes-drive-money component of MMT is supposed to explain what makes a JG program possible and effective. But “taxes-drive-money” doesn’t mean “government-drives-economy”. Even if it is true that the ultimate driver of the demand for the government’s money lies in the tax obligations the government imposes, that doesn’t mean that people engage in production and the exchange of the things they have produced solely in order to discharge tax liabilities. It only explains one reason why, out of all the things people could accept in exchange for the surpluses they produce out of their own initiative, they are willing to accept the government’s money in exchange for them. People want something of value for the extra things they have made, and since they value discharging tax obligations they are willing to take the means of discharging those obligations.

              I have already said that my personal view is that the demand for the government’s money has other sources, including the sheer inertia and convention attaching to a customary means of exchange, and also the legal framework establishing the government’s money as a final means of payment for any debts, something that any creditor must accept. To me the real centerpiece of MMT is the sovereign government’s legal and institutional monopoly over the fiat currency monetary system, and what this entails about both the constraints such governments do and do not face, and the necessary role such government’s must play in supplying money to the whole economic system.

              • Cullen Roche says:

                Dan, it’s terribly misleading to argue that MMT is “passive” on govt involvement in production when the theory includes a program that would currently involve the largest bureaucratic undertaking in the history of man. I mean, this isn’t even obfuscation. It borders on flat out lying to people’s faces. You are in favor of a 30 million person $16/hr street sweeping army with full benefits. Say it loud and say it proud. But don’t try to confuse people about it. I’ll give Mitchell some props here. That guys flaunts the JG like crazy because what you see with him is what you get.

                • geerussell says:

                  It’s misleading to use hyperbolic rhetoric like 30 million street sweepers. Hopefully at some point behind all the hyperbolic anti-JG rhetoric, there’s an alternative being suggested to the status quo of a buffer stock of millions of unemployed people.

                  I know you don’t like the phrase status quo but unless you’re describing a policy that creates an alternative the status quo is exactly where you are. A spending formula with a 4% nairu target still falls short.

                  • Cullen Roche says:

                    True, Randy uses terms like “cleanup engineer” instead. I’m all for accuracy here and “engineer” isn’t misleading at all when describing someone who will be picking up garbage. :-)

                    And if by, “status quo”, you mean, not way out left on the political spectrum, then yes, I guess I am status quo. But can I at least refer to myself as a status quo “engineer”? :-). Just teasing of course. You guys need to lighten up. You’re in favor of a huge govt labor program. Embrace what you believe in….But let’s call it what it is and not something else. I dont know what’s up with not embracing it. If I didn’t know any better it would appear like JG supporters are scared to call it what it is….it’s the largest govt employment program ever….

                  • Cullen Roche says:

                    Btw, the more I think about it, the more I think my innovation initiative wouldn’t just be beyond status quo, but would be far superior to the JG. more to come on that….

                    • George Melillo says:

                      Cullen,

                      I don’t see much theoretical merit in your innovations. The MMR law. The productivity drives money view. The rejection of “exports are a real cost.” Your “theory of the state.” All of this looks confused and wrong to me.

                      And I don’t think that you’ve discovered some deep logical connection, or hidden well spring of political motivation, whereby it is the political machinations of JG proponents that is driving their theoretical “mistakes”.

                      Nor do I believe that you have discovered some major flaw in the JG that the proponents of it haven’t already thought through. Instead you tend to construct straw men and resort to hyperbole when the JG comes up.

                      But I will say that if you have a policy proposal that will ensure that anyone who is willing and able to work will have an opportunity to do socially useful, productive work, and thereby support themselves, and that you believe to be superior to the JG on other counts, I look forward to hearing it.

                • Dan Kervick says:

                  In most normal times, Cullen, that huge program would only employ about 5% of the workforce. The other 95% would be employed doing more or less the same things they do now. Some of that is government work, but most of it is private sector work. The government role in all that private sector activity is mainly to supply money to meet the private sector’s demand for credit and growth in NFAs as the latter engages in its usual entrepreneurial capital development and creative destruction; it’s role is not to organize things. And not only is MMT consistent with this outcome, that is the outcome it expects.

                  So please don’t through around terms like “obfuscation” and “lying”. The fact is that in the economic world envisioned by the MMT writers is a world filled with lots of independent private sector activity. It’s not some statist nightmare with the government controlling everything.

                  • Cullen Roche says:

                    Well, calling a trashman a “cleanup engineer” is stretching the truth. So yes, lying is a bit much. But you get my point.

                    • George Melillo says:

                      That’s bad form.

                    • Cullen Roche says:

                      “bad form” is calling a garbage man a “clean-up engineer” in an obvious attempt to make the jobs appear more credible….It’s just more MMT obfuscation….I’m not trying to be rude, but let’s call things what they are and not what you want them to appear as….

              • George Melillo says:

                Exactly.

        • Detroit Dan says:

          It seems to me that the difference between “the private sector is saving overall” and “the private sector is net saving overall” is zero, and the later is redundant. +1 Mitchell

      • @Ramanan: “why use “S” in the sectoral balances at all”

        Thank you! I’ve been wondering exactly that for some time. If you want to talk about NAFA at the sectoral level that MMT tends to talk (private, govt, intl), you don’t really need S, do you? It’s just confusing.

        • Dan Kervick says:

          Yes, Steve, that’s why in my little outline above, I preferred to use “R” for receipts, and “P” for payments, and use those same two variables for all three sectors. All this business about savings and investment and taxes buries a simple framework under categories that are larded with extraneous connotations and are used by different kinds of professionals for different purposes.

          It’s just about changes in net financial assets. If there are three sectors, and the NFAs held by the the first sector are not changing, while the second sector is accumulating NFAs, then the third sector is losing NFAs. That’s it.

          • Yeah Dan I really like the way you do that. Which brings me back to my desire for a Godley-style accounting matrix — which never uses, never needs to use, the word Saving.

            It seems like SRW and JKH’s basic point is really a simple one: MMTers *often* use a different definition of the word Saving (“private-sector NAFA”, or net saving = S-I), without signaling it clearly. So govt. deficit = private saving.

            That tends to suggest causation to many (just like S=I suggests the loanable funds silliness), and I think MMTers often at least allow that misconception to stand. That notion certainly formed in my untutored head when I discovered MMT. (Notice my uses of the word often — there are many and significant counter-instances.)

            Would it be safe to say that sufficient govt deficits create a necessary *condition* for the private sector to thrive and prosper (by individuals monetizing their efforts/acquiring claims), while private sector efforts are the primary *cause* of that prosperity?

            • Oops “private-sector NAFA” should read “*change in* private-sector NAFA”

            • Dan Kervick says:

              Yes, I think that’s right Steve, with emphasis on the word “primary”. Of course the government does do some things that are very active, with government directly providing some of the economy’s consumption demand, and sometimes leading the capital development process and not just financially accommodating it. When the government builds roads and bridges itself, educates the country’s people, and builds the defensive and law enforcement systems that provide the essential security needed for economic prosperity – and doesn’t just leave it up to private sector initiative to provide these things – then government is taking a leading active role. But most of the productive activity in our economy is instigated and carried out in the private sector, and government plays the role of permitting for the growth in net financial assets needed to finance the increases in production.

              • Guys I hope we aren’t ignoring the carrot at the end of the stick effect of government spending. I think that is more than a second-order influence.

              • I think you put it perfectly.

                Government spending/programs obviously can/do actively contribute/participate in economic activity and development. They can/do also *spur* private activity (and in some cases certainly discourage or dis/replace it).

                Money creation via government *deficit* spending is necessary to accomodate increasing private-sector activity.

                I’ve been thinking about rises and falls in inventory as the nexus where S=I happens in a period (if there’s less spending/more saving, inventory — unconsumed investment — ends up higher). Is there some kind of similar variable “buffer” that explains the accounting connection between public deficit and private NAFA? Not sure if that’s useful.

            • George Melillo says:

              Yes. That’s cool with me.

              I can happily start saying, “Government deficits make private sector savings possible” if that’s what this comes down to. I might slip into “Government deficits fund private sector savings,” but I’ll try not to in mixed company!

    • That’s MMT primer, and it’s all fine, and we’re aware of that.

      Its standard sectoral balances, which is fine.

      There’s nothing terribly “wrong” with it for what it says.

      But it’s certainly not sufficient as a description of an economy’s saving dynamic. In terms of the specific aspect under discussion regarding Waldman’s critique, etc. it says nothing. It’s a constructed “net saving” centric description of saving. And that’s the point.

      • @JKH
        “…But it’s certainly not sufficient as a description of an economy’s saving dynamic…”

        The MMT use of the sectoral balances is not intended as a description of an economy’s saving dynamic.

        You have introduced a new idea re saving and investment but don’t conflate that with what the MMT school of thought is saying. Whether your new idea is useful or not remains to be seen.

        • I don’t conflate it. I separate it out. That’s the point.

          Several people associated with this site and a few others whose opinion I also respect have already found it useful.

          That’s good enough for me.

          I’m not selling anything here, so feel free to trash it.

          But don’t trash the views of those who’ve given it some thought and appreciate it.

  45. Ramanan
    Government runs a surplus of 2% of GDP. Would you say the private sector saving is minus 2% of GDP?

    It depends what you mean by “saving.”

    I would say private sector Net Financial Assets decreased by 2%.

    But suppose Households and Businesses had borrowed 2% of GDP from banks at the beginning of that period, invested it in real productive assets, produced real consumable goods, sold those consumables at a profit, and paid off the loans.

    At the end of the period, would H&Bs’ NFAs have declined by 2%?

    I went deep into the “change the way we do the accounting” thing, and came to the conclusion that it’s much easier, and much more sensible, to just be very clear *exactly* what we mean when we use the word “saving” (or abandon it entirely, at least in some usages).

    The Flow of Funds Z.1 Table F.10, for instance, gives you three definitions of Personal Saving to choose among. I include the 2010 numbers for each, in billions, for your comparison and delectation:

    42 Personal saving, FOF concept (FOF) $922

    45 Personal saving, NIPA concept (FOF) $823

    46 Personal saving, NIPA concept (NIPA) $593

    I *think* (might be wrong) that Ramanan is suggesting a definition here that is Private-Sector S minus Private-Sector I — change in PS NFA. That’s obviously very different from H&B S or (some definition of) Personal S.

    • SR,

      I am unsure of what you are suggesting here.

      “It depends what you mean by “saving.”

      Take a simple economy. No pension complications and very little depreciation

      S – I = G – T as per one definition.

      but G minus T is also the Net Accumulation of Financial Assets of the private sector

      So defined this way S minus I is necessarily equal to the net accumulation of financial assets which seems consistent with your quote below:

      “I *think* (might be wrong) that Ramanan is suggesting a definition here that is Private-Sector S minus Private-Sector I — change in PS NFA. That’s obviously very different from H&B S or (some definition of) Personal S.”

      (=) sign missing? Minor point.

      But IF there is a different definition of S, then S minus I is not equal to G minus T!

      Again will check about F.10, although there was some backlog from previous two days.

      • Not disagreeing with you here. Basically pointing out that S != S-I, and that MMTers tend to call S-I “saving” when talking at the highest sectoral level (private/govt/international).

        But dropping below that MMT sectoral level, I think there might be deeper waters in the various definitions of Personal saving in F.10.

    • Dan Kervick says:

      But suppose Households and Businesses had borrowed 2% of GDP from banks at the beginning of that period, invested it in real productive assets, produced real consumable goods, sold those consumables at a profit, and paid off the loans.

      That’s great. That’s where wealth comes from. But assume the increase in real value is for the whole sector is to be matched by an increase in financial assets. That is, assume the borrowers are all able to pay of their loans, with the pre-determined interest. Where do the additional dollars come from?

      Would there ever be circumstances in which it would be a good thing for the private sector to move to a higher volume of exchange of real goods and services, while at the same time seeing a decrease in its stock of net financial assets?

  46. “MMT argument that we need government deficits to help grow the economy. That’s BS.”

    I don’t think so, at least in the long term. If we had the money stock we had in 1900, today, the farmer would know that he can’t monetize his expanded farm. So he would have less incentive to expand it. (Especially if the general shortage of money meant he couldn’t sell much or take much profit, either.)

    The short-term effects are obviously subject to many other economic variables.

    But I do think it’s pretty significant that every depression in US and UK history was preceded by significant reductions in govt debt. (Except this one, for which there was a 7-year lag before the depression hit.)

    To repeat what I’ve said many times, I’m not saying “govt surpluses cause depressions.” Just that surpluses seem to be a necessary condition for depressions to emerge. Hence that sufficient deficits are necessary conditions for avoiding same.

    I don’t think it’s crazy to suggest that the government needs to create sufficient quantities of safe private financial assets (“money”) through deficit spending for the economy to thrive and grow.

    While others may have suggested the same in the past — before Stephanie coined the term MMT — the MMTers have done huge service to all by making it obvious, clear, and well-founded in rigorous accounting logic.

    They mainly need to be more careful in how they use, and think about, the word “saving” and associated concepts vis-a-vis different views of different sectors.

    • Could it not also be that government surpluses contribute to currency appreciation, leading to (greater) trade deficit (or reduced trade surplus), as well as reduced domestic private sector net saving at the same time. The resulting recession with reduced saving leads to increased indebtedness, accomodated by the central bank’s lowering of interest rates as it tries to find a way out of recession in the absence of adequate government deficit spending. The economy then begins to grow again, but driven by an expansion in credit and debt on the back of inflating asset prices and domestic consumption. Trade deficit then increases as capital pours into inflating assets, further fueling the debt bubble, unless government responds with an adequate deficit and/or moves to curb asset price inflation, resulting eventually in a financial collapse (?).
      Given a particular trade deficit, the question is what level of private indebtedness is sustainable. Private indebtedness can temporarily serve to prop up the value of the currency, as can public indebtedness (via sterilisation of the currency by exporting nations plowing it back into govt bonds). If the government deficit spends without borrowing then the currency can depreciate naturally in the face of a trade deficit and global imbalances can sort themselves out, meaning also that domestic private indebtedness will fall (net domestic private sector saving increases). If govt fails to run an adequate deficit and instead leaves the economy to grow on the back of domestic debt expansion and asset inflation, then at some point you get a big minsky moment. Financial fraud (AAA subprime loans, bullshit derivatives) can serve to make the bubble even bigger and the crash even harder, though beyond a certain point of indebtedness perhaps its the only way in which the economy can keep growing in the absence of adequate govt intervention and spending.
      Just a thought.

      • Right. Maybe because: private debt/money issuance is much more volatile. Big payback moments happen. Government, because it can always create more (vertical) money, doesn’t call its loans in nearly the volume that the private sector periodically does. ??

        • I think the natural rebalancing mechanism of the floating exchange rate can be distorted if the government doesn’t spend without issuing bonds when the country has a trade deficit. The deficit can be exacerbated by the build up of private debt, inflating assets, and credit driven domestic consumption as capital pours into the country, pushing up the value of the currency and engorging the financial sector. This makes it difficult for global imbalances to rectify themselves whilst rendering the country ever more dependent on imports as fundamental productive businesses close down or move abroad. If the government issues bonds when deficit spending this will do little to rectify the trade imbalance as the bonds serve as a mechanism by which deficit spending is sterilzed by other countries that want to prop up the dollar and hold down their own currency. If the government deficit spends without issuing bonds, on the other hand, the currency can drift downwards naturally whilst overall domestic private sector indebtedness is also reduced without damaging growth. The currency can depreciate to the point that financial sector shrinks and export sector grows leading to trade surplus. Then I suppose the opposite can be done to cause the currency value to rise again if needed. Rather than messing around with interest rates unless really necessary, rates can be kept steady.

          • “Could it not also be that government surpluses contribute to currency appreciation, leading to (greater) trade deficit (or reduced trade surplus), as well as reduced domestic private sector net saving at the same time. The resulting recession with reduced saving leads to increased indebtedness, accomodated by the central bank’s lowering of interest rates as it tries to find a way out of recession in the absence of adequate government deficit spending. The economy then begins to grow again, but driven by an expansion in credit and debt on the back of inflating asset prices and domestic consumption. Trade deficit then increases as capital pours into inflating assets, further fueling the debt bubble, unless government responds with an adequate deficit and/or moves to curb asset price inflation, resulting eventually in a financial collapse (?).”

            This is a model I think about all the time. I just asked about translating the MMR to a gold standard and this is exactly what you get when you apply MMR to the gold standard. T-G can’t move that much, so you have other currencies randomly debase against your currency.

            The gold standard is a special case of MMR.

            Then the rest of this scenario runs out over and over again. It’s easy to see how wars started over resources under gold standardish thinking because it’s the only way there could be a credible growth in private credit.

            • Global economics is essentially about balance, whether you have an international gold standard system or or fiat/credit money system. At present we have the worst of all possible worlds – a system which cannot balance itself because the ruling elite are using gold standard thinking without being constrained by the practical (if slightly moronic) realities of an international gold standard system. Instead of allowing the fiat/credit money system to opperate as it SHOULD they’re stuck instead in an endless purgatory state somewhere between heaven and hell, in which money is incessantly both a blessing and a curse.

    • Dan Kervick says:

      If we had the money stock we had in 1900, today, the farmer would know that he can’t monetize his expanded farm.

      Right!

      And the key MMT claim in this regard, I believe, is that in our system while the private sector can endogenously increase its stock of IOUs promising the payment of dollars, it can’t endogenously increase the stock of bank reserves needed to clear the payments of IOUs. Only the government is allowed to create reserves. Yes, the IOUs can grow for a time without additional money injections and roll themselves over in a kind of endogenous pyramid of paying debt with debt – at least as long as confidence (or irrational exuberance) is high. But eventually the demand for monetary payments between banks to settle these claims demands the injection of reserves.

  47. Steve Roth
    “The laws of arithmetic place constraints on the greater economy and the mechanics of money creation.”
    No! They place constraints on what we can logically *say* about the greater economy and the mechanics of money creation, without contradicting ourselves.
    I really think that’s a crucial distinction, and being clear on it is important to avoid the kind of confusion we (or at least I) often run up against — confuting ex-ante, causative assertions with ex-post “inevitable” results.
    Do government deficits “cause” private saving?

    Good point Steve.

    • Yes–this is a good point.

      This is part of what I was driving at in our earlier discussion of saving and investment, Steve.

      To talk about causality, we really need to use a model to pin down what we actually mean by something causing something else.

    • “Do government deficits “cause” private saving?”

      Government deficits “cause” net financial assets (the total of all financial assets minus the total of all financial liabilities) to increase. In this case unencumbered dollars and treasuries issued as debt.

      • Govt deficits are the same thing as the increase in net financial assets. It makes no sense to think of thing causing itself–leave that sort of stuff to the Scholastics.

  48. @vimothy

    You too are splitting hairs. I didn’t claim causation, hence the quotes around cause in my comment. It is an identity, there is no causation in either direction.

    At least it appears that you now understand what my point was.

    In this vein, it is this dynamic that MMT is referring to, not savings in the sense you guys are using it. Dan K. tried to narrow the discussion with a “stock of dollars” framing to avoid the “savings” gremlin. Nevertheless the chasing of the tail began anew.

    • @paulie: “hence the quotes around cause in my comment”

      This is exactly where I think we need to be careful. “So-called” quotes are a key signal that we’re quite possibly not using the same terms, definitions.

      • @Steve R.
        I’ve been making an effort to be careful. It’s clear that much of this discussion has been wheel-spinning while talking past each other. Whenever someone tries to clarify their ideas by expressing them in ways that don’t bring up the dreaded “keywords” they are told they don’t really understand what MMR proponents are trying to say. That’s probably true. but it’s just as much their fault in description as it is our fault in understanding.

        System processes don’t fail to function because they aren’t explained in the proper terminology, they just aren’t understood.

        There has been a tendency in this thread to take much of what is said literally rather than focus on the idea being explored. You can’t expect everyone involved to speak the language fluently but clearly many of the commenters understand the ideas in the abstract. Translating that into real-world terms is not simple.

      • I’d agree, this is really hard to be clear. They are the same thing, but they also “force” them higher. Very hard to be 100% clear in comments sections…

    • Well it’s clear from that (and from the three different measures of Personal Saving in F.10) that our national accountants have thought very hard about this. I don’t have the chops (or at least the energy to develop those chops) to provide useful thinking about those different measures, or of the absence of noncorporate business saving in F.8. Not even sure how much of a problem it is. Here’s hoping that others with larger minds than mine can put us on the track to using agreed-upon, rigorously defined terms in our discussions. I think this thread is definitely moving us that way.

      Maybe our task should be to create a glossary, defined in accounting terms?

      I still really want a Godley-style conceptual matrix for the NIPAs/FOFs. Vimothy suggested they’re widespread, but I haven’t been able to find one.

      • Steve,

        Do you have access to a university library?

      • @Steve R.
        “Maybe our task should be to create a glossary, defined in accounting terms?

        This is a good idea.

        Defining the problem would be another one.

  49. The first time I ever knew there was a huge problem in MMT was when Mosler published this article about pensions. http://moslereconomics.com/2011/07/26/why-there-is-a-deficit/

    He says:

    “The main reason we have a large budget deficit is because of all the tax advantaged savings plans- pension funds, IRA’s, insurance and corporate reserve.

    All of these financial assets, which compound continuously, represent unspent income.

    And unless they are offset by some other agent spending that much more than his income, the dollars won’t be there to be saved in these tax advantaged entities.

    And also realize this is an accounting identity, beyond dispute.
    Like 1+1=2.
    Like how your checkbook must balance or you made an arithmetic mistake.”

    …”That’s where the government comes in.
    When those dollars piling up in pension funds cause spending to fall short,
    government can spend more than its income to make up for that lost spending power, fill the spending gap, and keep everyone working and producing and selling real goods and services.”

    This is very wrong. Money does not “pile up” in secondary markets. Money moves thru secondary markets from the buyer to the seller. There is no lost savings because of pension funds, but MMT claims we have lost 20% of output beacuse of this.

    • Based on Mosler’s responses to the comments, I think your critique may be misunderstanding what Mosler is trying to say, though I will be honest, I am confused myself. I think JKH had a go at this in a similar, more recent Mosler post, but I am not sure what came of it.

      • I don’t know what’s to misunderstand. Mosler says that a pension fund removes spending power from the economy. This is wrong. When I put my money in a pension fund and the fund administrator buys stocks they are not piling up money. They are buying stocks on the secondary market and transferring cash to someone else who can then spend it. Money doesn’t move into secondary markets. It moves thru them. There is no spending lost because of the existence of secondary markets.

        • Right, my feeling is that he understands that. It’s a fairly basic concept. In the comments, he emphasizes his point has to do with private sector desires to accumulate NFA. This seems different than your point, but I am admittedly unclear on it, as it seems many of the commenters are.

          • I think he’s backpedaling from an erroneous position. The creation of new pension funds if influenced by public policy still does not detract from prviate savings.

            • My personal take is to give Mosler a break. He’s been really kind to me, even if he’s slightly wrong on a few things. ;)

              We’re walking through the massive hole he opened up, using thinking he helped to pioneer, and applying it in a more general and hopefully more practical manner.

              • Cullen Roche says:

                I agree Mike. No one is going to create a flawless line of thought in this field. We certainly haven’t! Though I would argue we’ve improved the MMT foundation substantially. :-)

                • I think we’ve done good work too, and we’re just getting started! Just setting up this comments section has been a valuable contribution.

                  But honestly, I’d be (slightly) worried about the inflation from QE if I had never run across Mosler. His ideas were like the red pill in the matrix. I swallowed them, and woke up in reality.

                  We’re standing on the shoulders of giants around here. And he’s one of them. Who cares if he might be wrong a little bit? He was right about something absolutely gigantic.

              • And you want to save some issues for those beers on his boat.

                (I argued this one with him very briefly, but it became quickly clear neither of us would move an inch on it. Interestingly (for me), I thought he was almost making a Chicago school type error on it, which is really weird.)

            • Dan Kervick says:

              I think he’s just denying that every dollar that is lent (invested) ends up being channeled through the secondary market where it is eventually spent on some consumption or production. Some of the dollars are indeed simply “stuffed under mattresses” – at least electronically. They are hoarded in response to the total desire of private sector households and firms to net save in total – increase their stocks of financial assets. He’s denying that the desires to save are exactly offset by the desires to spend. Therefore, since the total amount paid in wages is exactly the amount needed to produce the goods and services the workers receiving those wages produced.

              Since he is denying that S = I, I guess you could say he’s affirming that S = I + (S-I) where S-I is often not zero. In other words, he is recognizing and using the very thing MMT is said to ignore.

              • Cullen Roche says:

                Ha. If he were affirming S = I + (S-I) then he wouldn’t constantly say that household savings = govt issued NFAs “to the penny”. There is no “to the penny” relationship. You might slip that by amateurs in a classic form of MMT obfuscation, but not here Dan….

                • Dan Kervick says:

                  Ok, maybe you’ve got me. Does he say “household” savings or “private sector” savings?

                  • I always took him to mean NON Us govt sector savings…… which includes China

                  • @Dan: “Does he say “household” savings or “private sector” savings?”

                    Right! That’s exactly the conflation I pointed out Paulie making, elsewhere hereabouts.

                    I think I’ve got this right: When you consolidate firms’ RHS shareholder equity with household net worth to derive the stock of private-sector NFA, all of that firm value (cumulative gross I minus capital consumption, or just cumulative net I) disappears from the resulting picture, leaving only the marginal residual. JKH’s point, I think.

                    • And that answers Paulie’s question: how can households have $34 trillion in net worth even though the cumulative govt deficit is only $10 trillion?

                    • Dan Kervick says:

                      My guess, though, is that instances of MMT writers confusing the household sector with the entirety of the private sector are rare. Certainly household assets could increase because firm liabilities increase, even if the financial flows into and out of the whole sector are in balance, and therefore the net change in financial assets is zero.

                    • Right, which is exactly where this whole discussion began, with SRW correcting me for my confution of NIPA’s S/household saving with MMTers’ net private-sector saving/NAFA.

                • Dan Kervick says:

                  Could we please give it a rest with the accusations?

  50. vimothy
    MFN,
    There s nothing wrong with what Ramanan wrote. It just means that we can write the possible sources of finance for the budget deficit as debt issuance and money issuance. Obviously, we could make this identity more complicated if we wanted to.

    Ok, so he meant to write (G-T) -> dM + dB or something (I can agree with that)? Because the mathematical “equal” sign is not correct.

    • MFN,

      Why not?

      • See my previous posts. If the CB expands its balance sheet (but not by repo’s/direct purchasing of bonds), the monetary base expands, but G, T and B are not affected (unless you include this in G, but then G is different than the “traditional” gov expenditure).

        For instance, the Fed buys $1 trillion MBS. Monetary base increases with $1trillion (ceteris paribus), but (G-T) or B is not affected. So the government deficit not necessarily equals the change in monetary base plus the change in bonds held by the public. Unless you redefine (G-T) as the deficit of the consolidated gov, including refinancing ops, etc. But that is markedly different than the “conventional” (G-T).

  51. MFN,

    Understood, thanks. I think that’s a special case.

    Govt debt accumulation can be described by,

    dB + dM = (G – T) + rB

    For example.

    But as you’ve shown, and perhaps unsurprisingly, that simple identity doesn’t cover every possible case. It’s not meant to be the final word on the subject, just a way of characterising the govt’s budget constraint.

    If the Fed buys a portfolio of MBS–then the Fed has a portfolio of private sector assets that might make or lose money, for an increase in marginal M, but it hasn’t increased its holdings of B. If you wanted the identity to capture the effects of that on the government’s budget, I guess you would need to add terms somewhere, perhaps subtracting from the LHS the change in money due to Fed financial asset acquisition and adding interest income to total govt revenue on the RHS.

    Since people think that the Fed should not be doing this as a rule, it is not necessarily something that they pay particular attention to when formulating these sorts of budget constraints, which are very general by design. (Though I don’t doubt that someone is paying particular attention to it, or that it can be resolved with the general rule).

    • Yes Vimothy as you point out the equation was written for the mental model under discussion not with all kind of complications. In real life forget ABS, the central bank is also involved in purchasing real estate – such as in cases where it wants to shift to a new building.

      Also, even rB can be shifted inside G :) – although that is not standard.

      Not sure what MFN is looking for.

      The discussions have digressed so much but helps in getting some practice for handling situations in which everything under the sun is brought into the discussion.

      Having said this, I have seen the opposite happening Vimothy. I have seen people starting with G – T = dH + .. and then use this to describe situations in which this equation is no longer valid. For example, there is a tendency to describe purchases of financial assets by the government when it is running a surplus as reducing the surplus which of course is incorrect.

      • Sorry, was skimming through the posts, saw the equations and thought: hey, that doesnt seem entirely right.

        Didnt know it was used for modelling, so sorry for the nitpicking. I should have read all the posts more carefully before commenting :-)

    • Colin Sugioka says:

      @wh10 February 20, 2012 at 6:59 pm

      Again, I may be thinking too simplistically, but maybe Mosler is referring to the difference between a company Investing cash into increasing its productive activity, vs putting it into a pension fund.

      Yes, the fund will ‘invest’ it – treasuries, corporate bonds, equities, etc – but the sellers of any of these assets will just end up holding the cash instead.

      However, if the company would just ‘hoard the cash’/’invest’ it in similar assets anyway, given inadequate demand for its products, there would be little difference. (Disposing of the cash via dividends or stock buybacks on the other hand night have a more stimulative effect).

  52. Dan Kervick @February 20, 2012 at 9:10 pm

    Let me interrupt but for your good because it won’t help you “starting from scratch”.

    “I learned MMT mainly from Bill Mitchell’s blog, and was always led to understand that the sectoral balances model as deployed by MMT was a flow of funds model tracking monetary transactions.. It’s not a flow of value model, or a flow of real wealth model or a flow of everything model.”

    If it is a flow of funds model, then saving has a reasonable precise definition in the latter. Doesn’t help to mix saving and saving net of investment.

    “But at least show me the statements.”

    http://bilbo.economicoutlook.net/blog/?p=14867

    mixes saving and net saving. It’s okay if done once but these things keep happening.

    “Can’t you guys present a few terse and precise statements about exactly what it is you are trying to show?”

    Read SRW’s comment in JKH’s comment. JKH’s two long comments can be read independently.

    That it is possible for the private sector to save “overall” with without a budget deficit (closed economy case) in the same national accounting language you suggest is “deployed”.

    These things are not restricted to the points here. Sometimes we see statements that the government has to run a deficit so that the private sector pays taxes etc.

    Look, none of my statements are against deficit spending – I am just pointing out to the overkills turning counterproductive.

    • Dan Kervick says:

      That it is possible for the private sector to save “overall” with without a budget deficit (closed economy case) in the same national accounting language you suggest is “deployed”.

      And here “savings” means …?

      • The S in S – I = G – T + X – M

        • Dan Kervick says:

          So you just mean the private sector can save because of the external sector balance? Or because I could be negative?

          • Nice attempt to shift the discussion.

            First,

            I said:

            “That it is possible for the private sector to save “overall” with without a budget deficit (closed economy case) in the same national accounting language you suggest is “deployed”.

            Agree or disagree?

            We’ll bring the external sector later if you wish.

  53. phil @ February 20, 2012 at 10:19 pm

    phil
    it’s a distortion of the fed’s role, brought about by the fed’s own inept policies in the face of a complete misunderstanding of the role of the treasury, government, and fiscal policy. It’s a perversion – the fed is giving privately created assets the status of publicly created assets. It shouldn’t happen and it wouldn’t have happened if the people running the show weren’t so stuck up their own ideological sphincters.

    Phil, that’s a feature not a bug in the neoliberal worldview. That’s where the endgame is.

  54. Ramanan at February 20, 2012 at 11:08 pm
    Dan Kervick @February 20, 2012 at 9:10 pm
    That it is possible for the private sector to save “overall” with without a budget deficit (closed economy case) in the same national accounting language you suggest is “deployed”.

    This I have to see. Again, though we need to be more clear…

    It is impossible (mathematically) for the private sector to “save” (increase it’s “savings”) “overall” without the treasury spending newly created dollars and issuing treasuries into it.

    • “It is impossible (mathematically) for the private sector to “save” (increase it’s “savings”) “overall” without the treasury spending newly created dollars and issuing treasuries into it.”

      No, that’s not right.

      Here’s the proof

      (Unfortunately there is no closed economy so you have to consider an open economy).

      But the United States is a good example since during 1998-2000 the government budget was in surplus and moreover the US current account was in deficit.

      But wait that is all the more better!

      http://www.federalreserve.gov/releases/z1/current/annuals/a1995-2004.pdf#page=11

      Go to F.8 and check for yourself that the US private sector was “saving overall”

      Also, you may have to bear with it, because the “net saving” in their definition is saving net of consumption of fixed capital.

      What is negative is items in 43 for the same years.

      “This I have to see. Again, though we need to be more clear…”

      Clear on what?

    • Colin Sugioka says:

      @paulie46 February 21, 2012 at 7:42 am

      You are falling into the same ‘trap’ of confounding ‘Saving’ (S) with ‘Saving net of Investment’ (S – I) that is a major focus of this post.

      In S – I = (G – T) + (X – M), let both government deficit and trade balance = 0.

      Then S – I = 0; S = I, and can be >> 0 even with government at 0 (or in surplus).

      I will add that in my limited exposure to MMT, its developers obviously understand the difference between Saving (S) and Saving net of Investment (S – i) and it has always been clear to me from context which they were referring to regardless of what language was used. However your confusion shows the value of precise and consistent terminology.

  55. George Melillo says:

    I’m sorry this is so long, but I need to re-state things in order to understand them. I usually do this in the privacy of my own home, but I figure leaving a public residue of it might do more good than the rudeness of its length will do harm.

    If I have miscalculated, please forgive me.

    Claim 1: Firms have to spend all their profits, and people have to spend all their wages, in order to by up all the output created.

    Assume an economy with just the private sector. It’s unrealistic, because they are transacting in the state’s unit of account. It’s unrealistic because it abstracts from banks. Assume that widgets are created by labor, using fixed capital from a prior period, owned by firms, that was not monetized in that prior period. Yup – it’s very unrealistic.

    But, unless I’m mistaken (and I always am afraid of that in this domain), you can take out a little piece of paper, create two firms, one making widgets and the other wadgets, assign a dollar value to widgets and wadgets and wages, and you’ll see that in order to buy up all the widgets and wadgets, people must spend all of their wages and firms their profits.

    So what will happen if someone (firms or people) decides to hoard dollars? Answer: some of that output will accumulate as inventory. Firms won’t like that. They’ll cut back production. Wages will go down. Fear will go up. Savings desires rise. Rinse and repeat.

    Paradox of thrift!

    Claim 2: There is a scenario in which savings desires can be met without unleashing the paradox. Government can net spend into existence the dollars required to satisfy the savings desires of the private sector.

    We know this story. The government buys some widgets and wadgets to build a bridge (hopefully to somewhere), and taxes less than that out of the economy, and savings desires are met and all the output is bought up.

    But is there another way?

    Claim 3: There is a scenario in which savings desires of households (and even all firms but one) can be met, if there is a bank to lend to the deficit spending firm.

    The widget making firm borrows from a bank an amount equivalent to the amount of dollars everyone else wants to hoard. It has a new fangled iWidget that it wants to sell, but it needs to buy the technology from the Wizard first (up to this point, the Wizard lived in a cave dreaming). The firm borrows the money and buys the technology. The Wizard joins the private sector and spends it on widgets and wadgets, and the firm makes, in addition to its widgets and wadgets, the iWidget. Its total wage bill is unchanged (ex the fee to the huckster living in a cave). The cost to the consumer of the iWidget is the same as a widget (if only!)

    What happens? The money is now out there to fill the spending gap. But wait… there’s more output to be bought. So will it work?

    If the iWidget gets great service, thereby making it possible to have inane conversations over great distances, then the savings gap will not be filled. People will buy up some iWidgets, forgo buying some regular widgets, hoard some dollars, and we’re back in the paradox of thrift.

    But what if the iWidget is not bought up? Assume, then, that the iWidget gets lousy service, and no one wants it. Then all the widgets and wadgets are consumed. Savings desires are met and the government is unnecessary!

    But, as the Hieroglyphics crew once eloquently put it: “Wait up, hold up!”

    The iWidget firm now has unsellable inventory and the bank has made a bad loan. The firm defaults on their loan and reorganizes, leaving the bad loan on the bank’s books.

    Can anyone guess what happens?

    The bank, thankfully, has a friend in government (what are the odds!). Up until now the government has been buying widgets and wadgets with its currency, building highly responsible public works, and taxing out the money it spent to avoid inflation. It has been balancing its budget. But now government bails out the bank, and ends up in the deficit position again.

    Reductio ad absurdum.

    There must be another way…

    Claim 4: There is another scenario in which savings desires can be met without government (I’m starting to forget why I’m working so hard to prove this…), if the firms are willing to issue equity to the private sector.

    The iWidget was a smash success, and all the widget, wadgets, and iWidgets were bought up. Unfortuntely that left some savings desires unmet. The Wizard comes a-wandering into town (actually he just calls the CEO of the iWidget firm on his new-fangled device), and makes a suggestion:

    Issue pieces of paper to private citizens, entitling them to fractional ownership of the firm. We’ll call it: equity.

    In this scenario the fixed capital of the firm is unmonetized, so in monetary terms what the equity claim amounts to is a claim on the future profits of the firm. The clever actors in the private sector know that the world will end after twenty accounting periods, so they do a quick NPV calculation (I have no idea where they get their discount rate), and it turns out that the NPV of the equity works out to exactly their savings desires.

    Each private actor takes a fraction of their wages in stock instead of cash, in an amount equivalent to his or her savings desires. But what happens to all the cash that the firm receives in exchange for its widgets, since some of it does not go out to the wage-earners? It better be spent out, else all that happened is the cash value of the stock certificates is sitting in the firm’s coffers, and we’re still paradox of thrifting.

    So the firm goes back to the Wizard. “Can you do it again? Can you invent the iWadget?”

    And he can. And he is paid in cash from the money saved on wages due to the equity plan. And he spends it out. And government is not required. Whew!

    This equity plan will continue to work, subject to the following conditions:

    i) The private sector is willing to hold all of its savings in equity form. And the total portfolio preferences of the private sector (households and other firms) remain constant, such that whenever someone wants to liquidate their equity savings, there is always another buyer ready to pick it up.

    ii) The Wizard keeps coming up with good ideas. Which is another way of saying that firms engage in nothing put productive investment.

    CONCLUSION: It was a long and winding road, and much of what is being discussed here still looks to me like angels doing a kickass tap dance on the head of a very small pin, but I am satisfied and I have amended my understanding of MMT:

    The government is required to fund the financial savings of the private sector that the private sector is unwilling to hold in privately created instruments like equity claims, but would prefer to hold in cash/bank deposits.

    In a certain unrealistic scenario (the consolidated private sector is satisfied holding all of its savings as equity and the portfolio preferences of the private sector are unvarying in the aggregate) the government would not need to fund private sector savings.

    I think there are other dark paths to go down. For instance, what exactly happens when there is unproductive investment? What would happen to the banking system if the private sector did not want to hold any savings in cash/deposits? Doesn’t a firm have to put the value of the equity claims held by other private sector agents on its balance sheet as a liability, and doesn’t that mean that equity will be “netted out,” and that therefore “net financial asset” saving in the standard story *is* just savings as cash/deposits, and therefore my modified MMT statement about government funding savings is just a re-statement of the standard version, only slightly more explicit? Isn’t it also anyway obviously the case that the private sector does indeed want to hold savings as bank deposits, and doesn’t that render all of this interesting but moot (angels, angels everywhere!)?

    But I’ve had enough, and am forbidding myself to look at this board for another forty-eight hours, otherwise I will not do the productive things that I need to be doing: practicing the piano and thinking about what perennial vegetables I might want to get in the ground this year.

    I’ll be back later.

    (Don’t let that stop you from ripping me to shreds)

    • Colin Sugioka says:

      “angels doing a kickass tap dance on the head of a very small pin”-

      my vote for best line yet. On the other hand, since we both appear to have Invested the time to follow the discussion, the laugh is on us as well (and our S = I = ?).

      • Cullen Roche says:

        I disagree with the idea that it’s just angels doing kickass tap dance on the head of a very small pin. What we’ve connected the dots on here is a crucial linkage between the way the monetary system works to help us achieve our goals. If you work with the understanding that we should optimize time through resource utilization then you will approach the strategy of meeting that goal in a very different way than MMT does.

        It’s not a “small tap dance”, but an elegant tango that should be performed in the halls of Congress.

    • Detroit Dan says:

      George Melillo– That was a wonderful summary! Thanks…

  56. Ramanan @ February 21, 2012 at 8:12 am
    “It is impossible (mathematically) for the private sector to “save” (increase it’s “savings”) “overall” without the treasury spending newly created dollars and issuing treasuries into it.”
    No, that’s not right.
    Here’s the proof
    (Unfortunately there is no closed economy so you have to consider an open economy).
    But the United States is a good example since during 1998-2000 the government budget was in surplus and moreover the US current account was in deficit.
    But wait that is all the more better!
    http://www.federalreserve.gov/releases/z1/current/annuals/a1995-2004.pdf#page=11
    Go to F.8 and check for yourself that the US private sector was “saving overall”
    Also, you may have to bear with it, because the “net saving” in their definition is saving net of consumption of fixed capital.
    What is negative is items in 43 for the same years.
    “This I have to see. Again, though we need to be more clear…”
    Clear on what?

    “What we have here…is a failure to communicate”

    We (everyone in this thread?) have varying understandings of the meaning of the words:

    financial assets
    net financial assets
    saving
    savings
    net savings
    overall
    closed system
    cash and cash equivalents

    At the root level use of these terms other than “closed system” is not necessary when examining the mathematical relationship(s). Lets just use math…

    First, we can define the private sector as a closed system if we assign zero balances to the government and external sectors. Then…

    (I-S)=0 defines the private economy closed system.

    Definition:
    “Stock of dollars” is equal to the number of dollars existing in the non-government without an equal offsetting liability (unencumbered dollars).

    Whatever stock of dollars (dollars previously spent or “given” into the private sector), plus treasuries issued as debt that exist under this system is fixed and finite. The stock cannot be changed without an injection from outside the system.

    Regardless of what you glean from the tables you referenced this statement must be true.

    Now lets inject dollars into the system by deficit spending…

    Let X = existing stock of dollars as defined above in the non-government sector.

    ∆x = change in stock of dollars year-to-year

    Xn = end of year stock of dollars

    Then:

    X + ∆x = Xn

    Let (G-T) = net government spending during the period (G-T> 0 –> deficit)

    and let t = new treasuries (bonds) issued as debt during the period

    Then…

    ∆x = (G-T) – t ;   if all bonds are sold to private investors (swapped for dollars that have no offsetting liability)

    and (G-T) – t = 0 ;  by law deficit spending must be offset by treasury issuance dollar-for-dollar (institutional constraint).

    Then:

    X + ∆x = Xn

    X + [(G - T) - t] = Xn; (G-T) – t = 0; thus

    X = Xn     Q.E.D.===> Bonds sold to private investors that were bought using dollars from the existing stock (didn’t borrow it from the banking system) cannot add unencumbered dollar assets to the economy, only treasuries. The dollar stock remains unchanged.

    (some) Conclusions that follow from that relatively trivial exercise:

    An increase in the stock of dollars (as defined above) in the private sector cannot be accomplished through deficit spending constrained by treasury issuance to the public.

    If the Treasury has no mechanism through which dollars can be introduced into the private sector without selling treasuries to the public, the stock of unencumbered dollars would be very small – very nearly zero relative to the debt held by the public.

    Deficit spending increases the stock of treasuries issued as debt in the private sector. This is one component of “net financial assets” or “national savings” or “net savings” by my definition. You may assign any term you like inlace of mine to distinguish between my definition and yours in the discussion.

    MMT addresses the increase in this stock of dollars plus increase in debt issued by theTreasury as “net financial assets” or “national savings” or “net savings” over the budget cycle according to my definition (that’s my view gleaned from my exposure to MMT). That is the incremental result of (I-S) in the sectoral balances equation during the budget cycle. The sum of the incremental results of (I-S) across all budget cycles is the stock of “national savings”. Again my (and I think the MMT) definition.

    Dollars introduced by the Treasury is “printing” or money creation. The only mechanism by which the stock of dollars can be increased. It is an injection from outside the closed system (private sector).

    The list of possible conclusions is endless. MMT recognizes the limits of the monetary system and the constraints those limits place on various policy proposals.

    Example:

    Treasuries issued as debt described as “debt held by the public” is currently in the $10 Trillion range. It follows that this would be nearly impossible if the Treasury could not spend dollars into the private sector without public issuance of treasuries as public debt. This is a simple linear progression starting with “seed” money at some point in our history that in relative terms would be very small. (It would require that $100 Billion DOLLARS existed in 1913 when the National Debt™ was about $3 Billion. It may be possible that there were that many dollars floating around in the private sector in excess of borrowed dollars but I think it’s highly unlikely.)

    Please don’t make arguments out of typo’s. Just ask for clarification.

    • Paulie,

      You don’t have to keep explaining me the stock-flow math.

      I appreciate your defining a few things but I believe your definitions are not accurate enough.

      “Deficit spending increases the stock of treasuries issued as debt in the private sector. This is one component of “net financial assets” or “national savings” or “net savings” by my definition.”

      How do I understand this? Yes, deficit spending increases the stock of treasuries the private sector holds but … wait …

      What is “one component” – can you commit some equality signs there please?

      net financial assets is a stock. The corresponding flow is “net acquisition of financial assets”

      Is “national savings” is a stock or a flow in your definition? And what about “net savings”?

      Why keep it hanging with “one component”?

      I assume it is a stock there because you later claim so.

      There is a system of national accounts and look at the history and the amount of revisions and work done there http://unstats.un.org/unsd/nationalaccount/hsna.asp

      In the United States, there’s Flow of Funds but it doesn’t have an online version of a handbook. At any rate you can get some guides about NIPA.

      When the discussion is about MMT’s definitions, why would I need your definitions? Don’t get offended by that but when the whole point of the discussion is MMT then we don’t need more definitions here.

      It’s possible that your definitions are consistent with MMT but doesn’t appear to me so.

      So let us move to MMT.

      MMT tries to be consistent with the national accounts language.

      By writing S – I = G -T, MMT *commits* to one definition of the private sector saving which is that of NIPA/Flow of Funds. The “S” in that equation is the saving.

      So S = I + G -T.

      So, it is possible for the budget to be in surplus yet the private sector to be saving or “saving overall” (!)

      “Regardless of what you glean from the tables you referenced this statement must be true.”

      It is true that the private sector’s net financial assets is equal to the public debt but it is irrelevant to the underlying discussion here. The table I referenced shows the private sector can save with the budget in surplus and the current account in deficit.

      You can shift definitions around and try to define saving (as opposed to net saving) in another way but that is inconsistent with S – I = G – T.

      • Ramanan @ February 21, 2012 at 11:36 am
        How do I understand this? Yes, deficit spending increases the stock of treasuries the private sector holds but … wait …

        What is “one component” – can you commit some equality signs there please?
        The other component is dollar assets not offset by dollar liabilities within the closed system. “Physical” dollars in the sense that they exist on balance sheets – again within the closed system.

        I thought I was clear about that. Guess not.

        It is true that the private sector’s net financial assets is equal to the public debt but it is irrelevant to the underlying discussion here. The table I referenced shows the private sector can save with the budget in surplus and the current account in deficit.

        That’s not true of the economy in aggregate by my definition of “saving” or “savings”.

        Flows and stocks are both constrained by the closed system.

        I don’t know that it’s irrelevant. It does indicate that we are talking about different ideas about what constitutes “saving”.

        As far as the SB equation, you may see your definition of “saving” in it and in fact it may be – but it is also true for my definition of “saving”.

        Does that make our opposing “saving” identical?

        • “What is “one component” – can you commit some equality signs there please?
          The other component is dollar assets not offset by dollar liabilities within the closed system. “Physical” dollars in the sense that they exist on balance sheets – again within the closed system.”

          So I take it that “net savings” and national savings are stocks in your definition?

          Ramanan: It is true that the private sector’s net financial assets is equal to the public debt but it is irrelevant to the underlying discussion here. The table I referenced shows the private sector can save with the budget in surplus and the current account in deficit.

          Paulie: That’s not true of the economy in aggregate by my definition of “saving” or “savings”.

          You may define saving your way but is it counterproductive. This is because you first claim that your definition of saving is equivalent to MMT but it’s not!

          You seem to define saving as a financial balance but in that case

          S = G – T

          But in MMT,

          S – I = G – T

          Clearly your definition of saving is different from MMT.

          Now the question is whether your definition of saving makes sense. It does not because it has less economic meaning.

          National accountants have been careful in defining saving. Consider the household sector: Assuming away capital gains, the closing stock of net worth in one period is equal to the opening stock of net worth plus saving.

          If I define it as per your logic I lose that identity.

          This is not just a question of convenience. A household may prefer to purchase a real asset such as a house instead of purchasing a financial asset.

          At any rate, your definition is different from MMT.

          • re Ramanan @ February 21, 2012 at 12:56 pm

            Ramanan asked …
            “What is “one component” – can you commit some equality signs there please?
            The other component is dollar assets not offset by dollar liabilities within the closed system. “Physical” dollars in the sense that they exist on balance sheets – again within the closed system.”
            So I take it that “net savings” and national savings are stocks in your definition?

            S – I = G – T ; (S – I) is a flow measured over a budget cycle. This is “net savings” or change in financial assets.

            ∑(S – I) over all budget cycles is a stock. This is “national savings” or total financial assets.

            These financial assets as defined have no liability claims against them. They are “owned” outright by the private sector.

            And obviously I disagree – I believe this characterization of savings is consistent with MMT.

            (∑ ==> “the sum of”. I’m sure you know that but everyone may not)

            • Good.

              (this doesn’t matter to anything else – I am a bit against the usage of savings as a stock – doesn’t matter here).

              National saving has a different meaning in national accounting. And it is a flow. For a closed economy, it is investment (of all sectors including the government) and for an open economy, it is investment plus the current balance of payments. (simple model with no depreciation)

              My only point is even after we went through the exercise, it finally came to saving versus net saving (saving net of investment) of the domestic private sector and that it is possible for the private sector to have positive saving with a budget surplus which MMT says is not possible.

              • Is this still the Bill Mitchell thing, Ramanan?

                He’s wrong. You’re right.

                • “Is this still the Bill Mitchell thing, Ramanan?

                  He’s wrong. You’re right.”

                  JKH,

                  Just explaining that to Paulie46 who is finding it difficult to accept the conclusion. Happens – even I had empathy to the MMTers earlier and would give them benefit of the doubt, but no longer!

                  • Ramanan
                    Just explaining that to Paulie46 who is finding it difficult to accept the conclusion.

                    Accept what conclusion? No one has yet defined what the conclusion is.

                    The math is not particularly difficult. The difficult part is figuring out the language and it seems that everyone is speaking a slightly different dialect.

                    Maybe you guys who claim to have broken new ground here should make an official statement of your discovery. Give us a mathematical relationship with associated definitions and then the rest of us can see if we can catch up.

                    A statement of explicitly your new paradigm differs from MMT would be helpful also.

                    • “Accept what conclusion? No one has yet defined what the conclusion is.”

                      The obvious conclusion that MMT obfuscates the definitions such as you do by saying.

                      “The math is not particularly difficult. The difficult part is figuring out the language and it seems that everyone is speaking a slightly different dialect.”

                      .. and thus using a “bait-and-switch” strategy as SRW said.

                      “Give us a mathematical relationship with associated definitions and then the rest of us can see if we can catch up.

                      A statement of explicitly your new paradigm differs from MMT would be helpful also.”

                      No need for this. The paradigm -if that’s the right word – already exists. MMT is not the issuer of sectoral balances approach. It is a user.

                    • Ramanan February 21, 2012 at 11:35 pm
                      .. and thus using a “bait-and-switch” strategy as SRW said.

                      Your smugness is showing. I’ve been trying to make legitimate arguments in good faith to understand where our differences lie at the root. You guys are acting like you have broken new ground in economic theory and are high-fiving it all over the thread congratulating yourselves.

                      My take-away so far is that this gargantuan thread is at the root a criticism (near condemnation) of the principal MMT academics because they include treasuries in their definition of “savings”. Treasuries aren’t included in M2 and as far as I know the NIPA tables as part of “private savings”. Nevertheless treasuries are what is swapped into the economy when deficit spending takes place. I call that a net accumulation of wealth and if it isn’t spent it is “savings”.

                    • Paulie46,

                      I think that you are acting in good faith, and it’s to your credit that you want to engage with the arguments. Unfortunately, there is no substitution for careful study of these issues. If you don’t understand something, then the obvious takeaway is that more of this is required, not that the thing you don’t understand has no meaning. Some of the other commenters here have been thinking about these things (and indeed, discussing them online) for years.

                      Imagine I showed you the proof of, say, the triangle inequality. You might say, well you haven’t proved anything, since the inequality sign doesn’t have to have that meaning, and I can define absolute value differently. That might be fine for the Cheshire Cat, but it’s not the basis for a productive exchange of ideas. It’s a semantic argument, and the returns to effort look pretty concave from where I’m sitting.

                      Moreover, it’s tacit admission that what Ramanan writes has weight. If private sector or non-government saving is equal to the government deficit, why is it necessary to redefine private sector saving to be private sector saving net of investment? Answer: because private sector saving is not (as a rule) equal to the government deficit, because private sector saving is actually defined as private income less private consumption and not as private income less the sum of private consumption and private investment.

                      You write,

                      (S – I) is a flow measured over a budget cycle. This is “net savings” or change in net financial assets.

                      Which is correct, which one correction (in bold),

                      ∑(S – I) over all budget cycles is a stock.

                      Which is also correct; and,

                      This is “national savings” or total financial assets

                      Which is not correct. ∑(S – I) is what MMTers refer to as NET FINANCIAL ASSETS.

                      National savings is ∑S = ∑(Sg + Sp) = ∑(Y – C – G), where Sg is public saving and Sp is private saving.

                      You also confuse (further upthread, and at some length) dollars with assets denominated in dollars. The non-government sector cannot by definition acquire NET FINANCIAL ASSETS unless the government supplies them in the course of deficit spending.

                      The non-government sector does not require the government to deficit spend in order for it to acquire either dollars or dollar denominated assets.

                    • vimothy February 22, 2012 at 8:10 am

                      vimothy
                      Paulie46,
                      The non-government sector does not require the government to deficit spend in order for it to acquire either dollars or dollar denominated assets.

                      I say this is false. If the government doesn’t create these assets they don’t exist.

                      The argument you and others seem to be making is that by definition the MMT stance is false even though by mathematics it is true. So we are supposed to re-arrange some equation to make the definition true. Definitions can’t modify natural-world relationships.

                      If the mathematics is true then your definition of “saving” must be wrong or inappropriately applied re the SB equation.

                      It should be clear from (S-I) = (G-T) that if (G-T) can only be dollars or treasuries issued as debt that (S-I) is a flow of dollar-denominated financial assets. Seems pretty straightforward to me. There may be some relationship between dollars held in private savings accounts and (S-I) but I don’t see how that is important.

                      You are welcome to explain in logical detail how state money is introduced into a closed economy without the government first creating, then spending. I will be all ears (eyes). So far, no one has done so.

                    • Paulie46,

                      I’ve already explained how “dollars” enter the economy. The central bank issues them. Deficit spending has nothing to do with this process in any direct sense.

                      Like I said–concave returns.

                    • vimothy
                      Paulie46,
                      I’ve already explained how “dollars” enter the economy. The central bank issues them. Deficit spending has nothing to do with this process in any direct sense.

                      Now we’re headed in the right direction.

                      What transfer mechanism does the central bank use to introduce said dollars?

                • Detroit Dan says:

                  No, Mitchell was right as far as I can tell. JKH seems to think that “overall savings” is not the same as “net savings”, which strikes me as wrong…

              • Ramanan said…
                it is possible for the private sector to have positive saving with a budget surplus which MMT says is not possible.

                We can have an occurrence of a budget surplus over a budget cycle and still have the stock of savings be positive.

                We cannot have an occurrence of budget surpluses over all budget cycles and have a positive tock of savings.

                Over all budget cycles the nominal amount of deficits must exceed the nominal amount of surpluses in order for the stock of savings to be positive in the net (positive stock).

                I don’t know if that addresses your statement quoted above or not.

                MMT is looking at savings within the context I have presented, so it is not possible in that case. The claims that have been posted in several places in this thread that “prove” that the MMT founders have been dissembling are based on an erroneous understanding of what the founders are saying.

                • Paulie46,

                  Well, one can move the discussion in another direction. Yes, a growing economy needs deficits from the government to grow but it does not help to sneak in a few things that are wrong. This isn’t the first time.

              • Ramanan @ February 21, 2012 at 4:05 pm

                I don’t believe the NIPA tables include treasuries issued as debt as private savings, so this may be another area of misunderstanding.

                If you enter data from the NIPA tables into the SB equation you will be hard-pressed to get it to balance.

                • Paulie46,

                  “I don’t believe the NIPA tables include treasuries issued as debt as private savings, so this may be another area of misunderstanding.

                  If you enter data from the NIPA tables into the SB equation you will be hard-pressed to get it to balance.”

                  Sorry can’t catch you.

                  • Ramanan February 21, 2012 at 10:19 pm

                    “Sorry can’t catch you.”

                    This could mean you don’t understand what I am saying or that you are through with the discussion. I will assume the former until you say so explicitly.

                    If you take the sectoral balances equation:

                    (I-S) + (G-T) + (X-M) = 0 ;

                    Then plug in values for a given year from the NIPA tables at BEA for (G-T) and (X-M) which are readily available, you will get a value for (I-S) based on the identity.

                    Now go to the NIPA table with savings and investment data in it and try to make the identity work.

                    • “Now go to the NIPA table with savings and investment data in it and try to make the identity work.”

                      You continue to miss the point.

                      I know the identity well.

                      Please try to understand private sector saving is DIFFERENT from private sector financial balance. The latter is net private saving (i.e., saving net of investment) and the former is not.

                    • Plus of course, even if there are no statistical discrepancies, you won’t be able to verify it because the identity is just approximate. For example, the right identity involves the current account balance and not the trade balance.

                    • Ramanan
                      “Now go to the NIPA table with savings and investment data in it and try to make the identity work.”
                      You continue to miss the point.
                      I know the identity well.
                      Please try to understand private sector saving is DIFFERENT from private sector financial balance. The latter is net private saving (i.e., saving net of investment) and the former is not.

                      I continue to miss the point that the the (I-S) result in the SB equation is DIFFERENT from private sector saving?

                      I know that and always have.

                    • Ramanan
                      Plus of course, even if there are no statistical discrepancies, you won’t be able to verify it because the identity is just approximate. For example, the right identity involves the current account balance and not the trade balance.

                      The identity is exact by accounting.

                      The NIPA tables are estimates.

                    • Cullen Roche says:

                      Paulie,

                      I might be misinterpreting your position, but I think you highlighted the problem previously. When it’s convenient, MMTers refer to Tsys as a cash equivalent. But when we bring any other financial asset into the mix they call that financial wealth and shrug it off as a stock. It’s this sort of conflation that is so misleading. The private sector can also create financial assets. Yes, they can’t create net financial assets, but for real-world purposes (which MMT appears to be concerned with) it doesn’t really matter all that much. The act of saving can take place without govt spending, despite MMT claims otherwise.

                    • “I continue to miss the point that the the (I-S) result in the SB equation is DIFFERENT from private sector saving?

                      I know that and always have.”

                      “S-I” different from private sector saving not “I-S” – guess that’s what you meant.

                      Yes, so the underlying debate in this post is that MMTers tend to mix the two. This can easily be seen by claims that “Without a government deficit, there would be no private saving.”

                    • Ramanan
                      Yes, so the underlying debate in this post is that MMTers tend to mix the two. This can easily be seen by claims that “Without a government deficit, there would be no private saving.”

                      That’s been obvious since the third post in the thread. My argument has been we know the difference, so what’s the big deal?

                      By emphasizing this:

                      “Without a government deficit, there would be no private saving.”

                      You are implying that the founders (Mosler, Mitchell et al) are knowingly (or unknowingly) confusing the issue, being intellectually dishonest. I couldn’t disagree more.

                      Mosler has always been up front with what his idea of “savings” is. In every one of his media appearances he includes a statement that says something like:

                      ” …when an buys treasuries the simply moves their money from a checking account to a savings account at the Fed”.

                      No mystery here what he means.

                    • “That’s been obvious since the third post in the thread. My argument has been we know the difference, so what’s the big deal?”

                      Nice shift. Look at the muddle here http://bilbo.economicoutlook.net/blog/?p=14867 in the comments.

                      “You are implying that the founders (Mosler, Mitchell et al) are knowingly (or unknowingly) confusing the issue, being intellectually dishonest. I couldn’t disagree more.”

                      Well let’s be more analytic here.

                      “Mosler has always been up front with what his idea of “savings” is. In every one of his media appearances he includes a statement that says something like:

                      ” …when an buys treasuries the simply moves their money from a checking account to a savings account at the Fed”.

                      “savings account” at a bank is a different thing altogether from “saving” as a concept.

                    • Cullen Roche
                      Paulie,
                      I might be misinterpreting your position, but I think you highlighted the problem previously. When it’s convenient, MMTers refer to Tsys as a cash equivalent. But when we bring any other financial asset into they mix they call that financial wealth and shrug it off as a stock. It’s this sort of conflation that is so misleading. The private sector can also create financial assets. Yes, they can’t create net financial assets, but for real-world purposes (which MMT appears to be concerned with) it doesn’t really matter all that much. The act of saving can take place without govt spending, despite MMT claims otherwise.

                      MMT looks at saving as a residual, not an act. In this context the accumulation of this residual over budget cycles is a stock and is called net financial assets. It is the composition of these financial assets and how they relate to “saving” in the traditional sense that is in question.

                      There is nothing intellectually dishonest about this – it has been obvious to me from the first day I saw MMT and I am not financially literate so I don’t see this as a conflation.

                      Finally, MMT is concerned only with “state money”. I personally don’t see how the private sector can create it’s own financial assets and increase the aggregate dollar wealth of the economy without a corresponding injection by the Treasury. One can’t put a dollar on a balance sheet if the government hasn’t created it. The private sector does not have the ability to create it’s own “state money” that is owned outright (unencumbered) within the sector by it’s agents with no liability attached.
                      There is a “hard” relationship between this class of money and the Treasury’s balance sheet.

                    • Cullen Roche says:

                      Here’s the thing. “state money” is used by MMT in a vague sense when necessary. For instance, during the QE2 debates they all refer to Tsy bonds as money (they don’t use the term money because it confuses others, but whatever). I actually agree with this position. There’s not a lot you can’t do with Tsy bonds that you can’t do with cash. But the same can be said of Waldman’s example for stock in a firm. MMTers blatantly conflate financial assets when it’s convenient to their position and downplay the fact that the pvt sector can also create financial assets (though not NFA).

                      And again, we have to be careful with this word wealth. The state does not create wealth by injecting money into the system (they can potentially!). But for the most part they are accommodating private sector wealth that already exists and needs to be monetized. If you emphasize this point then you rework the MMT framework and all of the sudden capitalism takes precedence over socialism (even though some MMTers would like to see that order reversed).

                      I don’t think it’s intellectually dishonest. I think it’s political and I think MMT tries to drive home the notion of “state theory” and then misleads on sectoral balances to give the state this appearance of being some almighty and omnipotent creature that needs to be super involved in the economy at all times. That’s just wrong. And the beauty of this discussion is that it actually shows that MMT proves capitalism makes socialism acceptable. Once you connect the dots on all of this it becomes clear that some MMTers don’t want you to realize this (or that they don’t even realize it themselves)….

                    • “The state does not create wealth by injecting money into the system (they can potentially!).”

                      Agreed, and the govt deficit=private saving error contributes to that.

                      Better to say that a sufficient stock and flow of state money (deficit spending) provides a necessary condition for long-term wealth creation.

                    • Cullen Roche February 22, 2012 at 10:13 am
                      …Waldman’s example for stock in a firm… … MMTers blatantly conflate financial assets …
                      …the fact that the pvt sector can also create financial assets (though not NFA).

                      …wealth… …The state does not create wealth… …are accommodating…wealth that already exists… …needs to be monetized.

                      I don’t believe the MMT principals do this blatantly either intellectual or politically. At any rate, I judge these kinds of arguments in terms of the constraints of natural systems, of which math plays a big part. I guess I don’t notice the other stuff.

                      My view? Stock in a firm moves financial assets from one sector within the economy to another. No net wealth (when I make these kinds of claims I mean in the aggregate sense) is realized until it is monetized by fiscal money creation. Stock is worthless until someone buys it.

                      A process within a closed system will always wind down until it comes to a resting state. It will eventually have to be reset if it isn’t continuously provided with fuel. In this case, the system is the economy and the question is, what is the fuel? That is one of the fundamental questions in economics in my view. Obviously I think money is the fuel, in the sense of the carrot at the end of the stick.

                      I may believe that capitalism is better than socialism but if a system analysis indicates otherwise then I am open to it. I don’t have any ideological preference other than what I see as best for public purpose. I’m flexible here.

                      It all comes down to stability and sustainability of the system. Capitalism appears (to me) to be un-sustainable in it’s current form because profit-taking rent-taking, and financial wealth accumulation are parasitic events within the system. A disease attacks the host in a quest for survival (?) but if it kills the host well…?
                      This is not a moral judgement, it’s strictly system analysis. I could be wrong.

                      Filling up a room with people but not expanding the oxygen supply is an unsustainable situation. Everyone can try to breathe less to survive, but that is only a temporary solution. Accumulation of large amounts of financial wealth drains the economy of it’s oxygen.

                    • Cullen Roche says:

                      Nice. Good thoughts. Thanks Paulie.

                  • “The identity is exact by accounting.

                    The NIPA tables are estimates.”

                    The identity you presented is not exact. S-I=G-T+X-M

                    Because it is derived from many assumptions. Such as interest payments and dividend payments to foreigners are not even discussed when deriving etc. As I mentioned, the exact identity has the current account balance and not the trade balance.

              • “it is possible for the private sector to have positive saving with a budget surplus which MMT says is not possible”

                Right. It’s just not possible for the private sector to have positive *net* saving, NAFA, with a govt budget surplus. (Closed economy.)

                But the household sector still can. Unfortunately it generally requires them to work.

                500 comments to get to that? ;-)

                • Steve R. February 21, 2012 at 9:36 pm

                  What is NAFA? Is that what I have been calling net financial assets?

                  • Net Acquisition of Financial Assets.

                    Maybe would be better called “increase in the quantity of net financial assets.” Describing the change in accounting condition, not some human action (acquisition).

                    But in any case what we’ve here been calling net saving. S-I.

                    • OK Thanks. That’s what I thought.

                    • Oops I mean net *private-sector* saving, S-I. Gotta be meticulous in this crowd…

                      Though I”ve been avoiding the whole issue that government spending is now broken down into C and I (didn’t used to be), haven’t figured out that bookkeeping yet in regard to all this…

                  • NAFA is the flow equivalent of NFA.

      • When the discussion is about MMT’s definitions, why would I need your definitions? Don’t get offended by that but when the whole point of the discussion is MMT then we don’t need more definitions here.

        It’s possible that your definitions are consistent with MMT but doesn’t appear to me so.

        You can’t offend me unless you call me names, so no worries.

        I’m just trying to get on the same page as the people I may or may not be disagreeing with.

        The second part of this quote is the reason we are talking.

        • re: Ramanan @February 21, 2012 at 11:36 am

          Sorry, I’m a formatting klutz. Plus the previous comment was in response to you.

  57. Interesting: I just googled:

    “government deficit equals private saving” [note no "net"]

    I got exactly one hit — in a comment by “Geoff” at Mosler’s blog.

    But I swear this misconception (and associated normative and prescriptive statements) is far more widespread than that — including among some who should know better. (I certainly held it for a long time, until SRW and JKH had their way with me.)

    Am I wrong? Was I just one of a small, befuddled minority?

    i.e. this line, which both Marshall Auerbach and Randall Wray have in print:

    “Without a government deficit, there would be no private saving.”

    Do some MMTers use this misconception for rhetorical/political purposes? (Key question: consciously?) I dunno.

    • Cullen Roche says:

      That’s the crux of the discussion here, no? I personally think MMTers like to imply that one can only save through deficit spending because it supports their policy initiatives and flows nicely from the sectoral balances ideas….It’s an elegant presentation that is marred by obfuscation that only the minority will notice is a colossal error (if even an honest error).

      • yes it is. i’m not sure why we’re at 500 comments. wish someone like fullwiler would make a level-headed, honest statement on the issue and then we could move on to bigger and better things…

        • not that this isn’t important. i too would like a deeper understanding of S beyond the (S-I) component.

        • The $29T thing is another can of worms… I don’t even think Mosler and Fullwiler are on board with that…

        • “It’s not unlike Wray’s $29T article.”

          Agree completely. I took him to task on that. By overstating, mis-stating your case, you are handing ammunition to the enemy. Makes me crazy.

        • “it sort of undermines the MMT goals for permanent deficit spending”

          I totally disagree. All the good thinking here has confirmed my understanding — developed originally through MMT — that permanent deficit spending (within inflation limits) is both necessary and desirable for a growing economy.

        • Cullen Roche says:

          Haven’t read that paper, but it’s on my list. I’d be curious of your thoughts if you have read it….

    • Terrific find SR!

      • Cullen Roche says:

        Gosh Ramanan, we’ve really lined your pockets here, huh? :-) The key takeaway is that the wealthiest man leaving these discussions is the horizontalist!!!!! Ha.

    • Colin Sugioka says:

      Steve Roth February 21, 2012 at 1:58 pm

      Part of the problem for me: I am still confused about how to actually define/measure Investment (I) vs non-investment saving (S – I).

      For instance in Dan’s example of lumber,stored (but assume it is purchased in the time frame in question – similar to my example of a knife maker buying imported steel):

      Is that subsumed under I or under S – i (and then counted as I, when it is turned into a product and sold in a later time period?)?

      I also think that if breaking down into sub-sectors is called for, it would be useful to also break down iMports (M) into M:C and M:I to distinguish between imports of consumer goods and anything that contributes directly to domestic production. Such a distinction might be utilized in designing a tax on consumption, for instance, as well as to examine the impact of the US trade deficit.

    • Steve,

      Before this thread, I would have said that it was a common misconception among MMT advocates, but not among academic or professional MMTers. I’m updating my priors, though.

      I also noticed while reading one of the links here that Ralph Musgrave asked Bill Mitchell about Wray’s NEP post. Unfortunately, Ralph doesn’t seem understand the problem, but Mitchell’s verdict on the post that contains the statement,

      it is impossible for the aggregate saving of the nongovernment sector to be less than (or greater than) the budget deficit.

      Was,

      There was no mistake in what Randy wrote.

    • Well, government deficit does equal private saving, but not *total* “private saving”, just the net part.

      I can say “my deficit equals someone else’s surplus”, which would be true, but it wouldn’t mean that my deficit equals the totality of someone else’s surplus.

      But anyway MMT doesn’t state it that way.

      “Without a government deficit, there would be no private saving” Is true, if you take ‘private’ to mean ‘private sector’ as a whole, and you understand that ‘saving’ is taken to mean the saving of financial and not real assets.

      One private person can save whilst another private person goes into deficit, but ‘private saving’ as a whole is not possible without government deficit. This is true even if you don’t exclude a foreign sector. The issuer of the currency has to issue more that it takes in if there is to be non-government (private) “saving”. You can say that’s not true because one part of the private sector can have liabilities whilst the other holds those liabilities as assets, but that just misses the basic point that as a whole the private sector is not saving.

      • You can also split it up by saying that the private sector can have savings in one period even when the government is in surplus in that same period. But this misses the very basic point that at some time in the past the government had to run a deficit large enough to support the current level savings. If the government never runs a deficit, then the non-government never has the opportunity to save government financial assets.

  58. Colin Sugioka says:

    Sorry, I couldn’t resist being flip; aspects of the discussion had struck me that way, and GM’s fable was a clever summary – but I think I have learned something from parts as well.

    However, below are two comments by WM from the post cited above.

    WARREN MOSLER Replies:
    January 30th, 2012 at 7:28 am; 11:32 pm

    “my three proposals remain
    1. a fica suspension
    2. $500 per capita revenue for the state govs
    3. $8 transition job for anyone willing and able to work to assist the transition from unemployment to private sector employment.”
    /
    “first, this is a transition job implemented at the same time as the fica suspension,
    so i expect the private sector to be net hiring maybe north of 500,000 per month.

    second, as previously discussed, i would first allow any federal govt. supervisors to hire any additional staff they
    want that wants to work for the $8 wage. Then extend the offer to state and local. then non profits.
    can’t be too many left after that to work directly for the administrator of the program, the fed.”

    These seem more in line with serious MMT proposals than the stereotype based on remarks attributed to Randy Wray (eg $16/hr + benefits for street musicians/sweepers – which, if accurate, are an aberration from the clear thinking he has manifested in other writing).

    I am leery of proposals that depend too heavily on centralized government, but Mosler clearly shows sensitivity to those concerns (and a pilot project might test whether things would play as he portrays). And your reference to “…the halls of Congress”” suggests that you share the sense that government action may be necessary to initiate constructive change.

    I would therefore urge you and others to develop MMR not in opposition to MMT, but more to contribute a complementary focus, on areas that the latter does not address, or develop as fully as could be the case.

    • Matt Franko says:

      “but more to contribute a complementary focus”: Good idea! And I would entreat the MMR people that for every post they put up disparaging the MMT people, they have to put up TWO posts disparaging the deficit terrorists and monetarist morons…. Resp,

      • Cullen Roche says:

        We have no intention of disparaging MMT. We’d like to expand on Mosler Monetary Theory. And yes, we still know who the real enemy is. :-)

    • “MMR not in opposition to MMT, but more to contribute a complementary focus”

      Agree 100%. I.e. point out wherever/whenever possible or necessary, that saving and net saving (NAFA) are not the same thing.

  59. Bill Mitchell says Waldman, JKH, Ramanan and MMR are wrong on this. http://bilbo.economicoutlook.net/blog/?p=18273&cpage=1#comment-23145

    • Mitchell is obscuring the point. Waldman explained it here:

      “It is perfectly possible to hold the international balance constant, have the government reduce debt, and have “people” save more. “People’s” financial savings consists of claims on firms and claims on government. If I perform some work for a firm that (however infinitesimally) increases the firm’s real economic value, and I accept as payment a share of that firm’s stock, I have performed the economic act of saving, and increased the net saving of “people” — of the household sector. Net private sector financial assets have not increased: my “savings” is the firms’ obligation, the household sector’s surplus is offset by the business sector’s deficit. But much of what we call saving is exchanging real resources for claims on the private business sector. And as long as the private business sector doesn’t entirely squander those real resources, that act contributes to macroeconomic S. If the private business sector does squander the resources, then while I still perceive my contribution as “saving”, the value of macroeconomic S = I does not increase, and my claim amounts to a transfer from other shareholders of the firm.”

      Companies do this all the time issuing stock options. The point Mitchell is obscuring is that the saving is real, but requires net new issuance of financial assets to be monetized. I is the backbone of S. Resources precede government money. It’s all been covered here.

      • I show the MMT claim is incorrect with actual data here:

        “Without a government deficit, there would be no private saving.”

        http://www.concertedaction.com/2012/02/21/saving-net-of-investment-updated/

        • Aside from the question of how saving is defined in that chart, is it not possible that you are ignoring two things? 1. The chart covers the domestic private sector, not the private sector as a whole, which includes the foreign private sector. 2. Net private savings can be ‘left over’, as it were, from previous periods of government deficit. But if the government never deficit spends then the non-government never has the opportunity to net save overall. Of course I’m referring to net financial assets and not real assets.

      • I think you have just confirmed a very large tenet of MMT FD…….. and that is that INVESTMENT precedes SAVINGS.

        This may be a position you have always concurred with but many dont (Austrians, neoclassicals). Many like to say we must save IN ORDER TO invest, but I think you have confirmed the MMT view which is “I is first (backbone) and S is the residual”

        • Cullen Roche says:

          Yeah, MMT agrees with I precedes S, but that doesn’t mean they don’t conflate the idea that the pvt sector can save outside of govt spending….It’s a pretty huge conflation in my opinion.

      • The MMT position is not that government money precedes resources. That would be ridiculous, like saying that government money precedes the big bang.

  60. JKH,

    You should definitely read this (in case you haven’t)

    http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP279.pdf

    MODERN MONETARY THEORY: A DEBATE

    including the following papers:

    Modern Money Theory and the ‘Real-World’ Accounting of 1-1<0: The U.S. Treasury Does Not Spend as per a Bank – Brett Fiebiger

    Modern Money Theory: A Response To Critics – Scott Fullwiler, Stephanie Kelton
    & L. Randall Wray

    A Rejoinder to “Modern Money Theory: A Response to Critics” Brett Fiebiger

    Not sure of his conclusion “The paper concludes that modern money theory does not offer a viable alternative to fiscal austerity and suggests consideration of narrow banking a la Minsky (1994).” … just have had a preliminary read though but everything can be read independent of this.

    I.e., agree with MMT does not offer a viable alternative but unsure of “narrow banking” ideas. This is where the scope for MMR is.

    But you can read the rest without worrying about the conclusion at all. I will read it more carefully to offer more comments.

    … – MMT does not realize “that the procurement and execution of financing are separate issues.”

    “FKW (2012) do not retract any of their earlier work; and, end up declaring
    that the “results” of the “general” case apply entirely to the “specific” case.”

    • R.,

      I’ve read that–I think it’s quite good, although the reply by Fullwiler, Kelton and Wray is a bit strange, given that they don’t seem to address a single point that Fiebiger makes. (So it’s not much of “a debate”).

      • Vimothy,

        Yes the reply seems strange. In a sense it is alright because the kind of discussions we would have expected run into exchanges and infinite back and forths.

        • Ramanan, True enough, but then why take part in a debate if you’re not prepared to address any of the arguments your opponent makes? It’s kinda bizarre behaviour from an academic point of view.

    • Ramanan,

      Thanks. Saw it for the first time a few days ago, when wh10 linked to it.

      Only skimmed it then; my impression was there was a reinforcing kernel of truth to the approach, but the paper looked a bit messy in total.

      Skimmed your post too; looks good.

      Haven’t been following comments closely here for the last day or so, but just wanted to recap:

      You were right and Mitchell was wrong in your linked exchange.

      The “Waldman” effect is a statement of general perception on the same issue of which your exchange is a specific example.

      There seems to be a parallel conversation going on here about stock flow consistency. The Waldman effect and your example of it are orthogonal to the issue of stock flow consistency. This is the case in the sense that his perception and your real example of it hold for both flows and stocks.

      Stock flow consistency is a general accounting requirement. The fact that these things are challenging to calculate “to the penny” in terms of such formats as Fed Flow of Funds or SNA is an issue of calculation – not an issue of conceptual truth. Conversely, the conceptual truth that both the Waldman effect and your example of it cut across both flows and stocks is absolute.

      P.S. try not to burn yourself out too much responding with repeated proofs of these things to sceptics. Your knowledge is too valuable for that. I’ve yet to see an example of a denier of the Waldman effect whose criticism demonstrates that they actually understand what Waldman’s point is. It’s about a particularly powerful point of conceptual/ideological leverage in the MMT descriptive presentation. That doesn’t undo the fact that there is a mountain of descriptive and conceptual raw material on which MMT may be quite correct.

      • P.S. for Steve Roth – my use of the term leverage above is a degree or a dimension removed from the analytical point on vertical/horizontal financial leverage previously referred to

        • Oh yeah, totally get that. You’re talking about rhetorical leverage.

          • And yes: Statements like “There is no private saving without government deficit” are confuting saving and net-saving for rhetorical leverage. Invalidly. It’s just that simple.

            You’ll remember I got that, acknowledged it, explained it (though not as simply as above), and mea culpaed it almost immediately in response to Steve’s and your wonderful schooling in the original “How Accounting Constrains Economics” thread. (Thanks!)

            I object to that rhetorical ploy, as Steve said in better words, because it delivers an open target, live ammunition, for MMT-bashers to discredit what is otherwise profoundly good and even world-changing thinking.

            MMTers are wrong when they make such statements to justify deficit spending, but they’re *right* that deficit spending is necessary for a growing economy. They should use the valid arguments to make that point, not the invalid ones.

            Which leaves me still wildly interested in the behavioral mechanics of the whole “insurance”/”leverage” issue.

            • Cullen Roche says:

              I can’t speak for JKH, but to me, the idea comes down to “capitalism makes socialism acceptable”. Once we understand that I is the backbone of S, you understand that production steers the economic ship. And once we work from that foundation we come to very different conclusions than the ones MMT comes up with. It’s in this sense that the govt sector can leverage resources and bring them into public domain for public purpose. It’s only acceptable because we are satisfied by the general trajectory of living stds, which is primarily due to pvt sector production and I leading to S.

              That’s my take on it….JKH may not agree exactly.

              • @Cullen: “Capitalism makes socialism acceptable.”

                Nice. I think SRW said it (or similar) even better when he said (my words) that FDR proved Marx wrong — The New Deal showed that capitalism can adapt and avoid the meltdown that Marx considered inevitable.

                I riffed on Steve’s comments here:

                http://www.asymptosis.com/ows-saving-capitalism-from-the-capitalists.html

                • Cullen Roche says:

                  Nice. Thanks Steve. Hadn’t read that. And thanks to everyone for a great talk. It only took us 600 comments to get here. :-)

              • Entirely compatible, Cullen.

                I’ll come back at some point and flesh out my own instinct on the leverage aspect at bit more.

                Steve, I’m not sure I would select “necessary” as quite the right word or phrase at the highest level of generality. I’d say some level of deficit is almost certainly desirable in almost all cases, but I’ll come back on that as well.

            • And those behavioral mechanics, are undoubtedly, as you just said at Steve’s place, very complicated.

              I think — see my comment there re: this period/next period — they’re quite possibly only tractable using a dynamic simulation model like Keen is trying to build, incorporating rigorously stated and encoded behavioral algorithms that can be tried and tested in simulation.

              Why is that govt money insurance/leverage/whatever necessary? I think that’s what MMTers/MMRers need to figure out and explain in clear, simple terms.

      • P.S. Didn’t mean to offend by suggesting that criticism wasn’t worth responding to. Only that there’s a point of diminishing returns in having to replay the explanation. Mutual understanding requires investment of time from both sides of an argument. Sometimes those who make an argument have invested much more time in it than those who respond to it. These things are not resolved on the spot.

      • JKH,

        Thanks. Yes there is a lack of understand about what the issues really is.

        I was commenting on Winterspeak but he doesn’t see anything wrong, in spite of explicitly quoting a simple incorrect statement which is repeated often and by all MMTers and not simply a result of careless writing.

        I definitely see an inclination to phrase sentences in a way so as to influence in a big way. It’s sometimes okay to go for an overkill, but when incorrect statements are presented it becomes counterproductive. And it appears everywhere. And worse, there are defenses and it’s a huge waste of time.

        Probably you didn’t see the comments in sequence but I didn’t argue with Bill Mitchell this time – the previous one was long back. I quoted something which Ralph Musgrave took and posted at Billy Blog. Unfortunately his argument brought in unnecessary complications and was dismissed! One advantage MMT has is that since it is easy to err on monetary matters, they don’t get sufficiently challenged because the challenger himself has some error in reasoning and can be dismissed easily!

        Man, I wanted to get into Billy Blog – but will then decided against it.

        • re the ‘spk blog, I’ve spent some time there explaining the accounting over sev’l years (and indirectly through interfluidity), but there’s aren’t strong signs of effective assimilation

          if somebody is interested in the accounting, but only within a constrained framework of a pre-belief (MMT) that has potential conflicts with the objective interpretation of accounting, its tough to make true progress

    • Ramanan,

      I’m not even sure I need to read the thing in detail. The general approach is basically the same way take by Lavoie, as well as the one I’ve taken over the past several years in observation. I think you are familiar with this through our exchanges. MMT conflates factual and counterfactual in its description of monetary operations. It’s really that simple. And I have no idea whether it’s done that way for analytical preference or for ideological leverage or both. In any event, the MMT approach is to convince people that reality is not as it seems. My view is that reality is what the facts are, but that the facts can be changed through specific monetary architecture adjustments. The key real world implication of this is that the market implicitly knows this is the case for the US, while remaining very doubtful that it’s the case for the Euro zone. Apart from those kinds of perceptions and expectations, the arrangement that the Greek Treasury has with the ECB isn’t a whole different than the arrangement the US Treasury has with the Fed. The power of US fiat is not that reality is not what it seems, but that Congress can change the reality relatively easily if and when it wants to. The associated issue of a dedicated floating exchange rate is also very obviously important, but that doesn’t change the comparison of the two monetary operations per se.

      My own view is that MMR should thoroughly revamp this in its own version of monetary operations description, by setting out the facts of operations, and then setting out the architectural dials for various counterfactual possibilities. MMR does not need to rely on MMT in order to describe monetary operations. MMT is not the monopoly issuer of the interpretation of the “reality” of monetary operations, and we should try to ensure it’s not generally perceived that way.

      • The Board of Directors of the Fed is an agency of the US government. The ECB is not an agency of the Greek government. Do you think the Fed would refuse to buy US government bonds and watch impassively as the government was forced to wreck its own economy as the Greeks are now doing? The ECB does not seek to achieve goals set down by the Greek government or necessarily operate in the interests of the Greek population. It has no responsibility to them other than to maintain price stability. It works primarily in the interests of the banking sector. The eurozone is an economy in which the banking sector (with the ECB at its centre) controls the monetary system.

      • I am really curious what Ramanan and vimothy think was so great about the Fiebiger papers. I agree with JKH that any valid issues that remain were already brought up in the Lavoie critique, and much more coherently I might add. Honestly, I thought Fiebiger’s papers were terrible. I am not sure who Fiebiger is, but his paper was indeed quite messy and very poorly written (not that the MMT response was Shakespeare, but of higher quality IMO). In any case, I wasn’t convinced Fiebiger completely understood what MMT was saying, despite all of his citations, either in the first paper or in the rejoinder. It leaves me to think that Ram and vimothy are quite eager to praise anything which appears as a scholarly critique MMT, regardless of its quality.

        Anyways, as I said, I generally agree with JKH’s synopsis. However, JKH, I think the paper and Fullwiler have expressed very clearly why they prefer their method. In MMT’s mind, their approach is more scientific. They observe the real world and then work backward to build a general theory, which then can be modified to more accurately depict various different cases (strong to weak). However, the general theory still works as a simple analytical tool and base case. It’s like Newton’s theory of gravity – it’s not exact in the real world but useful for most situations and for most people and was developed by generalizing as such. JKH and Lavoie have presented the other side. As JKH has said in the past, this is in large part an issue of style and presentation. I’m not sure where I personally stand. Only time will tell if either side thinks they should change their mind.

        • wh10,

          I’m not sure that I think it is “so great”, but there are criticisms in there that it would have been good to see addressed.

        • “It leaves me to think that Ram and vimothy are quite eager to praise anything which appears as a scholarly critique MMT, regardless of its quality.”

          Well because it is quite accurate in many points especially on various versions appearing on MMT literature on how the Treasury spends.

          It goes into fair amount of details on how the Treasury spends.

          Consider the following:

          “So in MMT ‘money’ is only ‘money’ if statisticians ‘count’ it. That the Treasury’s cash holdings and deposits at the Fed are not counted in any money stock measure does not mean these items are akin to ‘non-money’.”

          MMT seems to exploit this to claim the “destruction” of money. There’s some conceptual advantage to the notion of destruction and you can see this in some Post Keynesian texts in the 80s but it’s more conceptual.

          It also goes into the point about an open line of credit to the government – i.e., unlimited overdrafts – it is against the nature of money itself. I do not think this is possible because the government has to finally “settle”.

          Plus it also minorly touches on claims about “we don’t borrow from foreigners”.

          It also challenges the MMT adamance that bond issuance IS an “interest rate maintenance operation”. Because it is a vacuous claim. It rightly goes into the issue that if that were really the case, the Treasury should have stopped issuing bonds when rates fell to near zero and the Fed started paying interest on reserves.

          Etc.

        • Wh10, quick supplement to my perspective, not complete:

          In a monetary world where the entire global financial system is represented in double entry bookkeeping form, there are no general cases that have uniquely indisputable claim to being “THE” general case. There are only specific cases, corresponding to deliberate choices among institutional accounting alternatives. For it to be otherwise would contradict “Fullwiler’s Law”, which says that economic outcomes require accounting representation. That’s a good law, but one which is inherently contradicted by elevating an MMT “general case” to the status of THE “general case”, as if it were somehow immune to the logically prior requirement of choosing at will an institutional accounting arrangement. If you want to define a case that way, OK, but it should be defined as a choice, instead of being anointed as “reality”. Also, I can construct the general case of Treasury as a depositing customer of the central bank just as easily. Then it becomes a dual between which constitutes the better general case. But when it is acknowledged that either one requires institutional accounting representation, and that such a choice constitutes a chosen “reality” when implemented, then the comparison between the two becomes just that – a comparison – as opposed to a debate about which one is more “general” than the other. I keep seeing the Davidson defense for the choice of what’s general, but whether or not that’s right, it’s not productive to conflate and submerge institutional accounting facts within a make believe “general reality”.

          • And I’m not saying the MMT “general case” isn’t a constructive reference point as an implicit institutional choice with considerable inherent flexibility; I just wouldn’t develop it or position it in quite the same way.

          • Thanks JKH. For my personal tastes, the MMT general case is too often presented or implied as the reality, without, for example, the strong to weak clarification. However I don’t think it is the MMTer’s intention that it is presented as the institutional reality; it’s more their intention that you can use this make believe case as an analytical framework to arrive at the right answer in the real world. Interestingly though, I don’t even think the MMRers, or at least Cullen, have beef with MMT here.

            Interesting point about “then it becomes a dual between which constitutes the better general case.”

            So, in your mind, you don’t think that if we were going to start a govt currency from scratch, the logically minimal institutional requirements would be the MMT “general case?” Because I would see the Treasury as the depositing customer of the central bank as a more complex structure than the minimal design.

            • ” it’s not productive to conflate and submerge institutional accounting facts within a make believe “general reality”.”

              I think in the MMTers mind it is, because 1) it elucidates what the minimal design might be, which sheds light and 2) it’s an easy tool for the average person to use

              Obviously you and Lavoie and many other economists disagree that that is “productive” :)

            • I have to leave for a time. If you have the time and are inclined, could you point me to what you think is the best reference (or 2) for that general case definition? If not, OK. I can get back to it later. Thx.

              • You might have me there… In my mind, I am imagining a consolidated Treasury/Fed.

              • wh10,

                I think your approach is generally even keeled on this issue.

                I’ll come back on it at some point later. It’s just fine tuning of one aspect.

            • That last paragraph is a great way of putting the question clearly.

              So resumption sometime later.

              • meaning your last paragraph

                “So, in your mind, you don’t think that if we were going to start a govt currency from scratch, the logically minimal institutional requirements would be the MMT “general case?” Because I would see the Treasury as the depositing customer of the central bank as a more complex structure than the minimal design.”

      • JKH @February 22, 2012 at 6:58 am,

        Yes most of that paper is nothing new.

        “MMT is not the monopoly issuer of the interpretation of the “reality” of monetary operations, and we should try to ensure it’s not generally perceived that way.”

        I think why MMT gets so much hostility is that firstly, these things are nothing new. Economists regularly refer to James Tobin paper where he discusses how debt should be managed and that it shouldn’t be an issue for the Treasury to make a draft at the Fed. He had also written a lot on the tussles between the Fed and the Treasury. He is of course read by economists because he is a Nobel Prize winner.

        By making it look as if MMTers have understood which nobody before them had a clue, they invite trouble for themselves. So that’s why the Fiebiger quotes Wray

        “[My 1998 book scared people] and I’m still scaring them. Why? Because nobody
        wants the truth about money.”

    • ………….

      Question just for Ramanan:

      Is it your impression that MMT written material has actually improved somewhat over time, in that it shows evidence of having been influenced in a marginally constructive way to some of the criticisms of style that have been hurled its way over the same time period?

      And is it also your impression also that there is a parallel propensity not to attribute that stylistic progression to the input from such criticism? In other words, although they have learned from certain reader criticisms and made (stealth) adjustments in response (adjustments that are probably only noticeable to the same critics), they tend not to admit it?

      …………

      Given our history of dialogue on these issues, I think you’ll know what I’m talking about. It was my first reaction once again to their response paper here.

      • JKH,

        Yes improved somewhat but my impression is that it’s hard for them to accept that they started on a wrong foot. They have been saying this for 10-15 years but right from the start, other have from the beginning itself told them their errors. (Reference in Marc Lavoie’s papers). Even Marc Lavoie makes an observation in his paper that there are changes in their language – and you are right that only a few will notice this.

        However it has taken so many years and also the result has been due to blog responses and not due to academic criticisms. (So we don’t see the Mitchell “crowd-in” story anymore)

        PS: There was another debate about Minskyian version of money endogeneity which is not right in my opinion and there’s some lack of admission there as well about opinion shifts.

      • Btw saw for the first time them describing funds at auctions moving first to the Treasury’s account at the Federal Reserve and then into TTL. Don’t think I have seen this earlier in their papers before they were told of this technicality in the blogosphere: Steps 2B and 3B in the paper.

        • Exactly.

          And after you told them about it, I suspect.

          In a nicer world, they might have given some one like yourself a bit of attribution, along the lines of Lavoie ‘s example in doing so.

  61. Man Im going to miss this thread! Im going to be in India (and out of Wi Fi range much of the time apparently) for about 8 days starting tomorrow.

    Hopefully this will all be a settled issue when I return and I can just come back and find THE answer here!

    Additionally, I hope this site can get back to skewering the real world suggestions of people like Sumner. Its guys like him that are THE problem.

  62. The purpose of combining the treasury and central bank into a single ‘government’ sector as opposed to the non-government sector, is to clarify the underlying logic and clear out the smoke and mirrors nonsense that stops people from gaining a clear understanding of the monetary system, and which makes it difficult for people to distinguish between the US monetary system, the eurozone system and a gold standard system. The self-imposed constraints and accounting practices may serve a real-world purpose but only serve to muddle people’s thinking about the monetary system, often causing them to reach incorrect conclusions about policy as a result. At least from an MMT point of view.

  63. Detroit Dan says:

    Well, I’ve scanned the whole discussion. My conclusion is that MMT got most things right, but there is some additional value in noting the various horizontal sector flows in more detail. There are no major flaws in the descriptive foundations of MMT, but rather just some legitimate stylistic concerns and quibbles re terminology (e.g. overall v net).

    I lean to the MMR side, versus pure MMT, myself. But MMT provides a good foundation, in my opinion.

    I have great respect and admiration for most of the contributors here…

    • Cullen Roche says:

      Dan, I don’t think anyone is pointing to anything definitively wrong about MMT. The differences between MMR and MMT primarily come in the form of execution of policy, which are substantial. We lean more towards the capitalist side while MMTers tend to lean a little more socialism I think (not saying those terms in a pejorative manner!). And I do think there are some core pieces that MMT misunderstands (for instance, they take the state monopolist idea way too far when the reality is that the horizontal level wields HUGE control over the state). I’d also argue that MMT is not apolitical at all (in fact, WAY out there left). And of course, I think embedding the JG in there is a bad decision.

      But none of this should let us lose sight of who the real bad guys are.

  64. There are different political viewpoints within the MMT camp. Mosler wants massive tax cuts, Mitchell wants massive spending increases, for example.

    • Cullen Roche says:

      This is often said to imply broad political acceptance of MMT. Warrens a democrat. You guys would help your cause by not saying things like this. Its blatant obfuscation…. You could maybe frame MMT as apolitical without the JG, but since it’s central you guys are pretty far out there. The main MMTers are all democrats. There is no broad political acceptance of MMT….It’s a leftist movement and most of them are pretty way far out there left….

      • I said “there are different political viewpoints within the MMT camp”, not that it contains representatives from all parts of the political spectrum. I don’t really see why it should have to.

      • Maybe it’s just that the “left” is right. (smiley face).

        P.S. you seem to be imply sometimes that your position is the political centre and that anything to the left of you is “left wing”. Maybe Mosler is actually in the centre and you’re to the right of him? I know that the popular “centre” in the US is to the right of Mosler, but bear in mind that to the outside world the US often looks very right wing.

        You tend to characterise the JG as a typically socialist program, but it can also be seen from another angle as a program in which the government subsidises private nonprofit initiatives – which is actually pretty centrist (if you think of what socialism actually is/means). But I don’t want to get into defending the JG again as I know this is a no-JG zone.

        • Cullen Roche says:

          Mosler ran as a Democrat. In the MMT founders, there’s left and there’s way left. There aren’t really “different political viewpoints” at all. There’s left and way left. I tried to bring some diversity to the group, but obviously my rejection of the JG showed the true political colors of MMT. That’s fine. MMT doesn’t have to pretend to be something it’s not. But MMTers shouldn’t go around saying “MMT is for Republicans and Democrats” because it’s not. It’s for democrats. In fact, I’d argue that it’s for far left democrats….

          • I’m a democrat and liberal. They were too far left for me. The JG is off the charts left for the U.S.

            I know we need a buffer stock, but jeeze, it sure seems to me like they are more concerned about getting people bad government jobs than getting people good private sector jobs.

            • Cullen Roche says:

              I’m pretty far left on the social spectrum and they pegged me as a rampaging right winger. MMTers are so far left that they can’t see anyone over their left shoulder. I tried to move MMT to the center, but that caused some problems obviously….

              • I’m pretty far left on the social spectrum and they pegged me as a rampaging right winger.
                Yeah, and the they started in with “you’re on the side of the 1%, not the 99%” (the whole 1%/99% business seems to have turned into a cliche rather quickly), doesn’t matter if you wanted to to increase the redistribution of income from the wealthy to the poor or cut the FIRE sector down to size, the end all and be all became whether you were on board with the Job Guarantee.
                Frankly, this whole episode has made me empathize with Paul Krugman, who gets hammered from all points of the political spectrum even (especially?) from people who are in almost complete agreement.

                • Cullen Roche says:

                  Just think of all the bridges that have been burned here with this attitude. Thoma was apparently ridiculed by MMTers in his comments to the point where he has banned all MMT comments. And the guy’s a liberal! His linkfests are read by everyone in econ circles and I mean everyone….

              • My last comment before heading to India;

                Im not sure left/right, democrat/republican is really the correct spectrum to look at this debate….. so I wont fall for that guys. Sometimes someone can be so far left they find common cause with those that are so far right. (Im going to the point on the globe exactly opposite to me today so I can go east or west and get there in the same amount of time)

                I think the better metric is supporting current institutional structure or wanting to completely overthrow institutional structure. Many MMTists (and MMRers too)just want to remove the veils from our institutional structures and stop pretending we need to engage in borrowing operations to satisfy bond markets or that we need to set debt ceilings as limits to maintain “credibility”. They want to talk about the US$ in the terms of what it actually is……. a government issued token. Not a proxy for a commodity or anything like that but simply a ticket to the wealth circus we have created here.

                There are plenty of conservatives who would love to sign everyone up for military conscription and be ready to wage battles all over the globe, (a military run JG of sorts with little choice by the conscripts) but the truth today seems to be if you are a republican and a democrat proposes an idea……. it MUST be a socialist scheme that involves the creation of new czars and will be wasteful. Additionally any idea by republicans must involve gutting a 1930s or 1960s (their two least favorite decades)institution and making a reference to Ronald Reagan.

                We used to be a pragmatic country but we have been hijacked by religious zealots who wage wars on every enemy. I DO happen to think they will not win (I am somewhat of a hopeless optimist in that regard) but they have already and will continue to cause a great deal of unnecessary suffering.

                I’m sure there will be those who disagree but the demise of the once decent republicans has hurt this country. Not that all democrats are saints but the crazy factor of Palin, Gingrich,Bachmann, Santorum etc etc is not interested in pragmatism, they are interested in domination and complete elimination of opposing views. While most Americans see a healthy system as one that vacillates between 55% Democrat and 55% republican, the current republicans want no compromise they want domination. Look at their governors in Michigan, Wisconsin and Arizona.

                I think we have lost pragmatism and I fear we MIGHT make a liar of Winston Churchill who apparently once said “America always does the right thing…. even if its after they have tried everything else”

          • “MMTers are so far left that they can’t see anyone over their left shoulder.”

            So a democrat who wants massive tax cuts is extreme far left because he wants to create a full employment program. There you go being all Jekyll and Hyde again (no offence intended). One minute it’s calm centrist Cullen, the next it’s “those guys are a bunch of commies! Cullen. I won’t disagree that MMTers are generally not Republicans, and some are pretty left wing. But then again most of the UK Conservative Party probably wouldn’t be Republicans either – they just wouldn’t be right wing enough. Imagine a Republican president who claimed that “socialised medicine” was one of the country’s greatest achievements!

            David Cameron, UK Prime Minister and Conservative Party leader:

            “I believe that the creation of the NHS is one of the greatest achievements of the 20th century.”

            You can favour lower taxes, less government interference, more personal liberty and the market economy without going down the road of unquestioning nationalism, religiosity, militarism, big oil pandering, gun-toting, electric-chairing, rich-worshipping, poor-demonising republicanism.

            What one sees as the centre is not necessarily “the centre”. “The centre” is a vague and fluid concept, defined differently among different groups and cultures. The default position in the US is to the right of much of the rest of the western world.

  65. As far as I can tell it doesn’t really matter whether you say “net private saving”, “private saving” or “aggregate private saving”, if it is understood that the word “private” stands for “the private sector as a whole, including both the domestic and foreign private sectors”, and that “saving” refers to the holding of net financial assets without corresponding liabilities in the private sector.

    • “that “saving” refers to the holding of net financial assets without corresponding liabilities in the private sector.”

      Saving is a flow and the discussion was about the flow identity S – I = G – T + …

      So it doesn’t help defining saving as “holding” of net financial assets as the latter is a stock.

  66. You can rewrite it with an alternative word to ‘holding’ if it helps. If I am saving or I have savings I am, in both cases, “holding” assets.

    • Holding is okay but I was trying to say something else.

      I can be a saver and yet can be a net debtor to the rest of the world.

      • If I have 15 coconuts but I owe 20 coconuts to someone else, I have no coconut savings overall, however you might want to phrase it. Pedantry might help to elucidate the precise nature of my holdings at any given point in time, but it won’t eliminate the basic logic.

        • Money is no coconut.

          Do you want me to link to Fed’s Z.1 again?

          • There’s a coconut tree. When a coconut falls from the tree you have a coconut. The people standing around the tree can’t make their own coconuts.

            • That doesn’t mean to say that they can’t do loads of really productive things whilst they’re waiting for that coconut to fall. Heck, they might even give that coconut tree a good ol’ republican shake down.

  67. Ramanan
    “that “saving” refers to the holding of net financial assets without corresponding liabilities in the private sector.”
    Saving is a flow and the discussion was about the flow identity S – I = G – T + …
    So it doesn’t help defining saving as “holding” of net financial assets as the latter is a stock.

    This is the same discussion we have gone ’round and ’round about throughout this thread. I don’t think anyone disagrees with what you are saying. The problem as I see it is that you are being hyper-anal about definitional differences and have made the argument so granular that you have gone way beyond arithmetic and semantics.
    Most people commenting on blogs and even many academics are not going to try to discuss ideas at that level of abstraction.

    If this language thing is so important to your argument put together a glossary and attach it to your argument everywhere you make it because otherwise you are just going to spin wheels. Thinking in the abstract is a lot easier than writing it.

    As far as you discussion with phil to are continuing to be obtuse. You wrote:

    “Saving is a flow and the discussion was about the flow identity S – I = G – T + …”

    Here, (S-I) can be expressed as “net savings” (a flow) or “net change in the stock of financial assets” (a flow). The flows may be different things but they are equal. Always.

    “I can be a saver and yet can be a net debtor to the rest of the world.”

    This is a vague statement. It doesn’t mean much unless you strictly define saver and net debtor and provide a explanation of the circumstances under which this can be true. Additional discussion of how this might relate to the relationship between saving in your context and increases in net financial assets would be helpful.

    Thank You

    • “This is the same discussion we have gone ’round and ’round about throughout this thread. I don’t think anyone disagrees with what you are saying.”

      Thanks.

      “The problem as I see it is that you are being hyper-anal about definitional differences and have made the argument so granular that you have gone way beyond arithmetic and semantics.”

      It’s nice to be accurate.

      “Most people commenting on blogs and even many academics are not going to try to discuss ideas at that level of abstraction.”

      Yes and continue to get things wrong.

      “If this language thing is so important to your argument put together a glossary and attach it to your argument everywhere you make it because otherwise you are just going to spin wheels. Thinking in the abstract is a lot easier than writing it.”

      These are not definitions created by me. These are created by national accountants. No need to put together a glossary.

      “Here, (S-I) can be expressed as “net savings” (a flow) or “net change in the stock of financial assets” (a flow). The flows may be different things but they are equal. Always.”

      This is because there are two senses in which “savings” are used here. Look phil wrote

      ““saving” refers to the holding of net financial assets without corresponding liabilities in the private sector.”

      Holding is a description of a balance sheet. On the other hand, saving is an income residual.

      “This is a vague statement. It doesn’t mean much unless you strictly define saver and net debtor and provide a explanation of the circumstances under which this can be true.”

      Think of a household who earns income via wages, interest, dividends etc, pays taxes and consumes. In period 1 he buys a house on loan with a value five time his income. Then on, he is paying down his mortgage and keeps less cash – just to meet liquid needs. Well, his burden of principal payments doesn’t give him a choice. He is a saver in every period. He is a deficit spender in the first period but in surplus in later periods. He is a saver (including the first) but has very little financial assets and huge indebtedness unlike what Phil says. Now, is that a one-in-a-zillion situation?

      There is a huge misunderstanding here with notions such as “saving is holding financial assets”. e.g. this one

      ““saving” refers to the holding of net financial assets without corresponding liabilities in the private sector.”

      which you indirectly seem to support.

      Muddling through saving and net saving and then the feeding of flows to the corresponding balance sheet doesn’t even get you into a more solid analysis.

      • Ramanan
        Think of a household who earns income via wages, interest, dividends etc, pays taxes and consumes. In period 1 he buys a house on loan with a value five time his income. Then on, he is paying down his mortgage and keeps less cash – just to meet liquid needs. Well, his burden of principal payments doesn’t give him a choice. He is a saver in every period. He is a deficit spender in the first period but in surplus in later periods. He is a saver (including the first) but has very little financial assets and huge indebtedness unlike what Phil says. Now, is that a one-in-a-zillion situation?

        Wow. Just wow.

        I see what you’ve done here. Let me lay some groundwork…

        Saving defers spending (consumption) into the future.

        Borrowing brings future spending (consumption) into the present. Borrowing is the reverse of saving.

        Borrowing creates money in the non-government. It also creates liabilities (negative money). Net creation is zero but velocity is generated.

        Saving is negative borrowing so re-paying a loan is negative saving.

        OK. You are calling loan repayment saving, which it is…negative saving…so technically you are right in a sense. The problem is this is a trivial insight and pretty much everyone that has ever thought about these things is aware of it so what is the big deal?

        The big deal is that you and your cohort have done such a poor job of explaining your position that you have wasted many thousands of man-hours on the internet.

        Further, when a borrower repays a loan he is “destroying” money by extinguishing the liability, so he is removing financial assets from the non-government.

        This saving will show up as positive saving in the sectoral balances equation because government fiscal transfers are providing the funds necessary to repay the loan. Where else is the borrower to get it? As financial wealth is accumulated by others in the non-government those funds become inert and generally un-available. Where are the dollars to repay the loan to come from?

        Apparently you think that the money he borrowed and spent will eventually come back to him in wages collected through the closed non-government economy. Good luck with that. You need to review the Paradox of Thrift, along with the Paradox of Profits and another which I may be creating out of thin air, the Paradox of Wealth Accumulation.

        • “Wow. Just wow.”

          :-)

          “Borrowing is the reverse of saving.”

          I can be a saver and a borrower simultaneously. Say in one year, my disposable income is $80 and I consume $70. I could buy a house worth $500 by taking a loan.

          My saving. SURPRISE = $80-$70 = $10!

          My net borrowing = $490.

          “Borrowing brings future spending (consumption) into the present. Borrowing is the reverse of saving.”

          I can buy a house by borrowing. That is not future consumption whatever you mean.

          “Borrowing creates money in the non-government.”

          Whatever that means – borrowing creates money in the non-government. Yes loans make deposits. But a corporate raising funds by issuing marketable paper to nonfinancials can’t be said to be “creating money in the non-government”.

          “It also creates liabilities (negative money).”

          I can be a net borrower and not increase my liabilities. This can be done by sale of assets. There’s nothing called “negative money”.

          “Net creation is zero but velocity is generated.”

          Monetarist!

          “Saving is negative borrowing so re-paying a loan is negative saving.”

          Saving is disposable income less consumption expenditure. It is meaningless to say saving is negative borrowing.

          REPEAT: I can be saving and YET have a net borrowing.

          There’s no meaning to say re-paying a loan is negative saving. Saving is income minus consumption expenditure.

          “OK. You are calling loan repayment saving, which it is…negative saving…so technically you are right in a sense.”

          Saving is income minus consumption expenditure. Man am loving this.

          If my consumption expenditure is higher than my income, my saving is negative. But that has nothing to do with repaying a loan.

          “The big deal is that you and your cohort have done such a poor job of explaining your position that you have wasted many thousands of man-hours on the internet.”

          Precisely why I have taken time here. To explain a few things people don’t seem to be aware of.

          “Further, when a borrower repays a loan he is “destroying” money by extinguishing the liability, so he is removing financial assets from the non-government.”

          When a borrower (say of a bank) repays a loan he is extinguishing his liability but also extinguishing the corresponding asset from his lender’s balance sheet.

          “This saving will show up as positive saving in the sectoral balances equation because government fiscal transfers are providing the funds necessary to repay the loan.”

          The act of repaying a loan does not constitute an act of saving. Saving is defined as a residual. Again saving is disposable income minus consumption.

          “This saving will show up as positive saving in the sectoral balances equation because government fiscal transfers are providing the funds necessary to repay the loan.”

          You should really get the concept of saving right.

          Fiscal transfer is not really deficit spending in the sense you think. Fiscal transfer has a special meaning. Let’s divide the US into two regions. Let’s say in region A the government’s expenditure is lower than the taxes it collects from this region. And let’s say it is the opposite in the other region B. This then is a fiscal transfer from A to B.

          “Apparently you think that the money he borrowed and spent will eventually come back to him in wages collected through the closed non-government economy.”

          An entirely different matter altogether.

          “You need to review the Paradox of Thrift, along with the Paradox of Profits and another which I may be creating out of thin air, the Paradox of Wealth Accumulation.”

          Yes just like you created your accounting system out of thin air.

          “Let me lay some groundwork…”

          Best line.

          • Ramanan
            I can be a saver and a borrower simultaneously. Say in one year, my disposable income is $80 and I consume $70. I could buy a house worth $500 by taking a loan.
            My saving. SURPRISE = $80-$70 = $10!
            My net borrowing = $490.

            Yep, this is one transaction. Out of billions. A micro example. If I’m not mistaken the sectoral balances equation is a macro relationship. So it has little to say about individual transactions if anything. I suppose you could apply individual transactions to it and then sum the debits and credits but…why? Let’s go a little further…

            The first payment that is made on this loan (and every one after that) is dis-saving or “negative” saving for that transaction. This is Income that could have been spent if the borrower hadn’t already spent it by borrowing on it – you know – bringing future consumption into the present. His savings will be debited by this transaction until the loan is extinguished incrementally by the payment amount. This does not mean that Income in excess of the loan that he chooses to save won’t increase his savings. That’s why we use the term “net”.

            Borrowing and spending allows you to spend income you haven’t earned yet. That’s the danger of credit.

            “Borrowing brings future spending (consumption) into the present. Borrowing is the reverse of saving.”I can buy a house by borrowing. That is not future consumption whatever you mean.

            Come on. It’s consumption using Income you haven’t earned yet – future income.

            “Borrowing creates money in the non-government.”
            Whatever that means – borrowing creates money in the non-government. Yes loans make deposits. But a corporate raising funds by issuing marketable paper to nonfinancials can’t be said to be “creating money in the non-government”.

            We’re talking about state money here. Quit getting off on tangents. Borrowing from a bank in the Federal Reserve System creates dollars out of thin air. The loans are offset by an equal dollar liability. Private issuance of bonds that do not leverage the Federal Reserve System does not create new dollars, it uses dollars already in existence.

            “It also creates liabilities (negative money).”
            I can be a net borrower and not increase my liabilities. This can be done by sale of assets. There’s nothing called “negative money”.

            Just another way of saying “liability”. If you borrow money you have increased your liabilities by an equal amount.

            I could continue but what’s the point?

            “Let me lay some groundwork…”
            “Best line.”
            I thought it was pretty good myself and I took pleasure in writing it.

            • OOPs! formatting error, must have lost a

              .

            • “Yep, this is one transaction. Out of billions. A micro example. If I’m not mistaken the sectoral balances equation is a macro relationship. So it has little to say about individual transactions if anything. I suppose you could apply individual transactions to it and then sum the debits and credits but…why? Let’s go a little further…”

              Yes as I showed you, you can check from data that the private sector can be saving and yet be a net borrower in the macro. You keep making this mistake.

              Check my post here http://www.concertedaction.com/2012/02/21/saving-net-of-investment-updated/

              “The first payment that is made on this loan (and every one after that) is dis-saving or “negative” saving for that transaction. ”

              Saving is disposable income less consumption expenditures. Even interest expenditures is counted. But hey, due to paying interest and principal the person could be consuming less. Still saving in every month :-)

              “his is Income that could have been spent if the borrower hadn’t already spent it by borrowing on it – you know – bringing future consumption into the present.”

              Yes it is true that the borrower is paying interest but he may be consuming less due to this without affecting his saving. He may still be saving.

              But buying a home is not consumption. You keep making this mistake.

              “That’s why we use the term “net”.

              Ha! “We” but then … other hear: “Without a government deficit, there would be no private saving.”

              “Borrowing and spending allows you to spend income you haven’t earned yet. That’s the danger of credit.”

              An entirely different matter altogether.

              “Come on. It’s consumption using Income you haven’t earned yet – future income.”

              Again the mistake. Buying a house is not consumption.

              “Borrowing from a bank in the Federal Reserve System creates dollars out of thin air.”

              Yes thank you.

              “Just another way of saying “liability”. If you borrow money you have increased your liabilities by an equal amount.”

              Merely addressing the fact that net borrowing can be financed by asset sales instead of incurring additional liabilities.

              ” could continue but what’s the point?”

              Why did I bring this? You have no clue about all this and continue to invent words such as negative money. I suggest you really sit down and work these out with examples.

              “We’re talking about state money here. Quit getting off on tangents.”

              Yes we can talk about this. Irrelevant to anything you said in response to

              “Think of a household who earns income via wages, interest, dividends etc, pays taxes and consumes. In period 1 he buys a house on loan with a value five time his income. Then on, he is paying down his mortgage and keeps less cash – just to meet liquid needs. Well, his burden of principal payments doesn’t give him a choice. He is a saver in every period. He is a deficit spender in the first period but in surplus in later periods. He is a saver (including the first) but has very little financial assets and huge indebtedness unlike what Phil says”

              It stands absolutely right.

              • Ramanan

                You’re killing me here.

                “Yes as I showed you, you can check from data that the private sector can be saving and yet be a net borrower in the macro. You keep making this mistake.”

                I haven’t made a mistake.

                “Saving is disposable income less consumption expenditures. Even interest expenditures is counted. But hey, due to paying interest and principal the person could be consuming less. Still saving in every month”

                Thats true at the individual transaction level but not at the macro level over the budget cycle.

                “Yes it is true that the borrower is paying interest but he may be consuming less due to this without affecting his saving. He may still be saving.”

                He is paying principal and interest. This is dis-saving.

                “But buying a home is not consumption. You keep making this mistake.”

                Yes, it is consumption. Why is it not consumption? I consider anything that has a labor component in it consumption. But, if buying a house isn’t consumption your argument is still applicable only at the micro level, which MMT