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.


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124 Responses

  1. Cullen Roche says

    @ bubbles,

    Sure, “redistribution” is a dirty word. But it shouldn’t be. The point I would emphasize is that we have a bank centric money system. Money is created primarily as inside money by banks and the govt and the rest of us redistribute that money in various ways. The govt does not actually create its own money in any meaningful sense. And the reserve system is an add-on and a facilitating feature of the inside money system.

    If we’re going to understand how the system actually works and how the flow of funds works then I think it’s crucial that we get this balance right. Starting with reserves and adding the banks on as part of the govt gives the impression that the govt is the creator of all funds essentially and not only gets the order of magnitude wrong, but gets the flow of funds wrong.

    This is important stuff in my opinion. We have very specific institutions serving very specific purposes. Consolidating them all and dumbing down things doesn’t help understand the specifics here. In fact, it can confuse the hell out of people.

    That’s my opinion anyhow.

    • 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.

  2. joe bongiovanni says

    To LVG at 3:06 (??)

    While Stephanie foretold further gloom for both Obama and the country absent another fiscal stimulus, I don’t see anything particularly errant in her observations, being necessarily unaware that the Billionaire and his white majority party would tank the much later election. I happen to agree that we’re merely whistling louder and faster while pretending a way forward.
    The thing I’m scratching my head over is ‘the MMT model’, while discussing DSGE and others. What page is that on?
    One major difficulty is in trying to cob together an understandable macroeconomic model based upon the ‘government-monopoly-issuer’ principle as the driver of aggregate demand, given that ‘the theory’ is ostensibly describing that which ‘is’.
    If there was a ‘model’, then we could take it to Treasury and show them how its not working with private capital markets using more debt as the vehicle for advancing national purchasing power.

    • bubbleRefuge says

      Cullen, without using abstract models with strict definitions its hard to have academic discussions. And yeah its important.

      • bubbleRefuge says

        replty to @Cullen 3:59

    • LVG says

      You don’t see anything wrong when someone predicts “millions” of job losses and bankruptcies at a time when the economy is actually starting to accelerate?

      I think an economic model should be able to translate into accurate economic outcomes. If Miss Kelton were the head of a major investment bank’s economic research department she would surely be looking for a job right now. Her predictions were way off the mark.

      • 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.

        • Tom Hickey says

          Sorry, should be “she.”

    • bubbleRefuge says

      @Joe . MMT is not a model? How about the sectoral balances equation? What constitutes a model , then ?

      • 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.

        • 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.

  3. stone says

    I must admit I don’t understand this whole “academic suicide” meme.

    We are talking about a tenured faculty member doing a subject that requires no equipment or consumables. Let’s imagine he commits “academic suicide” by taking note of accounting logic or whatever – what is the worst that could happen? It is not like with an experimental scientist who needs to spend >>$100k on reagents etc each year or else work stops. An economist could keep doing research work even if the rest of the field held their work in derision. Perhaps politicians would not listen to someone who was not listened to by other economists but I think truth is truth. It is wrong to not tell the truth.

    • A H says

      I think the problem is that over the past 30 years Macro has been completely dominated by RBC/DSGE models, which despite being constantly wrong empirically are still dominant because the are aesthetically pleasing in a mathematic sense and they take they are analytically in “right” kind of way that allows smart grad students to be noticed.

      To admit that this was wrong, would be to invalidate the last three decades of mainstream macro, and would destroy enormous amounts of social capital. Even people like Krugman and Stiglitz, who are very critical of mainstream economics, got their Nobels because they were good at this type of modeling, so it is very hard for them to forcefully change directions.

      • stone says

        A H
        I think the problem is that over the past 30 years Macro has been completely dominated by RBC/DSGE models, which despite being constantly wrong empirically are still dominant because the are aesthetically pleasing in a mathematic sense

        Mathematicians don’t find those models aesthetically pleasing though do they? They describe them as embarrassing travesties, an abuse of mathematics.

    • zanon says

      social disapprobriam. whispers and giggles as krugman put it so wells. and why flush that down the toilet when you have the great Ultron man’s ear?

      if you are billinoaire hedge fund guy in bahamas you do not care what anyone says, otherwise you want people to write nice things about you and compare you to their childhood TV hero

    • beowulf says

      Precisely, that’s the very reason for academic tenure. Without it, my old professor at Emory would probably feel uncomfortable discussing his psychic exploration of Atlantis. :o)

  4. stone says

    zanon, I think the problem is that economics as a field is adrift and has been for a very long time.
    Federick Soddy wrote (ht golemXIV), “It was indeed a revelation to the author, accustomed to think of the battle for liberty of thought in scientific matters as having been fought and won centuries ago at the time of Galileo and the Inquisition, to find that in economics, as distinct from physics, it has not yet been won at all… If economics were really a science, it would not need to protect itself from criticism by a conspiracy of silence. A responsible criticism would in any scientific subject be met with instant response, and not by the ostrich policy of burying the head in the sand in the hope that that will thereby choke the ears and throw dust in the eyes of the pursuer also.” Wealth…..p292

    When the field of economics is totally rotten it is a disaster to limit who you listen to on where they work or what position they hold. If you wanted to learn about biology or physics it would be a sound tactic to only pay heed to those in the top positions in the top institutions. Harvard etc have great biologists etc. BUT the very top economics positions in the top Universities are occupied by people who spout utter drivel -pompous fools. Sad but true.

    • joe bongiovanni says

      Thanks for this (also to golemXIV.
      Had Soddy’s generation the internet, the science of economics would have long been established.
      And had Soddy himself the internet, we would have long answered the seminal question of ‘what is money’, and would have also resolved therefrom to not continue to be operating with our version of a monetary system, which same system caused Soddy to declare, upon his two-year study thereof: ‘It’s not a system – it’s a confidence trick.”
      Both realistically, and in theory.

    • Tom Hickey says

      Not by accident. Have to keep the big donors happy, you know, and they don’t like “Marxists and socialists,” i.e., anything that challenges their politico-economic hegemony.

      • Nick Edmonds says

        Maybe not Marxists, but I don’t see why it has to be the case that neo-classicalism is dominant. The big money is in the commercial world and that cares about results a lot more than ideology. It would seem to me that economic ideas grounded in solid accounting and real numbers are going to have a lot more appeal to the business minded than highly theoretical neo-classical concepts. It seems to me no surprise that Goldman Sachs has someone like Jan Hatzius doing their economics.

        • stone says

          I guess what moneyed interests want is for policy to be directed solely towards upholding the financial and political power of debt. A clear accurate description of the economy would reveal that overall prosperity and well being is being sacrificed to serve that. So the form of economics that gets elevated to prominence is a load of hocus pocus that has the sole purpose of acting as a smokescreen to obscure what is being forced on society.

          What Goldman wants for directing its own trading is quite different from what is needed to ensure that politicians are bamboozled into ensuring that debt is never in danger of being devalued.

    • winterspeak says

      “zanon” is ridiculous, but I think there is some truth to what he’s saying. I don’t think he’s actually attacking Noah Smith, I think he’s attacking the belief on this post and comments thread that Smith has influence in the broader academic community. And it is unfair, but also true sadly, that credentialism and prestige carry weight in academic circles, and a business school professor in a out-of-the-way state school is unlikely to have much of either regardless of how fine and open his mind is. Smith would likely agree.

      You and I are in full agreement about the state of academic economics, and I like the Soddy quote. But the cultural and political sources of groupthink are strong, and even if we change Smith’s mind, he likely will not act on that knowledge because doing so would get him rejected from his community and close off professional advancement. There exist even more obscure academic programs dedicated to PK/MMT and those guys sadly are working in exile. Note that even if Smith changes his mind and decides to commit academic suicide by coming over, he will immediately be exiled himself and lose whatever shred of influence he had. Maybe he’ll move to Kansas City.

      I think the field needs a biological reboot, so everyone will need to die and be replaced by new blood. It will take 30 years — we need to focus on the kids.

      All very sad and defeatist, so let me stop and change tack. Looking at the S=I post from Smith, it seemed like the basic stuff I was going through with SRW, Rowe, Moldbug etc. etc. 4-5 years ago. Is there anything actually new there or has Smith just decided to “play ball”?

      • Tom Hickey says

        It is possible that Noah quoted Hatzius after I pointed out to him that Hatzius rose to premier status at GS in his thirties owing to correct market forecasting and they he was a Godley guy, so maybe Noah should pay attention to G&L as a professor of finance.

      • Ramanan says

        “Note that even if Smith changes his mind and decides to commit academic suicide by coming over, he will immediately be exiled himself and lose whatever shred of influence he had.”


        And IMO Krugman is constantly finding a way to make his work look like natural progress just like in sciences. He does frequently come up with mea culpas but those are more like the tone of scientists in other fields saying “oh this was wrong” rather than saying everything he was doing was BS. So if a particle physicist can say “in the 50s we thought xyz but that was wrong” it sounds OK because it doesn’t sound like he/she is saying physics itself is wrong. So Krugman wants to make it feel like that.

        • Tom Hickey says

          This is how change in the dominant paradigm (monetarism) is going to happen, one nudge at time. In the end, they’ll declare they knew it all along.

    • Greg says

      Well said Stone

  5. zanon says

    Noah Smith is it boy?

    Noah Smith is business professor in stony brook, wherever the hell that is. He is not even a real economist. he is blogger.

    maybe you try to curry favor by telling the no-body he is somebody?

    • beowulf says

      “Noah Smith is business professor in stony brook, wherever the hell that is.”

      Don’t be trollish. Stony Brook is a fine school, its part of the State University of New York. 10 seconds of googling reveals Stony Brook faculty have won Nobel Prizes in Medicine, Physics and Economics (to the extent the last actually is a Nobel Prize).

      • zanon says

        Stony Brook may be a fine school but please, it is low on the totem pole. If Harvard, Princetone, Chicago, Yale, or any high prestige college offered Noah a job, maybe because they are impressed by his blogging chops, he would say bye byes to stony brook and join the big leagues. maybe someday he might even get a regular column in nytimes like paul krugman.

        cullen, it seems that you are now mentioning noah smith (who is this clown?!) in the same breath as marx and keynes. you are so ridiculous. i missed when smith got this torch which gets you and sankowski so hot and bothered so to me he is just a no-name blogger who is at some 3rd rate state school and did not even make it into a real department he is with MBAs.

        • beowulf says

          “i missed when smith got this torch which gets you and sankowski so hot and bothered so to me he is just a no-name blogger who is at some 3rd rate state school and did not even make it into a real department he is with MBAs.”

          The implication is that his ideas would only be worthy of praise if he had the right credentials but since he does not, eff him. Some people, strange I know, are more interested in competence than in credentials.

        • Cullen Roche says

          Ha. Well, I am not comparing him to Keynes and Marx. But Noah Smith is taken seriously by lots of serious economists. You might not know who he is and you might not care, but some important people do. Krugman barely goes a day without mentioning him so if the high priests and prestigious schools are your gods then the gods have spoken and you should start reading Noah Smith a bit more closely.

          Or not. I doubt he’ll care much.


        • Michael Sankowski says

          I should have probably written “it boy of econ blogging” but heck, it’s tough writing thoughts exactly.

          Also, I may have pissed him off slightly. You’ll have to patch things up Cullen!

        • Greg says

          I dont really understand your attacks here Zanon. Discuss Noahs ideas, his arguments or his weaknesses as you see them but talking about his University pedigree seems……………. irrelevant. In todays www world everyones ideas can get out there via a blog and the blog readers can decide if they are worth reading. Would Marx or Keynes ideas have been able to achieve their level of circulation if they had existed in a time when everyone elses ideas were equally accessible?

          This is democracy of ideas in action. You got something to say? Put it on your blog and see how many people agree with you. Maybe before long congress will read your blog.

        • zanon says

          whether congress reads my blog or not is besides point. the point is that if they read blog, and if they agree, they will still not do anything different because I am nobody and very big somebodies will mock and ridicule them. nytimes will run article calling congress person X a “insane person” and have quote from better known economist — maybe even the nobody called nick rowe — who will be voice of authority dismiss me as well they should because otherwise they will be ridiculed.

        • SqueekyWheel says

          Harvard and Yale hire people after they have become famous for their work. Therefore Harvardites are just a bunch of has beens, already over the hill and on the way down 😀

        • zanon says

          For sure! But you see, those people are called “thought leaders” and they set the intellectual agenda until the croak.

          Social science, in case you have not noticed, is fashion.

        • Michael Sankowski says

          He’s just exploded on the blog scene and is mentioned by Krugman and Delong. Those guys are thought leaders in some circles.

        • zanon says

          Ah, this is what I was missing.

          i will look for the references

    • Cullen Roche says

      The vast majority of economists don’t work at prestigious schools. And the ones who do usually adhere to a strict ideology. Being an economist or an economist at a specific school doesn’t qualify your or disqualify you from being influential or understanding.

      Some of us in the PKE world need to learn that we won’t raise ourselves up by constantly tearing other people down. If Noah’s ideas appear wrong then let’s attack them. But Noah Smith the person and his school are not a fair or useful target representative of anything he does. As far as I can tell Noah is a pretty independent thinker and a good guy. Give him a chance before knocking him based on his university.

      • zanon says

        Influential economists work at prestigious schools. That is how influence and prestige works.

        I have never hear of this Noah Smith, who I am sure is fine, but my question is why is this nobody called “It boy” by Sankowski? Maybe I miss something in the english translation.

        • Cullen Roche says

          Influential economists don’t always work at prestigious schools. Heck, the most influential economists of our time, Keynes, wasn’t even technically an economist as he had no formal econ training. Same for Smith and Godley.

          I think you’re generalizing here.

        • Cullen Roche says

          Karl Marx had no formal econ training also. In fact, you could almost argue that most of the really good ideas in economics came from people who were not even economists. Maybe a formal econ training is a detriment to understanding how the real economy works.

          Did anyone ever consider that?

        • JKH says

          Consider it?

          It’s my initial thought when I wake up every morning.

          Noah Smith does seem to have inherited a torch of sorts.

          Nick Rowe attempted to deal with certain PKE insights and outrages – only briefly, before dismissing it.

          We’ll see how NS does by comparison.

          The starting point is still accounting – which you’ll note that NS admits in his post is not his strong suit. But so did Rowe and Keen.

          And that didn’t prevent the invention of 1.5 entry bookkeeping.

        • Greg says

          “Consider it?
          It’s my initial thought when I wake up every morning.”

          +1………. no +1.5

          Noah does seem to have Rowes penchant for storytelling but maybe he will decide to strengthen that which he admits is his weakness.

  6. SqueekyWheel says

    Michael Sankowski
    Not sure what your comment is here Tom – can you be a bit more clear?
    I’ll try to answer. It’s not financial vs. non-financial accounting, closer to real vs. nominal.
    Imagine you borrow $100, invent the wheel (funded by that $100 in research), build a wagon.
    The worth of the wagon is $120, which already throws off the accounting. The worth of inventing the wheel is not part of the accounting beyond the consumer good you created, which is worth $120.

    This seems to me to be a subtle part of Noah’s issue (subtle in that it’s not stated) and also seems to be where many (including economists) are misled by accounting identities.

    In real terms that $100 investment can become a >$100 investment given the addition of {labor, invention, luck, etc}. The stock of investment is not changed by a flow of investment, it’s changed by a flow of work (unless you count flow of human capital, but I’ve never seen MR attempt to include human capital in the S=I equation).

    This is not a violation of accounting identities, but if someone’s brain can’t work outside the identities their likely to think it’s impossible.

  7. beowulf says

    Apropos of nothing, I’ve been following Noah’s twitter feed for a while but it never occurred to me he actually had a website until I followed Mike’s link above. Live and learn.

    Perhaps “net lending” would be a less confusing term than “net savings” or “savings net of investment” (correct me if I’m wrong, Tom or Ramanan, but don’t those all mean the same thing?).

    • Tom Hickey says

      I think that for blog writing, authors should presume that the ordinary language meaning will predominate unless something else is specified. I comes down the principle, “Say what you mean.” A lot people are going to be confused by “net lending” without explanation, I think, and a lot of people familiar with basic macro are going to be confused by (S – I) or (I – S) in that they will presume that S = I.

      Judging from the amount of controversy on in the econ blogosphere over saving/savings and investment, this is a huge issue that is nowhere near over. Then try to explain it to interested people not very familiar with economics, like folks into politics and policy. Or to you congressional representative.

      Needs work.

      • Nick Edmonds says

        It’s good to try and use ordinary meanings where possible. The problem is that you need to be fairly precise with this stuff and ordinary meanings are often too vague. What exactly is the ordinary meaning of “saving”? Does it mean before or after fixed capital formation? I’m not sure.

    • stone says

      Noah’s website is apparently the 24th most influential economics blog :

      • Greg says

        PKE has a pretty good representation in the top 100.

  8. Cullen Roche says

    Good point Mike. I talked to Noah a bit about this on Twitter and I think he understands this better than some people are giving him credit for (mostly MMT people in his comments).

    The point is really simple. It’s better to think of S from the perspective of S=I+(S-I) because the stock of private saving is made up of I and not primarily (S-I). So, using the 3 sector financial balance can distort a proper understanding of the economy. We shouldn’t actually net out investment to understand this. Noah intuitively understands this which is why he’s confused to see people making a big deal out of the 3 sector equation with its focus on S-I.

    The pvt sector can and has grown just fine for long periods of time where S-I is not larger than X-M so the 3 sector equation doesn’t tell us the full story because the majority of the action is actually occurring in the I component of the equation. That’s where 80% of the pvt sector’s net worth sits.

    This understanding has important ramifications for learning how the system works and viewing the system in a balanced way. To me, the key takeaway is that I is the backbone of pvt sector equity and the govt is an important facilitator and supporter of pvt growth. Get that balance wrong and you’ll build models that don’t accurately represent the monetary system we have.

    • Michael Sankowski says

      “S-I is not larger than X-M so the 3 sector equation doesn’t tell us the full story because the majority of the action is actually occurring in the I component of the equation.”

      This can happen I think through credit creation and much more importantly, through humans adding value. Exchanging some S through credit to make a larger I then causes real world growth. Taking iron ore and making a car isn’t a simple exchange of matter. The iron ore plus the extra stuff is not worth as much as a car.

      This is the idea Noah was getting at and I think is part of the magic which happens in the S=I real vs. nominal accounting. It’s entirely possible for real world improvements to outstrip the nominal accounting of these improvements. This is something which SRW brought up in the epic comments section over at Steve R’s place, and something which seems to me to be part of what MR is striving to describe more accurately.

      That’s a post we need to write.

      • Tom Hickey says

        Do you mean real as inflation adjusted v. nominal accounting or financial v. non-financial (actual) accounting. If the later, WTF is that? That’s what Austrians and other that see money as a veil do. It’s BS. Standard accounting if numbers entered in the unit of account. There’s a huge amount of work done in economies doesn’t show up because it is not paid work. Until fairly recently, it was all the work that women did and that was “real” work even though it went unaccounted for.

        • Michael Sankowski says

          Not sure what your comment is here Tom – can you be a bit more clear?

          I’ll try to answer. It’s not financial vs. non-financial accounting, closer to real vs. nominal.

          Imagine you borrow $100, invent the wheel (funded by that $100 in research), build a wagon.

          The worth of the wagon is $120, which already throws off the accounting. The worth of inventing the wheel is not part of the accounting beyond the consumer good you created, which is worth $120.

        • brookside says

          I think your example can be explained quite well within the framework of the National Income and Product Accounts.

          Say a friend saves $100 and loans it to you and you use the loan to invent the wheel and build a wagon and then you sell the wagon for $120. You use the $120 from the sale to repay the $100 loan and keep $20 as profit. The wagon will last more than a year (if it is built correctly) and therefore can be classified as a capital investment. Also, your $20 profit is considered as savings in GDI accounts. So, what we have is you friend’s $100 loan/savings and your $20 profit/savings is equal the wagon buyer’s $120 purchase/investment. Thus S = I.

        • Tom Hickey says

          Wen “real” is used with “nominal,” the inference ordinarily is that “real” means adjusted for inflation and “nominal” not adjusted. I would call the example above financial v. non-financial, or financial v. actual, or even financial v. real, to avoid the ambiguity that may be involved with using nominal and real together without implying inflation adjustment.

          “Real assets” on the other hand are things like real estate in comparison with financial assets like bonds or cash. So real and financial are used in this sense. It also makes sense to talk of real v. nominal wrt to their valuation. Here the term “real” has different senses.

          Calling physical stuff real often results in confusion between real and nominal in the above sense of adjusting for inflation. I have found in the past that when I presumed the context made the meaning clear, I was misunderstood.

          Clearly credit-based asset is ontologically different from a physical assets like a piece of real estate, and real is used in the sense of non-financial, actual or ontologically “real.” An equity share evinced by a stock certificate is different from the stake in the physical asset. The value of the financial claim varies with marginal price while the physical asset remains substantially the same. Portfolio value changes with the changing price of the shares even though there may be no substantive change in the underlying “real” asset as bricks and mortar. But I think that using nominal and real to indicate this is not a good idea in the context, since nominal v. real has a specific meaning wrt to price adjustment that is often applied in cases like this. This may seem picayune, but I have been called out on it in the past.

          Also, Austrians are fond of saying that it is the physical asset that counts rather than the financial claim. An increase in physical assets (capital) is “real saving” regardless of the money value, which is subjective. This thinking seems to be based on the corn analogy, where the feed corn is consumption and seed corn is saving. The seed corn as saving from the prior period becomes investment in the next period, which yields further consumption and saving in that period. So the conclusion is that causality runs from real saving is to real investment. This is opposite the theory of saving and investment in a Keynesian view of a monetary economy, which is a fundamental difference between the Keynesian and Austrian viewpoints. Some neoclassical economists also think in the same mode as Austrians, which is a reason, I suspect, for Noah’s venison example.

        • A H says

          I think that economists should replace “real” with “relative”, because aside from Austrians, this is what the mean by “real”. In many ways nominal values are more real the “real” values because they are the ones that can actually be observed, and you cannot compute real values until you pick an arbitrary nominal reference point.

        • 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.

        • Nick Edmonds says


          I found your comments here quite helpful.

          One question:

          “Austrians are fond of saying that it is the physical asset that counts rather than the financial claim. An increase in physical assets (capital) is “real saving” regardless of the money value, which is subjective.”

          Is it not the case that you can’t generally say whether there has been an increase in physical assets? It’s easy if there is only one asset like corn feed, or if there is an increase in all assets, but if there is an increase in some assets and a decrease in others, you need some kind of valuation in order to aggregate.

        • Tom Hickey says

          Nick, the way I understand their position is that the nominal value is rather irrelevant “in reality” unless there is “sound money,” e.g., metal convertibility or bullion exchange. In the real world, growth and prosperity are measured not in terms of wealth in monetary terms but increase or decrease of real assets measured physically — sq ft of factory space, # of capital goods produced, # of homes constructed, etc.

          I don’t think that any economist of whatever school would deny that actual prosperity is measured in terms of real stuff consumed and actual (net) capital produced in a period. But others would say as you do that in a monetary economy we account for that using double entry accounting and the unit of account. Of course there is actual stuff behind some these money figures, and also some not, and we know how to distinguish this. Then there is the grey area of what constitutes capital goods. Does intellectual property count, does software count like hardware, etc.

          For example, GDP is the measure of growth but the raw number does really say much about growth and prosperity in the real world, as ordinarily presumed. Manufacturing could be declining while the financial sector is expanding more, giving the illusion of actual growth and increasing prosperity when that is not actually happening.

        • Nick Edmonds says

          Yes. I’d actually made this last point in reply to stone’s comment on my recent blog post on the impact of changes in output composition on UK productivity. Part of the reason UK productivity has fallen is that we’re not making so many of those high value-added derivatives anymore!

          I’d agree that no self-respecting economist would think that nominal values are what matter. The problem we have of course is that in order to look at the overall picture we have to aggregate and to do so requires some kind of relative valuation even if the common unit of account is itself a good.

        • JKH says

          Constructive stuff.

          I’d say there is a nominal/real value measurement distinction as those things apply to a monetary economy.

          And there is a real/financial asset distinction as those things apply to a monetary economy.

          (I think either real or physical is OK in that context)

          But when invoking real saving and real investment, you’re really assuming away either the existence of or at least the immediate relevance of a monetary economy.

          And in that case, it seems to me that real saving and real investment are the same thing.

          I don’t think it’s a case there of the saving/investment causality being the opposite from the Keynesian monetary case.

          I think it’s a case of them being the same thing in a non-monetary economy or non-monetary context, with the only causality (and the only true causality) from one to the other being the Keynesian case of investment to saving in a monetary economy.


        • Greg says

          “I think it’s a case of them being the same thing in a non-monetary economy or non-monetary context, with the only causality (and the only true causality) from one to the other being the Keynesian case of investment to saving in a monetary economy.”

          Hmmmm that is a very interesting and intuitively accurate way of stating things I think.

          So really what your saying is that instead of money being a neutral veil it is “the great illuminator” . In a non monetary economy, savings and investment are indistinguishable….S truly = I. But in an economy where money is introduced, the causality becomes distinguishable. S comes from I.

          In a monetary economy we can follow the money and get more insight into the S=I idenity

        • Tom Hickey says

          MMT economists are in agreement that the private sector is primary in a capitalistic system like the US and the government acts to support it. The purpose of the sectoral balance approach and functional finance wrt to the government’s fiscal stance that shifts cyclically to accommodate (ideally) growth, employment and price stability.

        • 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.

        • 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.

        • bubbleRefuge says

          The criticism of Dr Kelton’s “prediction” is cherry picking and extremely lame. She is not a hedge fund manager, or market analysis making predictions for a living, she is an activist educator trying to agitate for changes in monetary and fiscal policy and her “prediction” should be viewed in that context. Critcize Mosler if you want to and good luck with that , he’s been right.

        • 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

        • 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 ?

        • 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.

        • 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.

        • LVG says

          Mosler has been wrong also. He’s been saying all year how the sequester would hurt the recovery. He even admitted he was wrong earlier this year. And he’s gotten more wrong as the year has progressed.

          “the Jan and then Feb numbers showed I was wrong, and that the consumer had continued to grow his spending as before via housing and cars, etc. Even the cliff constrained -.1 GDP of Q4 was soon revised up to .4. ”

          “So my overall view is negative, with serious deflationary risks looming.”

        • 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.

        • Cullen Roche says

          That might be what MMT claims, but their world view is clearly govt centric. It’s basically a reworked version of neoclassical econ where the money system’s central component is the reserve system. Except, in MMT that’s expanded to include NFA as t-bonds. MMT starts with NFA in much the same way that neoclassicals start with base money. It’s all what MR would refer to as “outside money” of some type. Outside money facilitates inside money in all cases. It is not the center of the monetary universe and it does not exist so that the govt maintains a “money monopoly” or control over the economy. It is a secondary feature to the inside money system and the “money like” instruments that the pvt sector creates.

          The entire MMT framework places the govt on center stage in this description and acts as though it is the steering force for all economic growth. Anyone who’s on Mosler’s daily email list knows that the deficit is about the only variable that matters to his world view. Private investment is a totally secondary component and I rarely, if ever see MMTers discussing how important it is. It’s all deficits all the time. When one reads MMTers and their view of the economy, it sounds like we’re all just walking blindly through life waiting for the govt to spend more money and run deficits. As if that’s the only variable that matters. It might be an important one, but not nearly as important as MMTers like to think. The emphasis is essentially all backwards in MMT. Which is why anyone following their sequester predictions has been totally blindsided by the 2012 economic performance. And when Q3 and Q4 GDP come in at 2.5% the MMT crowd will have to explain the mistake in their model. I can tell you what it is right now. It’s a total lack of regard for private investment and a narrow minded emphasis on govt deficits.

          There’s a reason why MMTers couldn’t wrap their heads around the S=I discussions. When you remove the emphasis from the (S-I) component the entire driving force behind MMT’s thinking begins to unravel. Place govt in a secondary component to the pvt sector and suddenly many of MMT’s policy ideas become unnecessary, highly debatable or just “add ons”. But they are not add ons in MMT. The policy ideas and the ficsalist approach is what MMT is all about.

        • 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.

        • 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.

        • 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?

        • 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.


        • 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.

        • 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…

        • 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. :-)

        • 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?

        • 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.

        • 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.

        • Ramanan says


          That was wrong because it was simply repeating what Wynne Godley was saying who also had it wrong because his experiences in the UK and Europe suggested otherwise.

          There was a recession indeed but it was avoided by a huge fiscal expansion by the Bush government which Wynne Godley didn’t expect. And although he had it wrong it still won him a fan in Jan Hatzius. Nonetheless he turned out to be right because the imbalances continued and the private sector was back in deficit and the disaster did happen a few years later – much bigger one.

          But … after his death good forecasting and strategic prospects is also RIP.

        • Cullen Roche says

          @ LVG,

          I think that’s going overboard. The MMT model is not perfect in my view, but it’s definitely nowhere near as bad as the model used by most of mainstream econ. Kelton and the MMTers focus way too much on the deficit which is why they’ve erred some in recent years, but that doesn’t make their model nearly as bad as others. In fact, MMTers have generally predicted the last cycle pretty well. Which, from an economist’s perspective, is pretty impressive since they usually get most of it wrong. :-)

        • LVG says

          Why do MMTers think their model is better than anyone else’s? It’s been just as wrong. In 2011 MMTer Stephanie Kelton wrote this article about the recovery and how it was “time to panic”. She predicted millions of job losses and corporate bankruptcies. As far as predictions go, this one was way off the mark. MMT spews bearish views left and right because they don’t think the capitalist system works very well. Guys like Randall Wray have been bearish their entire lives. It’s all politics veiled as reality. In other words, it’s just as useless as listening to Paul Krugman beat his own chest about his “model”.

        • Tom Hickey says

          Your positions sounds like a variation of the supply side approach that sees government as adding imperfection to markets. How is that not the case?

        • Cullen Roche says

          I didn’t say the govt “adds imperfections” to the markets. You’ve just pulled that from thin air. You know my positions on this and you know that I think govt is a necessary and generally positive addition. But I would never build a world view where the govt is the center of the monetary universe. You take that distinction and constantly try to frame me as some sort of supply side crazy. That’s a construct of your imagination and little else.

        • bubbleRefuge says

          Ok. Income net of taxes, you get my point . The focus is on the ‘money’ the private sector uses to consume goods and services in the economy which drives ( AD ) business sales, which drives GDP, which drives unemployment , the price level , etc.

          It is irrefutable that if the gov lowers payroll taxes tomorrow the private sector will have more income ( net ) for consumption . Its also true that if people start borrowing and spending net income rises , but so does debt.

          MMT forecasts have been pretty accurate for the most part. Mosler has been unbelievably accurate. Also note, its hard to forecast changes fiscal policy because it depends on forecasting politics.

        • Cullen Roche says

          That’s not necessarily true at all. If the govt taxes more then it redistributes more. If the govt taxes less then it redistributes less. You’ve confused the real world flow of funds with MMT’s fantasy world of “creation” and “destruction”. Taxes don’t destroy bank deposits. They allow the govt to redistribute them. You have to study the flow of funds at work here and not the myth built around the reserve system via the MMT views.

        • bubbleRefuge says

          I’ve followed flow of funds and don’t agree on this notion of re-distribution. We’re just arguing language syntax. Government taxes, NFA is destroyed to the penny. Government spends vice versa. Why so much churn on how the backend of government finance works? Smart people( MMT literati , Mosler, JKH,Cullen, et-al ) looking at same system coming to different conclusions.

        • bubbleRefuge says

          Changes in the deficits reflect changes in aggregate income to the private sector. Aggregate income has a huge impact on the economy. Its supports the credit structure.

        • Cullen Roche says

          See, this is precisely what I mean. bubblerefuge thinks the shrinking deficit means income is being sucked out of the private sector. The deficit is not shrinking because money is being sucked out of the private sector. The govt is not spending less. It is taking in more tax revenues because private sector incomes have IMPROVED. Read the CBO’s monthly budget update:

          The Oct-July period reflected increased tax receipts of $228B. Of that, 75% of it was due to increase personal income taxes. That means the private sector is IMPROVING. It is not a reflection merely of the tax increase from the payroll tax or the sequester. Things have really been getting better mainly because private investment has remained strong.

          The reason MMTers have been forecasting economic doom is because they missed this crucial understanding. You can’t use a two or even a 3 sector view here! You need to go INTO the private sector. It’s flabbergasting how MMTers just can’t wrap their heads around the S=I+(S-I) concept….

        • JKH says

          I think you can get reasonably precise about concepts in a monetary economy.

          A non-monetary economy is so imaginary, all concepts seem up for grabs.

          And how much can we clarify about how the real world works by imagining a world that can’t possibly exist at the macro level?

          A monetary economy provides essential liquidity.

          One form of liquidity is (S – I), because it indicates agents/sectors can save in a form that doesn’t hurt when they drop it on their toes.

          (I think that’s a variation on a Denis Gartman line)

          Similarly, (X – M) and (G – T) require monetary liquidity to work, I think.

          Or maybe not. Does it require monetary liquidity to borrow the stuff that Walmart imports? Or just barter debts? Who knows?

          I’ve never understood the veil analogy. I think of a fluttering veil as a monetary system that has real effects.

        • zanon says

          This was my core confusion with the Noah Smith article. I don’t see why Michael was all excited about it.

          No one’s arguing that individuals cannot, via labor alone, create real items of real value and store them.

          The problem is the first sleight of hand when a monetary value is somehow assigned to those items as it means we now have two different systems and we cannot assume that the nominal is transparent to the real. But this is the assumption made in standard economic models.

          The standard thinking assumes that the nominal does not matter because the nominal should not matter. But it does so you have to explain why.

          Similarly, the point to explaining S = I + (S – I) is to explain why S = I is insufficient.

        • bubbleRefuge says

          “Without a government deficit, there would be no private saving.”
          Hi Culen. When MMT people say that, they are saying there would be no private saving of nominal financial assets ie bank deposits and / or Treasuries.

        • Cullen Roche says

          Of course, but it comes out all backwards in MMT. From the MR perspective t-bonds are basically just a form of outside money that supports the structure of inside money. It is not the backbone of the economy or the pvt sector’s net worth.

        • Tom Hickey says

          Greg, see Lord Keynes at Social Democracy for the 21st Century on fixed (administered) price v. flexible price. Most final goods markets are administered price, and at least some commodity markets are subject to monopoly pricing, like oil with the Saudi’s as swing producer (Warren Mosler). Warren also observes that prices are also determined by what government pays or allows to be accepted as collateral by lenders. The only ones that assume markets discover prices through competition iaw the “law of supply and demand” are market fundamentalists.

          For a detailed treatment, see Fredrick S. Lee, Post Keynesian Price Theory (book). He also has an article, “Pricing, the Price Model, and Post Keynesian Price Theory.”

        • Greg says

          Lots of good stuff in this comment Zanon.

          “The problem is the first sleight of hand when a monetary value is somehow assigned to those items as it means we now have two different systems and we cannot assume that the nominal is transparent to the real. But this is the assumption made in standard economic models.”

          Interesting! There is always a question as to how some prices gets set. There certainly are instances of someone “determining” (house appraisal is an obvious one) the money value of something. How does it occur? Who does it? It seems to me in the case of anyone setting a price they will always set the price in a way which advantages them. And small advantages at the beginning of any process which has many iterations (exchanges or resales in the economic world) can end up with much larger advantages later

          And you are absolutely right about the idea that many have that the nominal should not matter…. maybe not (but maybe so as well) but it does so lets figure out why.

        • Cullen Roche says

          The real problem is that some people constantly describe private saving as “saving net of investment” and use (S-I) to push their views. This view is a lot less interesting than some people seem to think and doesn’t present a totally accurate view of private saving. It’s really only interesting if you say things like “Without a government deficit, there would be no private saving.” Which, in that case, your world view is wrong.

        • Nick Edmonds says

          “And how much can we clarify about how the real world works by imagining a world that can’t possibly exist at the macro level?”

          I like this. It helps rationalise my conceptual difficulties with aggregating non-homogenous real assets.

        • winterspeak says

          Good point JKH. Economists are sloppy about what they mean by “real” — it can either mean a nominal number adjusted by another nominal number (inflation) or it can mean “consists of sweat and atoms” vs being just a number.

          I’ve written about this at length, maybe at SRW’s site.

          And I think you are right when you say that real saving and real investment are the same thing. Note that you cannot save labor (sweat), just atoms. Which is why in high unemployment times the “labor investment” shows up as unemployment.

          What we care about is real (sweat & atoms), and the nominal (whether you choose to inflation index or not) is only important when it prevents maximum output of real. This is why I find claims that you can generate “real wealth” without any change in a nominal number — by making stuff for example — frustrating. Yes, of course you can, but that’s not what’s at issue.

          To get the importance of MMT/PK, you need to privilege nominal. And I think you especially need to privilege Govt spending even though it plays a small role in % terms.

      • Greg says

        “It’s entirely possible for real world improvements to outstrip the nominal accounting of these improvements.”

        Yes, but wouldnt that only be the case for a couple periods? This seems to be arguing that we dont always properly initially price the value added by some investments. Not sure anyone would disagree with that but it wouldnt take long for someone to figure it out and then the accounting would incorporate it quite soon it seems to me.

        • stone says

          All prices potentially could adjust downwards. We could each spend say the same $20k per year that we spend today but just get much more for our money – unlimited hyperloop travel, astonishing personalized medical care with replacement organs, interactive online higher education, etc etc.

        • Greg says

          Yes we could. But I dont think we would see those types of price changes if it were private investment via banks that were providing the funding. The cost of interest and the need for ROI would likely make those projects expensive not cheaper, unless they got the labor for cheap!

        • stone says

          Greg, I agree that debt funding makes downward adjustment of prices a nightmare. Basically it often means defaults on the debts. But debt financing has increased relative to equity financing over recent decades and perhaps our economy would be much more fit for purpose if it hadn’t.
          I think we need to always remember that computers, DNA sequencing and solar power are success stories of capitalism and yet are dramatic examples of rampant price deflation.

        • Greg says

          “I think we need to always remember that computers, DNA sequencing and solar power are success stories of capitalism and yet are dramatic examples of rampant price deflation.”

          Agreed. The next question that leads me to is why. Those three things have had huge public investment for decades either via DOD or NIH or DOE. The initial financial investment (and much of the “sweat and atoms type” real) was overwhelmingly public. So while it was a success story of capitalism it wasnt just private investment capitalism.

          We probably cant totally account for every dollar of public spending that has been going to those projects over the last 6-8 decades but if we tried Ill bet it would be measured financially as a net loss or very poor investment up til now, (computers maybe not). But, because we dont account for our public spending the same way we do our private spending ( or at least up until the Neoliberal revolution we havent) we can just look at the end result of laptops in every lap, levels of computational power at every humans fingertips, the immeasurable personal connections made available via the www (not to mention the myriad ways our govts can now track us!!!) and truthfully say it was a fruitful investment.
          I think much of this is because these will be giving us real returns forever.

          The three things you mentioned have payoff periods of multiple centuries or millenia.

      • stone says

        When you say that it is possible for real world improvements to outstrip nominal accounting, that is exactly what I was trying to get at when saying that we could have no monetary expansion and yet have a great increase in real prosperity due to technological etc improvements together with falling prices (just as we now have with computers, solar power, DNA sequencing etc).

  9. Fed Up says

    “2.Credit creation is constrained by it’s relationship to the stock of Savings”

    What if the capital requirement is 0%?

    • Michael Sankowski says

      That’s possible, but not how most real world lending happens. Banks could lend against nothing, but they don’t, even if the capital requirements are zero.

      • Fed Up says

        What about “encouraging” banks to buy gov’t bonds?

    • Nick Edmonds says

      I was also not sure what was meant by this. I can think of various possible meanings, but I don’t know what was intended. I don’t think it has anything to do with capital requirements though.

  10. Fed Up says

    ““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).”

    For the private sector:

    S = I

    S = Y – C

    I = everything else

    everything else = Igoods plus financial assets plus MOA/MOE (also a financial asset)

    Y – C = Igoods plus financial assets plus MOA/MOE


    100 – 55 = 20 + 15 + 10

    Should private surplus equal Y – C – Igoods

    100 – 55 – 20 = 15 + 10?

  11. Ramanan says

    “a stock of saving called savings,”

    In national accounts language savingS is used as a plural of saving.

    In ordinary language savings refers to a stock.

    However the former is definitely the usage of practitioners, so it is better to not using savingS as a stock.

    What is InvestmentS?

    • Michael Sankowski says

      It was my intention to use savingS = investmentS as representative of the Stock relationship between these two variableS.

      Hard enough here to get it all straight, thought I would try to make it a bit more clear – which you are probably going to hate. 😉

    • Nick Edmonds says

      Do you see savings used as a plural? I think I would tend to talk about the combined saving of all sectors, rather than the combined savings. I don’t know. Anyway, if you can use the plural of saving, I guess you can use the plural of investment. Probably best avoided though, as it’s bound to cause confusion.

      • Ramanan says

        Yeah one talks of savings ratio (not saving ratio) or a saving rate and no savings rate – although they are equal. I think it is saving when one talks of disposable income less consumption but savings when it is the counterpart – the saving allocated into various assets even for a single sector or a unit.

        Yes savings is also used as combined saving of many sectors.

    • Tom Hickey says

      Good point. A lot of confusion seems to arise from ambiguity of terms.

      The flow of income less consumption is saving and the stock is called “wealth.” A portfolio is comprised of monetary, financial, and real assets. In ordinary language, monetary assets are called savings, and financial and real assets are called “investments.” Total assets minus total liabilities are net worth. Most people are going to understand the terms in portfolio terms, and it seems strange to them that they are used technically in a different sense in other contexts.

      How to overcome this ambiguity at this point, when the use of terms in context is well-embedded culturally and institutionally?

      • Ramanan says

        Talking of ambiguity, here is how physicists live with ambiguities without any problem. See footnote 12 here in this funny website page:

        on how they use the symbol “pi” in the same context to mean two different things!

  12. stone says

    We want nominal GDP to grow faster than real GDP because hoarding causes bad effects on our economy; but,

    I’m not convinced by this. I still think it would have more chance of working if an asset tax were used as the way to ensure that resources were put to productive use rather than being locked up due to hoarding.
    Expanding nominal GDP faster than real GDP still lets you keep ahead of inflation by speculating in secondary markets in an entirely unproductive way (that is hoarding too in its own way).

    If hoarding were discouraged by an asset tax, then real GDP expansion due to improving technology and organization, could continue apace with no increase in nominal GDP and instead falling prices as occur today for computers, DNA sequencing, solar power etc.

    • Michael Sankowski says

      Oh man this is such a hard topic.

      Great point on using an asset tax to spur people to use their assets. I think that is a very hard thing to do. What is the value of land in Nevada? Or west Texas?

      My experience with small business valuation is that it is hugely subjective. It’s very difficult to value a business with revenues less than $10m, because typically the owners human capital is such an integral part of the business taking that person out of the business would result in it failing in a matter of months. In this I agree with Ayn Rand very slightly. Ha!

      Yet, using inflation as a stealth asset tax only works on money, and causes other assets to react in not entirely predictable ways. It’s flawed, and doesn’t neatly address the problem of hoarding.

      “If hoarding were discouraged by an asset tax, then real GDP expansion due to improving technology and organization, could continue apace with no increase in nominal GDP and instead falling prices as occur today for computers, DNA sequencing, solar power etc.”

      • stone says

        I’m not convinced that it would matter if small businesses somewhat slipped through the taxation net. I think the sensible way to do it would be to tax on the basis of what any assest could be sold for. For a small business that had little value without the owner, the tax would be minimal.
        I’ve had a go at trying to thrash out what it might entail (including trying to address the issue you brought up with small businesses) in a post:

        • beowulf says

          Right, as I’ve mentioned before, Ronald McKinnon (the Stanford Econ professor who coined the term “financial repression”) wrote a WSJ piece last year, The Conservative Case for a Wealth Tax, where he called for a 3% annual tax on net assets with a $3 million exemption, presumably twice that for a couple. The revenue could be used to eliminate the estate tax and most of the income tax (at that point, might as well trade out remaining income and FICA taxes for a VAT).

          Net assets meaning, of course, assets minus liabilities. A gross asset tax would not be as equitable in that a person with a $10 million in assets free and clear is in a different financial position than someone who owns the same amount of assets but leveraged to the hilt.