Monetary Realism

Understanding The Modern Monetary System…

Noah Smith starts to get S = I + (S – I)

Seems like our little corner of the internet got a bit more popular. Noah Smith is nosing around S = I + (S-I).

The It-boy of economics, Noah Smith, has stumbled across an issue which we hold dear. Saving/Savings, and Investment/Investments are hard to understand, and yet I feel even slightly better understanding is extremely useful.

Noah Smith points out in the absence of a government sector, saving and therefore a stock of saving called savings, can still exist. Defining the government out of existence does not break accounting, so the S = I relationship holds. Still, as we’ve pointed out, even smart people like Nick Rowe routinely forget we live in a world with government and foreign sectors – and even beyond that assumption, the relationship between Saving/Savings and Investment/Investments is slightly magical.*

He gets confused for a bit, but then sorts out that surpluses and Savings are different, which makes it all work for him.

“Some people are telling me that “private-sector surplus”, as used by Hatzius and others, does not mean “private saving”, but rather “private saving minus private investment”. In that case, the accounting clearly makes sense, and does not conflict with my example (since storing salted venison is investment).

However, he hints at a more interesting question here:

“OK, so what about the nominal value of the real assets (salted venison) sitting in the sheds? This is determined by the nominal price of a pound of salted venison – i.e., how many pounds of fresh venison must be exchanged for a pound of salted venison. The total stock of nominal assets in the economy is given by: (lbs of salted venison) * (lbs of fresh venison / lb of salted venison)

Can this rise? It seems to me that it can. Suppose that the stock of salted venison increases, s per the previous example, but the price of salted venison stays fixed (which we can assume because we’re just looking at accounting identities, not at the determinants of prices). It seems that aggregate nominal saving is positive.”

This is a massive simplification of the real world. Still, it’s useful. It makes us think about the S = I relationship. I’ll give massive kudos to the venison/salted venison idea, because it sure makes the flow/stock idea much easier to understand. It’s a very useful thought experiment simply due to this distinction. unsalted venison is the flow, salted is the stock. Nice!

When we add in a few details, it becomes clear the relationship he is talking about here is not trivial.

  • If we make the stock of venison large to the economy, things become much more uncertain.
  • If we allow other assets to become savings, but which are still valued in venison, the world becomes more complex.
  • If we abstract to paper fiat money rather than commodity money (venison), the stock of savings becomes something entirely different in real and nominal terms.
  • If we then allow banking to create money against the stock of savings – like we do with our real estate monetary standard – then things become even more complex.

The S = I relationship is only useful in a very, very limited world, and our modern world is not simple.

About that “*”. Magical in this case means “something which has not been well figured out”. As we know, any sufficiently advanced technology is indistinguishable from magic. We know S = I + (S-I) because it must. Yet, the workings seem “magical”. Godley helped to scientize (neologisim warning) some of this magic, but it sure seems like there is a lot of work left to do.

I’ll circle back with my favorite economic quote of all time, because it helps to scientize the magic. From the paper “Fiscal Policy will Matter“:

“It is thirty years since Carl Christ, of Johns Hopkins University, had the brilliant insight that should an economy ever reach stationary equilibrium, all stock variables as well as all flow variables would be constant; and that if all stock variables, including government debt, were constant, government receipts would have to equal government payments. It would then follow that if the economy were moving toward stock-flow equilibrium and if taxes were levied as a proportion of income, the GDP of a (closed) economy would always be tracking, perhaps with a long lag, government outlays divided by the average tax rate – the very same concept that we call fiscal stance. Therefore, a necessary condition for the expansion of the economy, at least in the long term, is that the fiscal stance should rise: Government expenditure must rise relative to the average tax rate. If the tax rate were held constant, government expenditure would have to rise absolutely for output to grow; if government expenditure were held constant, the tax rate would have to fall.”

In a closed economy, if you balanced the budget over a long time, the economy cannot not grow in nominal terms.

But I also love this quote because he uses it as a launching pad to demonstrate the importance of credit to the economy. The next thing he does in the paper is to say: “You need to add government and the foreign sector to make it more accurately match the real world.” Then he notes even adding these sectors to the fiscal stance is not enough.You need to add credit to these numbers to get the best match to what we see in the economy.

Adding in credit creation/destruction makes all the difference, which he then shows in his deceptively simple prose and method.

Yet, the amount of credit created in an economy has limits. Nearly all credit is created against the stock of Savings which the economy has created for itself over time. This stock is not infinite. This stock can also vary in value. Different parts of this stock can also be expanded to devalue that sector of the stock relative to other parts of the stock.

All of this relates back to the venison/salted venison story Noah told, and is related to the safe asset debate which David Beckworth is spearheading.

We are faced with a huge dilemma:

  1. We want nominal GDP to grow faster than real GDP because hoarding causes bad effects on our economy; but,
  2. Credit creation is constrained by it’s relationship to the stock of Savings, government is constrained by credibility issues, and foreign investment is…heh.
Nearly all of the debate around this issue is about how to get that lump of real Savings to become nominally useful in some way, but it’s already Investements, and so these need to be repurposed in some way, or using the (S-I) magic to make our economy gainfully employ the full population.
So, thanks Noah for bringing this up.


View all posts by

124 Responses

  1. Cullen Roche says

    THIS SITE. THE SITE YOU’RE COMMENTING ON. I don’t read MNE. I don’t comment on MNE. As far as I know, no MRist reads MNE nor do they feel the need to populate the comment section there or in any other MMT website.

    Anyhow, you don’t even seem to be reading my comments in full so never mind.

  2. Tom Hickey says

    First, the subtitle of MNE is not the one you cite. It is “An MMT site bringing you dogma-free economics without the pleadings of self interest” Mike wrote that, not me. It would not be my choice, but it’s his place and I am must one of the contributors.

    Secondly, we get our share of opposition at MNE and also at NEP, some of which is MR based. No, I am not blaming any of the MR principals for that, and everyone is welcome at both places to share ideas.

    Thirdly, OK, I accept that explanation. But I am still not sure just what MMT being “too government-centric” means to you, especially wrt deficits. Different economists and schools have approach macro as a policy science differently. Policy choices and economic assumption that favor particular policy are basically normative. Macro should be called “political economy.” OK, you don’t want to do that.

    Boiling it down, it seems to me that the major difference, from which most of the other differences follow, is wrt the MMT Chartalist position, especially Mosler’s “insight” about currency sovereignty implying currency monopoly. Within PKE, that is most actively opposed by the MCT (Circuitist) faction that disagrees with MMT over this, while another MCT faction agrees with MMT on it and integrates MMT with MCT.

    So, summarizing, it looks like the significant aspect of the debate is over facts relating to monetary description rather than theory or policy. That’s a constructive debate to have and one that is ultimately resolvable, whereas debates over theory and policy rarely are.

  3. Cullen Roche says

    “Fine, just say so.”

    The subtitle of the website you’re on is “economics without politics”. We didn’t create MR so we could pretend to have pieced together a set of policies that will solve the world’s problems. That’s what you do with after concluding that we live in an inherently unstable debt system (wrong) which can be steered to some sort of “equilibrium with optimal output” by government spending and mass employment programs (also wrong and somewhat neoclassical thinking though with a twist).

    We describe real-world monetary dynamics based on understanding the actual institutional design we have (not some sloppily cobbled together consolidated govt version that doesn’t even exist). That’s about it. Some of us have personal opinions on things. Carlos loves the coin. Mike wants automated spending. I want deficits in this particular environment though I wouldn’t apply some one size fits all policy process. Lots of the MRists at Pragcap come to totally different conclusions. So we’re kind of all over the map. And that’s been the goal from day one. I am not pretending to know what “equilibrium with optimal output” is. But I do know how the system works and I explain it in a manner that allows the reader to become better informed. Meanwhile, you trot around the internet lecturing people about economic history and policy berating equilibrium based economic models while claiming to have your own nonsensical version of it with a different political twist. Frankly, it’s hypocrtical and is communicated at all times in a rather churlish and naive “we know everything” sort of manner. Let’s be honest, how can you write the words “equilibrium with optimal output” and expect that to be taken more seriously than any equilibrium based neoclassical view?

    I am not sure how you’ve managed to miss this over the years. It’s literally as if you don’t even read the actual content or writers here and instead just fill the comments with whatever the MMT overlords programmed your brain to type out….I’m sorry that I call you guys out on your BS when you come here, but hey, if you don’t like the heat get out of the kitchen. And trust me, no one forces MMters to come into the MR kitchen….You guys come here and then complain when you get flamed out. If you’re going to bring a steaming hot pile of dog shit into our house and sling it at us then don’t complain when we punt it back in your face. MMTers instigate all the fights they get their way. I doubt we’d discuss MMT much, if at all, if it weren’t for the commenters who come here and instigate BS (Zanon, PeterP, Phil, Tom H, etc, etc). There’s literally dozens of you who seem to have been stationed on certain sites to irritate and promote the ideas. I don’t see a single MR person on MMT websites bitching and moaning, but for some reason you guys are professional internet trolls who populate websites and think it’s okay to insult and lash out at everyone. So yeah, it is “bugging”. And I think that’s precisely your plan. You instigate to get a rise out of people so they will respond to your ideas where you can then regroup, attack and promote…Unfortunately, lots of naive non-economists and non-financial types think you guys have solved all the world’s monetary problems. Sometimes, even idiots like me think you’re right for brief periods of time (before waking up). And I am calling you guys out for it when you do it on my sites. Sorry if that hurts feelings, but it gets old.

  4. Tom Hickey says

    Again, changing the subject. I understand your claim as being that MMT is overly government-centric in generally, not just at this point in the recovery. As far as at this point in the recovery goes, it’s hardly just MMT economists that are saying the deficit is too small, government needs to do more fiscally, etc., This includes Keynesian-monetarists like Krugman and Keynesian-institutionalists like Jamie Galbraith.

    But the larger question is about government-centricity. Keynesian macro is “government-centric” (“big government” in neoliberal terms) because it is focused on policy solutions that center on maintaining full employment. There is debate among Keynesians about how to address this policy-wise but Keynesians are in agreement with the basic principle that if employment is taken care of the rest will follow. Of course, the objection of the opposition is, what about price stability?

    I still haven’t heard how you address this. If you are on the Keynesian demand side, then how do your policy recommendations address the issue differently than MMT to be less government-centric?

    It may appear to you that I am another MMT’er bugging you. I don’t see it that way. I am not an economists or a financial professional but a citizen interested in a good society and policy that will lead to it. I didn’t pay much attention to econ until the crisis, when it became obvious that there was something deeply wrong. After surveying the field and acquainting myself with the issues and doing some research, I concluded that Warren and the MMT economists had the most correct analysis and the most promising solution. I have no stake in this professionally. I am interested in answering the original question I came to this with.

    Now MR is new so you may not have all your ducks lined up yet, and I understand that you are not into macro theory and so may not plan to address policy issues like this. Fine, just say so. If that is not the case, and you don’t have your game worked up yet, fine, just say so. If you do, say so,and tell me what is it or cite something. Simple, no?

    But it the claim is that MMT too government-centric in general rather than just at this juncture, then “too government-centric” become an issue and an issue within the Keynesian framework. After all, Greg Mankiw is a “New Keynesian” and he is extremely neoliberal wrt the role of government.

    OK, I also understand that you disagree with Mosler’s notion of currency sovereignty implying currency monopoly, which is different from money monopoly, btw. If you think that MMT is too government -centric due to its stance wrt to Chartalism is basis of your criticism, which I have gathered it is, fine. But that doesn’t relate directly to the MMT position on deficits, just government solvency.

    It seems to me that you are saying further that MMT is too heavy on using the fiscal stance to achieve and maintain optimal growth, employment and price stability. If that is the case, what is the alternative you prefer? Then we can tear and compare.

  5. Cullen Roche says

    ” are saying that the government needs to step up more to reduce the drag. You have a different opinion.”

    Not even close. For 5 years I’ve been saying the govt should be spending more. I’ve never advocated declines in the deficit in recent years. I simply explained how they’re not currently torpedoing the recovery and you decided you’d just jump to all sorts of conclusions that confirm whatever biases you have.

    And what is this about “sustainable” debt? The debt based fiat system is not inherently unstable. I don’t think MMTers would say that (in fact, I know Scott doesn’t think that), but you’re here saying it. It’s not right. Combined with the commentary about “equilibrium” and “optimal output” due to govt spending and you are starting to sound more and more like someone who will do anything and everything to get others to believe your ideology….

    Do MMTers actually read the content here or do they just glaze over things and then regurgitate their usual talking points? Sheesh. You obviously refuse to read the website closely so I’ll bold this for you since you somehow missed it over the course of 2 years of reading this site: MR DOES NOT HAVE SPECIFIC POLICY IDEAS EMBEDDED WITHIN THE FRAMEWORK. THE WHOLE GOAL OF MR IS TO DESCRIBE WHAT IS AND LET ITS USERS DECIDE WHAT THE BEST POLICIES ARE.


  6. Tom Hickey says

    You are either avoiding answering what I said twice, or your don’t get issues in the history of economics between supply side and demand side and the ways of approaching it. There are different ways within both supply side (neoclassical and neoclassical synthesis) and demand side (Keynesian).

    See, for example, Ramanan on Kalecki’s profit equation, “This is Kalecki’s profit equation which says among other things that firms’ retained earnings is related to the government deficit!” at his place.

    Now it is possible to argue within the same paradigm over the state of the economy at any point. It seems that there is a recovery in the US but most analysis are saying it is weak. Employment is still historically elevated, incomes not growing much other than at the top, the trade deficit is persistent, and people at the top as well as firms are still saving at a historically high rate.

    If other households that make up the lower 80% don’t markedly increase their borrowing, then the recovery will continue to lag and there is little evidence that the US consumer is bounding back. Evidence shows the opposite. As a result many Keynesians, hardly just MMT, are saying that the government needs to step up more to reduce the drag. You have a different opinion. OK, Time will tell who was right. But even if the lower 80% do step up their borrowing again, that is unsustainable.

    Overall, sectoral balances identities and Kalecki profit equation make clear that the fiscal balance is a buffer that can be used as policy instrument similar to monetary policy. Monetarists (supply side) think that the interest rate is the most potent way to affect investment, and Keynesians (demand side) think that the way to affect investment is through effective demand. There is good reason to think now that interest rates are not all they are cracked up to be.

    BTW, if Krugman would drop his ISLM model and pick up the Krugman cross, he’s be OK. See Rob Parteneau, “Employing Krugman’s Cross: Farewell, Mr. Hicks?”

    Anyway, this is going nowhere unless without addressing the approach to investment including policy choices. Unless one is a neoliberal that thinks government is the problem or a fiscal conservative that holds the budget should be balanced or in surplus all the time. But those positions, too, are policy choices, albeit negative ones.

    I’ve articulated the different sides and how MMT fits into the demand side approach. You have said your position is clear. Well, I must have forgotten it. Please provide a reference to a macro analysis so I can refresh my memory. ,And no, s = I + (S = I) is not a macro analysis of this. It might be a building block as is the MMT monetary analysis, but it says nothing about the macro. If MMT is too government-centric for you, how does MR deal with the trilemma of growth, employment, and price stability policy-wise, and what is the economic rationale showing the plausibility?

  7. Cullen Roche says

    While we’re labelling one another this and that….Why is it that MMTers are always labelling everyone else, but take it so personally when people label them? I mean, by your own admission MMT is built around three primary legs – SFB by Godley, FF by Lerner and ELR by Minsky. Of course, Lerner was a market socialist and Minsky was a member of the socialist party for much of his life and said he didn’t associate himself with the PKers. Yet you guys always try to claim you’re just good old PKers. It seems quite obvious to me, however, that you’re not just good old fashioned PKers. You’re PKers who have hijacked the PK label on the internet, threw in a pretty hefty dose of socialist thinking on top of it and then continued to claim you’re consistent with all PK thought.

    Now, I don’t like to label people or use these terms pejoratively, but since we’re throwing economic history around and labelling people I figured I’d ask you – why do you run from that label? You and I both know that MMT has a great deal of influence from Marx, socialist thought and statist thoughts. Many MMTers fully admit that they’re socialists. So MMT is not just PKE. It’s PKE plus a lot more. A lot more that has some fairly strong Marxist and socialist influences. There’s nothing wrong with that necessarily, but I never see you guys align yourselves with them. Is that because you’re afraid of the label? You know it would crush the MMT movement in the USA? Or do you just like pejoratively labelling everyone except yourselves?

    Something to chew on…

  8. Cullen Roche says

    We’re not in a debt deflation any more. The aggregate pvt sector balance sheet has been expanding for over a year now. Even with a declining deficit. MMTers are hanging onto the crisis desperately trying to convince people that the private sector needs the govt as much as it did back before the crisis or right after….

    And sorry, but I stopped at “equilibrium at full employment-optimal output” What in the world is that? This is part of the problem. You really think that the govt can just steer us towards whatever you think “equilibrium” and “optimal output” is. The difference between you and supply siders (which I am not despite your accusations) is that you’re on polar opposites of the political spectrum. Like their silly market based equilibrium, you have your own govt oriented version of “equilibrium”. While you have unfettered confidence in govt’s ability to manage the economy the supply siders having virtually no faith in it. Both are naive positions in my opinion. The truth, as is usually the case, is somewhere in the middle. Maybe you’ll join us there one day? I predict not though. :-)

  9. Tom Hickey says

    “Sigh. Back to square one. You’re saying private saving is driven primarily by (G-T) and (X-M). You need to go back and read all those S=I discussions. You’re still confused about how I drives S and why.”

    No, that is your version and a misunderstanding of what MMT says. No economist denies that private investment is the driver of the economy and it was Keynes position that saving does not drive investment but investment saving by providing income. Keynesian macro is about equilibration of supply and demand at full employment/optimal output. Neoclassical economics held that this equilibration is a natural effect of perfect markets. Keynes observed that markets are not perfect and different equilibria are possible.

    The question then is when there is not equilibrium at full employment-optimal output, why and what to do about it. Supply siders say get government out of the picture to increase confidence since, due to Ricardian equivalence, all government can do is create imperfections. Left to themselves, prices will fall including waste and investment will naturally pick up ((Pigou effect). Fisher had pointed out that deflation influences this dynamic, since nominal debt remains the same when money is getting harder to come by. So improvement where there is debt deflation will not improve the way supply siders think.

    Keynes agreed and held that the issue was lack of demand, since it is customer demand that sends a signal to firms to invest. While the private sector is saving/delevering, unless exports increase, the only way to stimulate effective demand and therefore investment is offsetting the demand leakage by loosening the fiscal stance.

    The issue is not whether private investment is the driver in a capitalistic system. The numbers are clear that it is. The question is how to maintain investment at equilibrium at full employment/optimal output without incurring higher than targeted inflation. Virtually macro analysis but MMT holds that growth, employment and price stability constitute a trifecta in which two can be achieved but not all three simultaneously. This involves the sectoral balance approach, functional finance, and the MMT JG to mop up residual unemployment and provide a price anchor.

    Now one can argue that MMT is wrong about this by showing how, but claiming that MMT holds that government is more important than private investment in the economy or that deficits drive either private saving or investment in MMT is not the case. The government’s fiscal balance should be seen as a buffer that expands and contracts with changing nongovernment saving preference, creating space where needed to maintain equilibrium at full employment and optimal output and collapsing space when needed to prevent inflation from excessive demand relative to the ability of the economy to expand to meet it. In short, fiscal stance is about accommodation, which is needed since the neoclassical narrative about long run equilibrium and “natural” rates is wrong. Kalecki sums this up in Political Aspects of Full Employment, section 1, and it is in Marriner Eccles writings, too. Much of what MMT economists have done is resurrecting what was already known, and they have been clear about this.

    The MMT worldview is “government-centric” to the degree it is a Keynesian approach to macro as a policy science rather than a neoclassical model of an imaginary world that doesn’t exist, in which markets are perfect and there is no government and no banks, and money is a veil.

  10. bubbleRefuge says

    CR, I don’t see how S = I+ (S-I) which you generously explained yesterday ( OP thread on pragcap) by giving examples – someone getting a loan for a house and also a stock market offering – negates MMT principles of demand leakage and SBE saying that deltas in government spending equate to deltas in private sector saving. To me it feels like you are trying to argue that mirco economics negates macro-economics. Your examples are correct in the sense that the private sector can invest its savings and create ‘wealth’ using these micro-economic mechanisms. But these micro economic mechanisms, like making loans or stock offerings do not have a guaranteed outcome in the way deficit spending guarantees NFA to the private sector. The loans can fail. The stock market offering can go bust, etc. That is why deficit spending can be used as a policy variable and S = I + (S – I ) is not.

  11. Greg says

    Right AH. This whole real/nominal thing is quite confusing(the way its used by Sumner and co anyway) and should be dropped. I saw somewhere where real should be understood as “if prices never changed”. So we are supposed to try and analyze an economy as if prices simply remained constant?

    “Hey !! Lets imagine price controls and see what happens!!”

    I’ve never heard such a ridiculous constraint.

  12. Tom Hickey says

    Sorry, should be “she.”

  13. Tom Hickey says

    Yes, but he is the chair of an academic department. Warren Mosler, who is an actual hedge fund manager, was not predicting this outcome at the time.

  14. Tom Hickey says

    If policy makers understood the SBE model, along with the Keynesian concept of demand leakage and offsetting it to maintain effective demand at equilibrium with supply at optimal output and full employment, the Fed would not have to use extraordinary means to try to make up (ineffectively) for what the fiscal authority is failing to do owing to a false notion of fiscal sustainability. It’s blindingly obvious, and the predicted results of austerity in the UK and EZ, and to a lesser degree in the US, back it up empirically.

  15. Cullen Roche says

    Sigh. Back to square one. You’re saying private saving is driven primarily by (G-T) and (X-M). You need to go back and read all those S=I discussions. You’re still confused about how I drives S and why.

    Hint: it’s not supply side economics.

  16. Tom Hickey says

    No, I don’t know your position on this. According to PKE demand side analysis, investment is demand driven and demand leakage reduces demand sending a signal to firms to cut back as unplanned inventory increases. The point of combining Godley’s sectoral balance approach with Lerner’s functional finance is to target demand leakage through fiscal policy, especially when automatic stabilization is not sufficient, e.g., during periods of deleveraging after a financial crisis.

    The present recovery is slow due to continued household saving along with a persistent CAD. The latest figures show demand still lagging as Walmart and Macy’s failed to hit expected earnings. Walmart blamed it on the expiration of the FICA tax holiday that is pinching consumer demand. Sequestration (austerity) is also taking a bite out of demand.

    Is’ the supply siders who are arguing that investment is lagging because wages are too high, government borrowing is crowding out private borrowing (even though interests rates are historically low), and business lacks confidence due to “uncertainty” over government policy and Ricardian effects of high government borrowing.

    The Keynesian solution, on the other hand, is government stepping up by loosening its fiscal stance as the only sector capable of addressing demand leakage in the face of continued household propensity to save and stagnant income, business propensity to save rather than invest in the face of weak demand, and a persistent CAD.

    This is not just MMT either. It is straight up Keynesian demand side analysis. If you are emphasizing the primacy of investment, how is that not supply side?

  17. joe bongiovanni says

    I am glad to accept your proposal that the ‘sectoral balance equation'(SBE) is the MMT model. But to me, the SBE is simply a picture of the relationship between the account balances of the self-defined economic sectors.
    While potentially accurate – to the penny – I don’t see how it guides any aspect of public policy toward any particular economic outcomes.
    IOW, of itself it adds nothing to our understanding of the workings of the economy outside these private-public ‘sectoral’ accounting-balance outcomes, which are pretty much determined by the status of the national current account.
    If knowing the results of the SBE informs public policy initiatives toward predictive and determinative future SBE values, so that the future SBE relationships reflect a public policy gain, then it would be something of a model that could be useful in getting there. It’s what most economists attempt using DSGE.
    So I look for the proposed policy recommendations that the SBE ‘model’ can bring to the fore.

  18. bubbleRefuge says

    Mike. Never heard about the 6 month lag correlation. Wow quite prescient.
    AFS = Auto Fiscal Stabililizers I presume. But what about pro-active legislative fiscal policy. Does the mechanism matter? ex Capital gains tax cut vs payroll ?

  19. bubbleRefuge says

    Hi Mike. Nothing you said there I disagree with nor do I believe Mosler would disagree with either. Mosler talks about credit expansion in the economy on a daily basis if you follow his blog as I do. MMT shows that fiscally policy is underutilized due to myths, ignorance, etc and if utilized more efficiently could lead to greater gains as measured by employment and inflation. Implementation of fiscal policy is very political.

    BTW, 1% ish nominal GDP is a very weak expansion.

  20. joe bongiovanni says

    On the bank-centric money system..
    Re-distribution only comes into play from the ever-present evidence of mal-distribution, manifest in the increasing stratification of national incomes and wealth.

    Based on Soddy’s appreciation of things social and monetary, as outlined in his book titled “Wealth, Virtual Wealth and Debt”, he further constructed the fail of our modern monetary economy being to not recognize the inherent “distributive” power of money.
    ‘Capital’-ists gain and the Restofus lose because we do not have a monetary system that is designed to ‘distribute’ (share) the wealth that is created among all of the creators of that wealth.
    His book “The Role of Money” attempts to interpret the changes needed in our yet-present system to achieve that distribution of real wealth along with the expansion of the economy – exactly the opposite results from those we have observed over the last couple of generations.

  21. Michael Sankowski says

    I’d also add the expected time lag on credit/government deficit spending is about 6 months. That’s what Godley said in his paper, and he also noted it’s been remarkably consistent over 50 years of U.S. history, contra Solow.

    “What about time lags? The lag between the AFS at one time and the flow of GDP at another must be governed, under purely hydraulic principles, by the size of the net stock of assets generated by total inflows (government outlays plus exports) less outflows (taxes plus imports). Just as the length of the production period (approximately one quarter of a year in the United States) may be estimated from the ratio of inventories to production, so the mean lag of GDP behind the AFS will be given by the normal ratio (if there is such a thing) between the stock of net financial assets (government debt plus net overseas assets) and total inflows, that is, government expenditure plus exports.”

    So, we should be seeing the impact of the payroll tax increases right about…now.

    It seems like we are in fact seeing this:

    Average Real Wages fell .5% last month, .2% due to inflation, .3% due to reduced hours

  22. Michael Sankowski says


    I agree in some ways – the MMT crowd focuses too much on the deficit as the primary driver of economic well being.

    Still, getting predictions wrong isn’t the worst thing in the world. Predictions are hard, especially about the future. 😉 My take on this is few people get short term predictions correct, and the MMT focus on govt deficits makes them kinda blind to credit-driven expansions.

    We are in a credit driven expansion now, driven by real estate prices going up and new borrowing against that real estate.

    Even if these credit driven (or export driven) expansions end badly, during their run the economy performs well. This is a one of the problems with the MMT paradigm – they get some of the details right, Scott F gets lots of the details right on Fed actions, but they still think the economy is almost solely driven by government deficits.

    And in some way, this government centric view has merit because there are limits to how much private credit the economy can absorb, and using foreign trade as a driver has issues too. Yet, the economy clearly grows during credit expansions, and as a result, the MMT view has a hard time when credit starts to fuel the economy.

  23. bubbleRefuge says

    So he is not a good b/c he didn’t get the precise month right ? The sequester has hurt the economy. GDP has been revised down. Corporate profits are being revised down. WallMart ? Cisco ? You are trolling dude and diluting the level of commentary on this site.

  24. bubbleRefuge says

    replty to @Cullen 3:59