Monetary Realism

Understanding The Modern Monetary System…

Paul Krugman Does S = I + (S-I)

Via JKH in the comments:

“Paul Krugman does:

S = I + (S – I)

The blue line = S

The red line = I

The gap between the blue line and the red line = (S – I)

Oh, yeah … and I’m pretty sure he knows what the definition of saving is.

Anybody ever see a neat graph like this in MMT land?

I.e. one that actually includes I?”

About

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • AK

    Whenever we try to reconcile “layman’s” definitions of the word savings with economic definitions, we inevitably run into issues. The layman tends to define “savings” as any instrument that carries subjectively-defined ‘low’ risk (and can therefore be regarded as a relatively certain guarantee of a claim over future resources); and the layman does not care whether that is a private sector low-risk instrument or a risk-free government instrument.

    So to answer your question; yes, it is perfectly possible to hold both beliefs simultaneously, depending on what you choose to define as a ‘reasonable measure of household savings’. If I choose to define only risk-free instruments as “savings” then only government liabilities (S-I) will count. If I choose to broaden the definition, then I can begin to count private-sector instruments too such that (S-I) + arbitrary_%*S is my definition of savings.

    So once again, MMR is back to arguing semantics and subjective definitions as a ‘point of difference’ between it and MMT. Clarification is all very well and good, but I do feel we will end up chasing our tails if we continue to argue about the best way to define a subjective word.

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

    “The equation S = I + (S – I) simply says that we can place our money in private sector investments, (carrying some level of risk), or “net savings” instruments (which are provided by government and carry no risk).”

    The household sector can have a positive “S-I” but it is allocated across a range of assets such as equities and cannot be said to be “risk-free”. Even government bonds have an interest rate risk attached to them.

  • AK

    No default risk, which is the where the hazy difference between “savings” and “investment” lies, in the layman’s sense.

    In any case, the point remains unchanged: government “savings” instruments simply broaden the risk spectrum available to savers.

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

    Point being households hold assets which are not just government bonds but other things such as corporate bonds, domestic equities as well – all directly and indirectly. These are not risk free.

  • phil

    I’m not sure why so much has been made out of that Kelton article and CP’s subsequent comments.

    Scott Fullwiler clarifies the points made by Kelton and answers CP’s criticisms. Here are some of Fullwiler’s comments:

    (their order has been rearranged for clarity)

    “The post is about a simple accounting identity that should be–but isn’t usually–standard or given in any discussion of government deficits. It is not about causation, and Stephanie didn’t suggest otherwise.”

    “This post is about changes to the financial position of the pvt sector, which would seem to obviously have positive/negative effects. You actually don’t dispute that point. You dispute what S is, but beyond that you appear to agree.”

    “S-I is the appropriate measure of the sector’s income relative to spending, or the change to its financial position. What it is is “net saving” for the sector.”

    “S-I is about the financial position, not the ability to produce real goods and services. Nobody ever said you should look at the sector balances alone, only to understand financial positions–and even then it’s not eveything.”

    “S includes investment spending. S-I doesn’t. If you want to call investment spending “saving,” then go ahead. As I said, Y-C-T (which = S) is only subtracting spending by households, not by businesses. So, while it is called “saving,” I don’t consider that a measure of “saving.”

    What WE (MMT’ers) are after is a measure of the change to the financial position of the private sector, spending relative to income. That is S-I, not S.”

    “S-I refers to total spending out of income for the sector as a whole… If S>I, then the sector’s income was greater than its spending. If S<I, then its income was less than its spending.
    If S-I S, that is not necessarily bad, or a “deterioration” as the author called it.”

    SF: “It means the private sector is spending more than it’s income.”

  • phil

    Sorry, for some reason the following paragraphs were not posted. Please ignore the mixed-up bit at the bottom of the above post. It should have continued as follows:

    “S-I refers to total spending out of income for the sector as a whole… If S>I, then the sector’s income was greater than its spending. If S<I, then its income was less than its spending.
    If S-I S, that is not necessarily bad, or a “deterioration” as the author called it.”

    SF: “It means the private sector is spending more than it’s income.”

  • phil

    Err, ok, the paragraphs failed to post again. Can someone delete the above two posts so I can comment again and get it right this time?

  • phil

    Last attempt.

    “S-I refers to total spending out of income for the sector as a whole… If S>I, then the sector’s income was greater than its spending. If S<I, then its income was less than its spending.

    If S-I S, that is not necessarily bad, or a “deterioration” as the author called it.”

    SF: “It means the private sector is spending more than it’s income.”

  • phil

    No, it didn’t work. Can whoever’s running the site today delete my last four comments please?

  • Cullen Roche

    The only reason it’s become a big deal is because the MMTers have gotten all defensive like they always do. If you all had understood our original point no one would even be making a big deal about this, but like always, you’ve gone and gotten all defensive because someone said your pet theory might not have been very clear on one point (which it wasn’t). Frankly, I have no idea why anyone would bother arguing with you all. We might as well go challenge an Austrian to a debate over the merits of the gold standard….

  • Cullen Roche

    It was a simple clarification on a point MMT doesn’t clarify. The only reason this became a big deal was because MMTers got all defensive like they always do. Then it spirals out of control with Neil Wilson calling us supply siders (which is BEYOND ridiculous) and the conversation devolves into MMTers convincing themselves that they’ve never done anything wrong or explained anything incompletely. MMT has turned into a big group think project with zero objective or independent thinking….We try to inject some in there and it gets turned into a big pissing match….

    Personally, I have no idea why anyone would bother arguing with you all. You make a mountain of a mole hill with just about everything and end up personally insulting everyone in your path. And when anyone defends themselves to this MMT response you accuse them of being mean and evil or something like that. It ends up with guys like Mark Thoma (who should be your biggest ally) just banning MMT from his comments….MMTers have turned their biggest allies into enemies. It’s a real shame that you all approach critiques and simple clarifications in this manner….

  • AK

    Of course they do, I said precisely that in all of my posts.

    Still failing to see what the revelation is. If MMR simply wants to say that S = I + (S-I) adds “clarity” to the concept private sector savings, then that’s fine; however MMR may want to recognise that this point has already been made in MMT literature many times over.

    More importantly – MMT recognises the outright importance of investment (I) as opposed to corporate welfare (long term government debt), and hence is precisely one of the reasons why MMTers argue that government debt should be restricted to the short term.

  • Cullen Roche

    I am sure it’s been made in MMT literature. In fact, Warren writes about investment in some detail in 7DIF. But there were questions over several articles and uses of the SBE. So we added some clarification. I have no idea why MMTers have made this into such a big deal. I now see Scott Fullwiler over on other sites accusing me of being “sloppy” in other arguments, Neil Wilson accusing us of being “supply siders” and 100’s of other MMTers getting angry over this discussion. I have no idea what you all are so upset about. You guys really need to learn how to take some criticism and use it to bolster your own positions. Like, “yes, we have not always been clear with our terminology, but here’s a clarification and we hope that helps readers better understand our position”. Instead, MMTers flock to other websites and attack the “critic” like they’re some evil doer. And in doing so, they make enemies of people who should be allies….I mean, MMT’s reputation around websites is absurd because you guys respond in the same way to everything. Your comments on other sites are strewn with people who should be on MMT’s side who absolutely abhor it because of this sort of vitriolic response…..Just some friendly constructive criticism.

  • Cullen Roche

    And Randy’s latest is filled with absurd mischaracterizations:

    Here is what the MMR folks claim about it:
    “Hence, our focus on S=I+(S-I) with the emphasis on the idea that “the backbone of private sector equity is I, not Net Financial Assets.” The idea is not novel, but simply clarifies the understanding of the private sector component.”

    The equation is attributed to the “brilliant” analysis of some JKH—who is roundly praised by all those at MMR for coming up with the smoking gun against MMT and Godley’s sectoral balance approach.

    This is the fundamental MMR equation that proves MMT wrong? The thing in parenthesis is excess or “net” saving. It is supposed to be eye-popping and revelatory, indeed, revolutionary in the deep meaning it exposes. It says that household saving is equal to investment plus the excess of saving over investment!

    I mean, the quoted sentence says it’s “not novel” and a “clarification”, but he then goes on to use that quote to claim that we think it “proves MMT wrong”. I have no idea what is going through his head as he writes that. It’s like he forgot what he read 10 seconds after reading it….But more likely, he was so intent to disparage any minor criticism that he didn’t exactly write a very cogent statement….

  • Cullen Roche

    And then this gem:

    “Ok fine. But note that if the household sector continually ran deficits against the business sector (even with the private sector in balance) we could still get into trouble—and get a Minsky-type debt deflation simply because households cannot service their debts to firms. And also note it does no good to go the other way: what if firms went increasingly into debt against the household sector? Yes, they could get into trouble if gross income flows were not enough to service debts.

    But MMRers ignore that as they jump to the conclusion that it is perfectly fine if the business sector’s deficit exceeds the household sector’s surplus—so the private sector taken as a whole is running a deficit.”

    Yes, they hijacked the balance sheet recession from me and started using it in their work….and the BSR is ENTIRELY about pvt debt levels. This has been the core of my work over the last 5 years. And now I suddenly “ignore” that? Is this guy even the least bit familiar with what he’s criticizing????

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

    AK,

    “Still failing to see what the revelation is.”

    An entirely different matter altogether.

    You said:

    “The equation S = I + (S – I) simply says that we can place our money in private sector investments, (carrying some level of risk), or “net savings” instruments (which are provided by government and carry no risk).

    Risky private investments (I) usually drive innovation and increased standards of living.
    Risk-free “net savings” (S-I) provide risk-free certainty of future claims on resources.”

    which of course is what I took issue with.

  • phil

    The rest of my post was SUPPOSED to read as follows (for some reason bits kept getting chopped out when I tried posting yesterday):

    Scott Fullwiler:

    “S-I refers to total spending out of income for the sector as a whole… If S>I, then the sector’s income was greater than its spending. If S<I, then its income was less than its spending."

    "If S-IS, that is not necessarily bad, or a “deterioration”, as the author called it.”
    SF: “It means the private sector is spending more than its income.”

  • phil

    OK, forget it, for some reason it doesn’t post properly. Ignore my above posts, the text has been garbled by the computer.

  • AK

    You seem to be particularly upset about some online bloggers displaying a lack of manners and respect. Certainly a valid reason to be upset. But not a valid reason to imply (as you clearly have in your above series of points) that all/most MMTers are not open to critical debate.

    MMR is a criticism of some parts of MMT. It says so on pragcap. And that is absolutely fine – everyone is entitled to criticise. But MMTers are also entitled to respond. In responding I have simply pointed out, as respectfully as possible, that I don’t feel MMR has provided anything new via its “points of difference” between it and MMT. MMR may feel that MMT could use words in a different, better way. But the umbrella terms used in ANY theory, MMT included, are unavoidably going to be subjective and open to misinterpretation. The best way to understand the objective meaning behind MMT’s subjective words is to read the MMT literature to put it in context. I feel that is a more successful way of being accurate, rather than defining and redefining vague words such as “monopoly” and “savings”.

    That is ultimately the same reason why I consider S=I+(S-I) as being rather un-illuminating. I have considered, responded, debated and ultimately rejected, as have many other MMTers. Some have rejected respectfully. Some have not. But rejection per se does not equal disrespect.

  • Cullen Roche

    AK, you’ve been very respectful here and I appreciate that. I have no problem with criticism. Debate is healthy. But most MMTers don’t debate. They attack viciously and in a very crude way. They misrepresent, throw ad hominems where unnecessary and take every criticism as some personal attack. They haven’t acquired this reputation recently. It’s broadly acknowledged all over econ circles and they’ve burned so many bridges that they’re basically sitting alone on their own island now with no place to go. Their attack dog approach is both unhealthy and self defeating. But I do appreciate the fact that you and some others have been thoughtful respectful. So thanks.

  • AK

    Ok, so I think your issue is with simply with my use of the word “risk-free”.

    I realise that “risk-free” is not an ideal term to describe anything, since even government bonds have interest rate risk attached. But the term “risk free rate” is pretty entrenched in finance language and most people get what it means when used in that context.

  • AK

    I sympathise. But rudeness is a condition of all anonymous internet debate, unfortunately, rather than MMT specifically. I’d say MMT and all related debates are pretty good overall (by internet standards, that is!).

    In any case – I look forward to the interesting debates!

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

    Ok but “S-I” doesn’t map to risk-free in any sense.