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?”


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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223 Responses

  1. phil says

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

  2. phil says

    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.”

  3. phil says

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

    • Cullen Roche says

      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….

  4. phil says

    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.”

  5. phil says

    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?

  6. phil says

    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.”

  7. phil says

    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.”

  8. Steve Roth says

    Very good point re: real (nonfinancial) vs real (inflation adjusted).

    How about “fixed assets”? Yeah, software is hardly “fixed,” but that’s how Structures, Equipment (Hardware), and Software are generally referred to in aggregate.

    Another reason not to use “real” when referring to assets in the national accounts: there are *lots* of real assets that aren’t fixed assets, and aren’t accounted for in the national accounts. Ideas. Organizational systems (arguably the bulk of most corporations’ value — what makes them “going concerns”). Knowledge. Hell, the population’s ability to work is a real asset.

  9. vimothy says

    While we’re talking about source of confusion, I’d like to nominate the following:

    Real vs. nominal, and,
    Real vs. financial

    Those two dichotomies are not equivalent!

    It’s understandable that people use “real” when they refer assets, and it’s intuitively obvious what it means.

    However, many commenters then make the link that “real” in both senses is the same word, so it must be the same thing, which therefore means that nominal and financial mean the same thing.

    This is not correct. I’ve noticed MMT bloggers getting the two confused recently, and I believe that there is an NEP MMT primer that also makes this mistake.

    • Ramanan says

      Agree Vimothy. I too wanted to point this out at some point.

      • vimothy says

        Confusing “non-govt sector” with “private sector” has to rank as well.

        • Ramanan says

          The source of that confusion is the phrase “domestic private sector” which can make one believe that the private sector is composed of domestic private sector and a foreign sector!

          The phrase domestic private sector is used because the private sector is owned by national ones as well as by foreign controlled corporations.

          Private sector should never be used to include the rest of the world sector because the latter includes foreign governments – and hence hardly the right terminology!

        • vimothy says

          It looks like it’s turtles all the way down…

        • Ramanan says

          Another turtle: There is a tendency to think – and I have seen this in an MMP tutorial that there are sectoral balances for each currency. That’s incorrect. There’s just one sectoral balance equation for one national boundary. For example the US private sector transacts in all currencies with foreigners (and also residents in the financial markets) – that doesn’t mean there are some 200 *different* sectoral balances equation for the US. There’s just one.

        • Joseph Laliberté says

          Could not reply to your last reply at 3:23 PM, so
          I reply here. If your impression is that what I learned from JKH is that mark-to-market could lead to an increase in NFA even if the private sector is in deficit, then you are wrong. And if you think that MMTers are not aware of this possibility, again your are wrong. This clearly leads me to wonder whether you understand at all what JKH has been saying regarding corporate S leading to an increase in book value of the corporate sector and being -potentially- translated into the market value of the stock holding of the household sector.

          What I learned from JKH is that the true measure of savings is… savings! Not “net savings”. And negative net savings can not be possibly assimilated to “net losses” for the private sector. Clearly my interpretation of “savings” has changed thanks to JKH.

          Now, with your clarification, it is clear that you used the expression “overall debt level” referring to some kind of ratio between assets and liabilities, this is just a wrong terminology as “overall debt level” speaks to the level of debt only. I am not the biggest fan of Bill Mitchell, but while criticising Bill Mitchell for its choice of words, you managed to misquote him and to use a wrong terminology to describe NFA.

        • Ramanan says

          Not sure where you are heading.

          Take a closed economy. Let’s say that the government has a surplus.

          Is it possible for the private sector to have seen an increase in it’s financial assets?



          The central bank reduces short term interest rates and signals an easing cycle causing the whole yield curve to go down. This causes a huge revaluation gain for the private sector because of increase in the price of government debt.

          “I am not the biggest fan of Bill Mitchell, but while criticising Bill Mitchell for its choice of words, you managed to misquote him and to use a wrong terminology to describe NFA.”

          No I haven’t. He says the private sector cannot reduce its indebtedness in some scenarios which is not true as I have shown.

          Take a simple example. You are indebted to the bank and in one year run a deficit. Which means your expenditure is higher than your income. However, you make huge capital gains in the stock markets and prepay your loan. Clearly you have reduced your indebtedness.

          “and liabilities, this is just a wrong terminology as “overall debt level” speaks to the level of debt only”

          What I wanted to say in any one definition or another – choose it, I will give a scenario where my overall debt level can come down – which is what I did at 3:23.

        • Ramanan says

          i.e., the intuition gained out of the “simple example” can be applied for the case of an open economy for the private sector as a whole and where revaluation gains are in markets abroad.

        • Ramanan says
        • Ramanan says

          Joseph @March 2, 2012 at 7:52 pm,

          I have no disagreement with JKH and was exchanging some notes. It was not related to your discussions with JKH directly.

          Having said that, I did indeed prove to you that overall debt level can indeed be reduced under specific circumstances.

          You may think that the MMTers are aware of this possibility but it does not come out. I can quote many specific examples where they say that the only way the NFA can increase is by deficit spending when they start describing “horizontal” and “vertical”. However, I am not going to find that out for you. If you want, you can try the comment thread with 900+ comments. (More on Saving and Investment)

        • Joseph Laliberté says

          We are just arguing past each others. If you think that your insights is that asset re-evaluation through mark-to-market could lead to an increase in NFA of the private sector even when the private sector is running a deficit, I am sorry to disapoint you, but every MMTers under the sun is aware of this possibility.

          The real insights come from JKH essay published on CNBC, and it has nothing to do with a simple observation regarding asset re-evaluation leading to an increase in private sector’s NFA when (S-I) is negative.

    • vimothy says

      I think that “non-financial assets” may be more appropriate / cause less confusion that “real assets”–or perhaps someone else has a suggestion…

  10. vimothy says

    I’m glad someone posted a link to that Prag Cap thread–Kelton’s OP had been bothering me since someone linked to it in the S-I thread.

    • vimothy says

      FWIW, I think pieces like that combine MMT at its best with MMT at its worst.

      • Dan M. says

        Agreed. Great description of sectoral financial balance sheets, acknowledgement of not discussing gov’t waste and corruption, and completely ignoring the meat of the private sector.

  11. JKH says


    “Whenever the government’s deficit is too small to offset a deficit in the current account, the private sector will experience a net loss. The result my ruffle your feathers, but it is an unimpeachable fact.”

    Not to beat a dead horse, but my two cents:

    The private sector experiences a loss only if the definition of the word loss as used is precisely restricted and isolated to the case of an absolute or comparative decline in NFA. This is a decline in just one component of saving. It is obviously almost certainly not a loss in the more general sense of the private sector’s change in net worth or equity. Very importantly here, SFB nets equity claims to zero; it does not net equity to zero. There is a difference.

    Additionally, the statement has potential ambiguity as to whether it could refer to an absolute loss or a comparative loss.

    For example, the following qualified statement regarding comparisons rather than absolutes might be less ambiguous, although quite tortured:

    “Whenever the government’s deficit is too small to offset a deficit in the current account, the private sector will experience a net loss – where such loss is defined specifically to mean the differential shortfall in private sector NFA between the actual outcome and a counterfactual outcome, and where in the latter case the government’s deficit DOES offset a deficit in the current account, while all other things are held equal (include the rest of saving).

    Note that this last interpretation is that of a loss meaning a negative difference between two outcomes – not an absolute loss for any one outcome per se.

    So it has to be highly qualified to be true. And the qualification has to be so precise that you may as well say that for any given level of current account, a government deficit will result in a private sector “loss” as a differential negative outcome when compared to the case of a higher government deficit, all other things equal. It becomes a bit stretched and potentially misleading to use the word “loss” in making such a simple comparative point. Rather than ruffle feathers, it tends to be dismissed as a result.

    • geerussell says

      In the interest of having a shared vocabulary,

      (G-T) + (X-M) = something

      What’s the universally understood short label for that thing? Also that thing with a minus sign or plus sign in front of it?

    • Ramanan says

      I love these statements made by MMTers which have the word “impossible” :-)

      For example with no reply.

      It can happen that the private sector can be in deficit and yet see its NFA increase because of revaluations such as revaluations of assets held abroad such as happened in 1999 when the government budget was in surplus and the external sector in deficit.

      • JKH says

        Yes, Ramanan

        The claim of impossibility typically requires strict qualification with an “other things equal” requirement, which itself is highly improbable. The gross and net result of such a claim is unambiguously conflicting.


        • JKH says

          jumped the gun there without seeing the specific linking statement, but I have seen a number of cases of the general point you’re making

        • Ramanan says

          Yeah that’s why I love these statements with “impossible” – super strict qualifications are needed and if one is able to show even one case where it does not hold, then the person making the statement needs to modify.

      • Joseph Laliberté says

        Here’s Bill Mitchell complete sentence:
        “Refreshing the balances (again) – we know that from an accounting sense, if the external sector overall is in deficit, then it is impossible for both the private domestic sector and government sector to run surpluses.”

        What is the issue here ? He does not talk about profit or “net loss”, he just uses the word “surplus”. Would you want him to specify that a surplus could nevertheless occurs through “mark-to-market”? The accounting identity is not about mark-to-market at all.

        • Ramanan says


          Q: “For the US private sector to reduce its overall overall debt levels, the government must run a deficit.”

          Bill’s A: True

          (Bill is obviously assuming the empirical fact that the US has a CAD and let’s assume that.)

          “What is the issue here ? He does not talk about profit or “net loss”, he just uses the word “surplus”.”

          While it is true that if the government is in surplus, the private sector is in deficit (assuming the current account deficit), the private sector’s NFA will decrease. The private sector could be making a huge killing in its holding of assets abroad via holding gains which are not calculated in flows. So the private sector’s “overall debt levels” could actually decrease.

          Bill also uses many permutations and combinations to ask the same thing.

        • Ramanan says

          “While it is true that if the government is in surplus, the private sector is in deficit (assuming the current account deficit), the private sector’s NFA will decrease. ”

          should be …

          While it is true that if the government is in surplus, the private sector is in deficit (assuming the current account deficit), it’s not true the private sector’s NFA will necessarily decrease.

        • Joseph Laliberté says

          Of course NFA could increase through “mark-to-market”, no MMTers would dispute this. Just get irrational exhuberance going, and you will get an increase in NFA. If you think that JKH is referring to this kind of mark-to-market, you are wrong. JKH is specifically referring to mark-to-market that would reflect fundamental value (i.e. increase in book value).

          The sad thing in all of this (I am not talking about you in particular, as I sense you get what I just said), is that most MMR guys has not clue of what JKH is referring to when in talks about the fact that “stock market “projects” that value from the firm to the household, according to how it translates a book value change to a market value change.”

          These same MMR guys then go on to say that MMT does not understand that net physical assets could result from horizontal activity, on top of saying that MMTers does not understand that NFA could increase through mark–to-market.

          Any wonder why no MMT heavyweights has engaged into this debate with you guys? This is getting highly frustrating for people like me that would like to see a fruitfull academic on these issues to take place. Perhaps, I should just retire from this thread and go split some wood.

          BTW- thanks a lot to JKH for your take on savings, this has definitely change my perspective on the whole “savings” thing.

        • Ramanan says


          JKH was talking with a lens on a closed economy. I gave an example on an open economy so our points were not related except for saying one needs a lot of qualifiers in saying these things.

          “Any wonder why no MMT heavyweights has engaged into this debate with you guys? ”

          They won’t! All this has a history and has never been addressed. Someone asked Bill on his blog about the statements being made on mixing saving and net saving but he took the position that he is right – which of course he isn’t.

        • Joseph Laliberté says

          Just need a small clarification from you, you said:
          “The private sector could be making a huge killing in its holding of assets abroad via holding gains which are not calculated in flows. So the private sector’s “overall debt levels” could actually decrease.”

          What do you mean by that? Are you suggesting that if the private sector is in deficit, meaning (S-I) negative, and the market value of its assets does not change between the beginning and end of the accounting period, then it can not decrease its “overall debt levels”?

        • Ramanan says


          “What do you mean by that? Are you suggesting that if the private sector is in deficit, meaning (S-I) negative, and the market value of its assets does not change between the beginning and end of the accounting period, then it can not decrease its “overall debt levels”?”

          What I meant was that one would normally think that by running a deficit, the private sector’s net financial assets reduces. However, that is not true because the connection between stocks and flows is via

          Stocks (end of period) = Stocks (beginning of period) + Flows + Revaluations

          Hence even when running a deficit, the private sector’s NFA can increase – for example when the private sector’s holding of equities abroad increases in value or due to depreciation of the domestic currency or both.

          Overall debt levels precisely because since NFA has increased, as opposed to decreased (in the scenario I presented), the private sector is becoming less indebted. For example Financial Assets/Liabilities would have reduced. Etc.

        • Ramanan says

          “You might want to say that NFA has increased through re-evaluation of assets, or that net debt level has decreased when taking into account re-evaluations, but not that “overall debt level” has decreased.”

          Careful. I guess you agree with NFA having increased.

          A negative financial balance is equivalent of net borrowing. But the net borrowing can be financed by sale of assets than by incurring liabilities (which its possible can be negative). Hence there exists situations in which the overall debt level has reduced (because of revaluations).

        • Joseph Laliberté says

          Ramanan, you said:
          “Overall debt levels precisely because since NFA has increased, as opposed to decreased (in the scenario I presented), the private sector is becoming less indebted.”

          You can not say that “overall debt level” has decreased at all in such case. You might want to say that NFA has increased through re-evaluation of assets, or that net debt level has decreased when taking into account re-evaluations, but not that “overall debt level” has decreased.

          You may feel that I am playing on semantic to call you wrong here, but sure enough, a lot of MMTers would feel reading MMR blog threads that that they are being called wrong on a semantic lelvel as well.

        • Dan M. says


          Could you link to that exchange?

        • Ramanan says

          In Saturday quizzes mostly I tried to find myself but coulnd’t.

  12. phil says

    That was in reply to Dan M, btw.

  13. phil says

    It is always made clear by MMTers that government deficit spending can help to generate growth (at full capacity with low inflation) and full employment when total private sector spending isn’t enough to achieve this on its own. That’s a crucial distinction. If total private sector spending is inadequate then this indicates a private sector desire to ‘net save’ and the government should fill the gap, by deficit spending more/ taxing less (providing NFAs up to the level of full employment/ full capacity utilisation – without high inflation). The spending also serves to reduce overall indebtedness and leverage.

    This is my understanding, but it would be better to clarify this with more authoritative sources.

    • Cullen Roche says

      No, it’s not always made clear. Read statements like “net loss” in describing the SBE and tell me that it’s “made clear”. It’s obviously not. There is no “net loss” there, but MMT often implies that the pvt sector is automatically worse off if there is no deficit spending.

      • phil says

        You’re going to have to ask Kelton to clarify that one. I don’t want to screw it up. I’m going to refrain from trying to explain my understanding of the MMT position from now on as I seem to be doing more harm than good.

        • Cullen Roche says

          Well, the comments are pretty clear. I don’t mean to be really picky, but had she said “loss in net financial assets” then it would have been clearer. But that’s not the terminology. I don’t think this is done intentionally. I think MMT economists clearly understand this so maybe it’s just a harmless case of forgetting that you’re often talking to amateurs on all of this, but it is perceived as meaning that the pvt financial position is indeed worse off because the govt didn’t spend. And that’s just not true.

          I don’t mean to make a big deal out of this (and I don’t think it’s a big deal), but it’s important to be very clear. I have probably been guilty of not explaining the SBE outside of a balance sheer recession so that’s my fault as well. Just trying to be very clear about all of this because the details matter.

        • phil says

          Ok, but I think she may have been referring to net loss of things other than NFA, but ask her. Best to get a clarification. If you’re right then at least it’ll be clear for everyone.

        • Cullen Roche says

          Hmmm, well, if she was referring to a loss in real wealth then that’s clearly an inaccurate position as the example FDO cited shows. Whatever, it’s not a semantic point, but I am tired of arguing with you guys. I think we agree on our conclusions no matter what so there’s no point getting hung up on this stuff. I am just trying to be clearer. Sorry if it comes off as obnoxious or anal.

        • phil says

          As I said it’s probably best to get a clarification or response from the author (or one of her colleagues) rather than from someoneone else.

        • Dan M. says

          Ok so I read it. Here’s what I noticed:

          Pretty much the whole time she spoke in terms of sectoral balances, referring to financial balance sheets. This is fine, as most of what she was illustrating is something that should be understood IN THE CONTEXT of sectoral FINANCIAL balance sheets.

          She used the term “net loss” without much detail, but I’ll give her the benefit of the doubt and assume she’s STILL simply trying to concentrate of financial balance sheets, and temporarily ignoring REAL assets… BUT…

          then she says this at the very end:

          “An aside: I am aware that I have said nothing about the usefulness of the spending projects, the waste and inefficiency that exists with many government programs, cronyism, inequality, etc., etc. These are legitimate and important questions, but they are not the focus of this analysis. I wrote this series of blogs to try to get people to understand the interplay between the private, public and foreign sectors’ balance sheets. Criticizing me for not addressing a myriad of other issues is like reading Old Yeller and complaining, “What about the cat? You’ve completely ignored the genus Felis!”

          Here’s where I felt she displayed complete lack of acknowledgement of the driving factor of our economy… REAL wealth. She took an opportunity to point out “Hey, I know there’s more to talk about here,” but what does she mention?
          Waste & inefficiency in gov’t programs, cronyism and inequality. So given the chance to put her entire post on sectoral FINANCIAL balance sheets in context of some broader considerations, she basically goes right to government programs.

          That, to me, says it all. I’m really not the type to try to get into “Gotcha” moments with people, but it really seems like she is totally missing the boat.

        • geerussell says

          That concern would prompt me to then ask what does MMT have to say about real resources? In answer to it, I would go beyond the scope of that blog post.

        • Cullen Roche says

          I am NOT saying the article was intentionally misleading. I am simply pointing out that many people seem confused by this subject and the way it has been communicated. MMT and MMR agree on the conclusions. No one is saying MMT has this wrong, just that it hasn’t been communicated all that thoroughly. That’s my take. Maybe I an being overly critical in which case I apologize to Prof Kelton, whose work I have a great deal of respect for….

        • Dan M. says

          As someone who used to think Cullen’s points against MMT were “semantics,” I have to weight in here.

          If she really meant a REAL loss (even if she didn’t, to use that term is asinine), then this is truly fundamentally misunderstanding how money fits into a real economy.

          The only reason we need mediums of exchange is because we have lots of REAL value to bring to market and want to use that to buy/sell consumer goods and beyond…. long-lived assets require slightly more complex monetary instruments to “facilitate the creation of” because the nature of long-term value implies a certain amount of leveraged horizontal activity to bring to fruition.

          To IGNORE the real assets that drive our economy is ridiculous, and if she really meant “loss” in terms of loss of real wealth, then I’m absolutely floored.

        • geerussell says

          I think it’s important to maintain context in evaluating what “net loss” meant. The phrasing was preceded by a discussion of “financial flows” “financial resources” “monetary transactions” and “net accumulating financial claims” between govt, domestic private and foreign sectors. It was then footnoted for emphasis that the focus of the analysis in the piece was interplay between balance sheets.

          Only if all the surrounding material is disregarded and then the nowhere-mentioned “real resources” introduced can it be read as a net loss of real resources.

        • Dan M. says


          Maybe I’m misunderstanding you, but real resources are part of our balance sheets. Claims on corporate assets may net to zero, but in the end there is a factory there that can make widgets.

          I haven’t read her piece though… I’d imagine you’re probably right…

          But even so, what was she trying to say about the broader effect of the situation? Maybe us crying foul about the term “net loss” is taking it out of context, but of course if you combine a surplus with a trade deficit, you’re going to have “a loss” on your sectoral FINANCIAL balance sheet. What was her broader point?

          If we don’t bring real wealth into the picture at some point, what the hell are we even talking about here?

        • geerussell says

          That’s the piece in question. I encourage you to read it and form your own opinion. Could be that I’m reading it wrong.

          My reading of it was that the intent was to frame a discussion of financial flows in order to make a broad point about the impact of government budgets/surpluses.

  14. JKH says


    Cullen, John Carney’s post last evening, “Accounting Identity Errors and MMT”, motivated my putting together the following:



    The correct economic definition of saving is disposable income not spent on consumer goods.

    Individuals often save and deploy their saved income into financial assets such as stocks, bonds, and pension funds. (They may also invest saving in newly constructed residential real estate, which is separate from financial asset acquisition, of course).

    Such financial assets represent direct and indirect claims on corporations and governments.

    The recent blogosphere kerfuffle about saving arose in part because MMT embraces the sector financial balances model (SFB), which features the consolidation of household and corporate sectors as a unified private sector. The model treats financial claims on corporations as negative financial assets for corporations, so the consolidated result is that household saving deployed in such financial assets makes a zero net contribution to private sector saving after counterparty corporate netting. At the margin, such deployment of funds becomes a net financial asset for the household, a net financial liability for the corporation, and a net financial asset wash for the private sector as a whole.

    The private sector as a whole adds net financial assets when either the household or corporate sub-sectors deploy funds from saving into the acquisition of financial claims on either the government or foreign sectors. This can occur for example with the purchase of government bonds or foreign financial assets. Saving thus used can be identified as a particular subset of saving, but by no means does it account for saving per se.

    Private sector consolidation within SFB is not an indicator of saving per se. Consolidation obscures the core underlying saving dynamic of the private sector.

    All private sector saving can be condensed, in effect, to a measure of household saving alone – by projecting the cumulative value of corporate saving onto the household balance sheet. This occurs when household financial claims on the corporate sector are valued by the marketplace to reflect those underlying corporate saving changes. E.g. the value of stocks tends to increase when corporations save and invest in real assets. The issue there is one of valuation translation, rather than the conceptual correctness of corporate saving being reflected at the separate level of household balance sheets as well.

    MMT alludes on occasion to a definitional change for saving that it deems desirable for purposes of delineating saving as portrayed in the sector financial balances model. It sometimes describes the act of deploying the proceeds of normally defined saving into physical asset investment as spending, without associated saving. This revised interpretation of saving treats spending on consumer and investment goods similarly, with zero associated saving under such a revised definition.

    But on that basis, it would only be consistent to extend the implied revised definition of “non-saving” to include the use of normally defined saving proceeds to acquire financial assets. In either case, funds that have been saved according to the normal definition of saving have been “spent”, which would allow for consistent abandonment of the idea that saving has been the source of such spending. (Indeed, MMT has occasionally referred to central bank acquisition of financial assets and associated creation of reserves as “spending”.)

    The problem here is that the correct definition of saving precisely specifies the passive act of not spending on consumer goods. It does not specify how the proceeds of such saving should be used, whether to acquire real or financial assets. Saving is described in proper accounting terms as funds sourced from income by virtue of being saved from income. The eventual deployment of that source of funds is described properly as a use of funds – whether such deployment and use occurs in the form of a bank deposit, a bond, a stock, newly produced residential real estate, or newly produced plant and equipment. The deployment or use of funds is separate from the act of saving itself.

    In summary, the consolidated private sector account obscures, not only the view of saving as it materializes within a given accounting period in bifurcated fashion across household and corporate sectors separately, but also the view of total private sector saving as it is projected fully into the household balance sheet, when captured as a cumulative measure over a sequence of such accounting periods. As a result, the consolidated private sector presentation within the sector financial balances model obscures the measurement of the core component of saving.


    Carney’s post:


    • Joseph Laliberté says

      For those interested, below is my accounting demonstration of what JKH means with the following sentence (I was myself confused when I first read it):
      “All private sector saving can be condensed, in effect, to a measure of household saving alone – by projecting the cumulative value of corporate saving onto the household balance sheet.”
      (again, sorry in advance if I misinterpret what he says through this accounting demonstration)
      Assume no new liabilities (private or government) are created in the accounting period. The corporate sector produces widget in the accounting period using household sector labour, and sells it to the household sector.
      Household sector receives wage of $10 during the production process of widget, the impact on the household sector balance sheet of this wage is:
      Since the corporate sector pays wage of $10 to labour, the impact on the corporate sector balance sheet is:
      Then, corporate sector sells all its production of widget for $12 to the household sector, the impact on the household sector balance sheet becomes:
      And the impact on the corporate sector balance becomes:
      The corporate sector then use its 2$ in additional retained earnings and invest in machinery, which -let’s assume- creates an additional earnings within the corporate sector of 1$ (assume for simplification purpose that this machinery was made using unpaid overtime labour and existing input inventories in the corporate sector, note: depleting inventory reduces investment, in this case inventory depletes by $1, so residual impact on investment is 1$). Then the impact on the corporate sector consolidated balance sheet is:
      -$2 (cash)
      +2$ (machinery)
      +1$ (cash)
      +1$ (retained earnings)
      So at the end of the accounting period, we have:
      Total saving of the private sector (S) = $1, and the breakdown of savings in the private sector is:
      Household savings= -2
      Corporate savings= +3
      There is no change in net financial assets of the private sector as a whole denoted by (S-I). This being said, the book value of the corporate sector goes up by 3$ through the retained earnings effect. Through its ownership of the stock of the corporate sector, household net worth could be said to go up by $1 in net (which corresponds to the penny to the total savings of the private sector).

      • JKH says


        Full blown examples can get pretty complicated in the flow of funds.

        Corporate saving is represented in after-tax earnings, assuming no payment of dividends. That saving increases the book value of equity on the corporate balance sheet. And that book value increase is “projected” in some fashion to the value of the common stock claim held by households in this example.

        Due to the inherent complexity of stock market valuation, changes in book value won’t always be transmitted to exactly the same changes in value of the corresponding stock. If they were, stocks would always trade at book value, which is not the case. Nevertheless, the market will determine a value to put on increases in book value as a result of corporate saving. And that becomes part of the total value to which households have as a financial claim. So the stock market “projects” that value from the firm to the household, according to how it translates a book value change to a market value change.

        With such a translation of value, household sector assets incorporate all corporate sector value via financial markets, including the value of corporate saving.

        • Joseph Laliberté says

          Thanks for the reply. I am more at ease with corporate balance sheet than macroeconomic modelling, so I always have to bring macroeconomic statements into a balance sheet form.

          I learn most of my macro reading MMT. Let me say that you bring an interesting perspective (or new interpretation) to macro-economic identities. I fully concurr with you on this -great way to put it by the way:
          “Saving thus used can be identified as a particular subset of saving, but by no means does it account for saving per se. Private sector consolidation within SFB is not an indicator of saving per se. Consolidation obscures the core underlying saving dynamic of the private sector.”

          For the first time since reading MMR related material, I think it would be great for MMT heavyweights to engage with you on this (there is a lot of strawman stuff unfortunately in MMR treads -not from you- and this is generally a total turn down for a guy like Fullwiler that could otherwise engage).

          Personnaly, I am not debating with you your take on saving, as I said, I concur. Where it is getting a bit more touchy is when you say:
          “With such a translation of value, household sector assets incorporate all corporate sector value via financial markets, including the value of corporate saving.”

          This is factualy true as my example has shown (and it would be wrong to claim that all MMTers are unaware of this). This being said, I would say that this would sound a lot like trickle down economic to MMT ears. MMTers could interpret this as you saying that the household sector is ultimately -for a lack of a better word- the owner of the means of production. Therefore, any increase in retained earnings (corporate S) is ultimately a wash for the household sector even it means for them a negative households S.

          I think this kind of intepretaton could lead to all kind of wrong-headed policy implications. I am from Canada, and there was a big debate in Canada about corporate tax cut. This intrepretation could lead one to say that corporate tax cuts are great for households in any case, because even assuming that everything else remains the same, corporate tax cut will lead to an increase in corporate S, and thefore will be “projected” in some fashion to the value of the common stock claim held by households in any case.

          Again, what you are saying is factually correct, and MMTers (at least some) are surely aware of this. I am just not sure what this interpretation brings in term of policy implications that could lead MMTers to say: “gosh, we were wrong on this one.”

        • JKH says


          In my view, at least regarding my own contribution, a good deal of this has to do with presentation, rather than being right or wrong. It is more a question of one’s opinion on how best to think about things, rather than one being wrong and the other being right. There are pinpointed exceptions to that of course, but that’s my general take. And it’s just a matter of opinion regarding the better or best way to look at things.

          In other words, a good deal of it is about the nature of positive analysis rather than normative right and wrong. For example, I see it that way with the way in which the SFB model is positioned within the MMT framework. Nobody thinks, or at least I don’t think, that MMTers haven’t considered issues of horizontal analysis. However, it is clear that their usual presentation favors SFB in the chosen mode of private sector consolidation. They have made presentations at times that include private sector deconsolidation, but this is not their preferred mode. And because it’s not their preferred mode, certain analytical perceptions and ways of thinking and language around that thinking become generally accepted. Debates about positive/normative orientation may flow from that, but they are secondary to the actual analysis. Regarding your suggestion that there is an ideological inference depending on how one captures that idea of “projection” of corporate worth to household worth, I’m not sure. Perhaps you’re right, but that wasn’t on my mind, to be honest.

        • Joseph Laliberté says

          Thanks again JKH,
          your take on savings has definitely changed my perspective on the whole “savings” thing. (please see my response to Ramanan @11:11 am)

    • John Carney says

      This is really excellent. I have a couple of thoughts to add.

      If saving does not include households purchasing financial assets of the corporate sector, why should purchasing financial assets of the public sector count as saving? The attempt to exclude “investment” from saving just makes saving vanish altogether if taken to its logical conclusion. If all you mean by “saving” is one sector accumulating claims on a different sector, then you aren’t talking in ordinary language any more. You are probably confusing most of your listeners or readers and if you do this over and over again it’s fair to wonder if you are intentionally befuddling people.

      The problem with constantly thinking in terms of a consolidated “private sector” is that it encourages you to skip over the most important economic dynamics, most of which take place within the private sector. Businesses get started, venture capitalists commit funds, people take out loans, and customers buy stuff with cash and credit–within the private sector. If all this just “nets out” to you and is therefore uninteresting, you aren’t really doing economics at all. You are doing something else that may be interesting but it isn’t economics. It isn’t a new economic perspective or heterodox economics or any kind of economics at all.

      I’m going to post this entire comment on NetNet.

      • Oliver says

        Re counting purchase of gvt. papers vs. corporate papers:

        Doesn’t it matter greatly what happens to the proceeds of such a purchase? To the extent that gvt. bond purchases are a reserve drain, the proceeds effectively leave the system – it’s an exchange. With corporate papers, this is not the case, someone’s got the money, or, more importantly, that someone is active in the economy. One can now argue whether to follow the financial flow and count those proceeds as savings (stock) or whether to count the corporate papers as such, but one cannot logically do both, else one is double counting. Or am I muddled here?

        • JKH says

          Purchase of new issue government bonds is a reserve drain, but the central bank manages the net reserve impact, so that’s not really the issue. The issue is whether the bonds reflect an underlying deficit, which is normally the case. So that increases non government NFA, which reflects an increase in non government saving.

          MMT makes the valid point that such bonds can be used as collateral for bank borrowing. The net effect of that is as if the deficit had been left in the form of reserves and bank money instead of bonds being issued. I think the collateral point has its limits though. I’m not sure how much the Chinese put value on the collateral utility of their bonds, and I’m not sure they wouldn’t do something else instead of just holding their own FX reserves in the form of deposits at the Fed, if no bonds were issued.

          Corporate saving and related “paper” issued by corporations is something else, part of the horizontal system – and in addition to any “vertical” saving in the form of government liabilities.

      • JKH says

        thanks John

      • Dan M. says

        The whole purpose of saving is to be able to claim assets in the future. Since the horizonal level is usually built on secured claims of the very productive assets that will produce that future desired claim, even when the desire of society to “net save,” that doesn’t mean much if the horizontal sector is doing its job poorly at directing the firehose of credit beforehand.

        I don’t think society’s desire to “net save” should be the overriding focus of the monetary economy… it’s simply one very important stabilizing factor.

    • Steve Roth says


      “(They may also invest saving in newly constructed residential real estate, which is separate from financial asset acquisition, of course).”

      I think it’s always worth pointing out that households can also deploy their savings into investment in non-publicly traded businesses — starting their own new ones and lending directly to their existing or others’ for investment purposes. This is kind of hidden in higher-level national accounting, at which level only firms appear to do business investment. You have to get pretty far down into the FOF plumbing to see this kind of household business investment happening.

      Similar to the way that SFB obscures household saving, and the telescoping of firms into households obscures firm saving.

      None of this makes the accounting wrong. You just need to understand what’s happening, what’s necessarily being hidden in the consolidation/telescoping, and how to drill down past that to perceive necessarily obscured realities.

      I think Carney should have defined net saving in his post, btw: S-I.

      “The problem here is that the correct definition of saving precisely specifies the passive act of not spending on consumer goods.”

      Here’s a big question I’ve been pondering: shouldn’t “consumption” include Consumption of Fixed Assets (CFA)? “Consumption” is used synonymously (confuted?), with “consumption spending” — purchase of goods to be consumed within the period. But that’s only one part of consumption, measured via spending. The other part — CFA — is estimated via depreciation schedules.

      Shouldn’t they be added together to arrive at “consumption”? How would this impact our notions and definitions of “saving”?

      This is related to I, which is gross investment (before deducting CFA, which yields net I), raising another confusion for me. You’ve suggested that cumulative I plus cumulative S-I results in the stock of savingS. (Right?) But don’t you have to deduct cumulative CFA from that stock?


      Gosh darn it, it’s really time for you to set up a goddam blog. This stuff shouldn’t be hidden and scattered (hence hidden) across a zillion blog comment threads. It’s a public good that I feel that you should feel obligated to provide. 😉

      • Ramanan says

        “Here’s a big question I’ve been pondering: shouldn’t “consumption” include Consumption of Fixed Assets (CFA)? “Consumption” is used synonymously (confuted?), with “consumption spending” — purchase of goods to be consumed within the period. But that’s only one part of consumption, measured via spending. The other part — CFA — is estimated via depreciation schedules.”

        I think first consumption expenditure (the actual spending) is used to calculate the gross saving and then consumption of fixed capital is subtracted to calculate the “net saving”. Confusing because the “net saving” seen frequently around here is Saving net of investment whereas the former is Saving net of consumption of fixed capital.

        “Shouldn’t they be added together to arrive at “consumption”? How would this impact our notions and definitions of “saving”?”

        Instead just gross saving and net saving are presented as I argued above.

        Once you have net saving – saving net of consumption of fixed capital, you could add that to previous accumulated saving for each sector.

      • JKH says



        After-tax corporate income takes into account depreciation expense. The corporation’s depreciation cost is analogous to a household that pays for consumer goods purchased before any income can be saved.


        GDP includes gross investment before depreciation.

        That corresponds to a measure of gross saving.

        Subtract depreciation from both investment and saving to get a measure that’s congruent with micro.

        I figured there’d been enough confusion with SFB “net saving”, etc., so I bypassed that drill down.


        “Gosh darn it”

        Thanks – I appreciate that, and will remember.

        • Steve Roth says

          Thanks, JKH. I get all that. But shouldn’t “national saving” be:

          S – CFA = Y – C – CFA


        • JKH says


          You’re slaying me on technical classifications, whereby GDP is sliced and diced to a whole bunch of lower sub-levels and other intersections. I always hated that part of the textbook I recall those from. I suspect you already guessed that.

          I’ll have to revisit that area in more detail later to make sure I get the classification labels right. For the time being, I’d say the logic for such decomposition will end up being reflected in the actual technical slicing and dicing of the national accounts at lower levels. I think that must hold for the extraction of depreciation and some corresponding measure of (adjusted) saving. Net national product sounds right as part of it. Ramanan has noted one aspect of your formulation, and he may have the more direct answer in total with his knowledge of the technical classification of the accounts.

        • Steve Roth says

          Right, of course that’s NDP.

        • Ramanan says

          Careful about “S” – the one we started out in this post was the private saving, whereas your statement is about “national saving”

      • Steve Roth says

        Let’s see… You’re gonna need a name for the blog. Preferably a non-existent intangible noun that implies (in my case falsely) depth and perspicacity — like Interfluidity or Asymptosis. Hmmm…



        • beowulf says

          The Lords of Dharmaraja (actually, its already used by an Indian hacking group, but what a cool name!).

  15. phil says

    If the government doesn’t deficit spend when there is a current account deficit the non-government can still grow but only by increasing its overall liabilities and indebtedness. This has been said so many times by MMTers that it shouldn’t have to be said again. But there you go.

    Contrary to what people are saying here, the fundamental tenet of functional finance is that the government should act to further the interests of the non-government (the private sector as a whole). Pushing the non-government into over-leveraging and over-indebtedness can lead to financial fragility and instability, often ending in a crash and the subsequent destruction of both people’s financial and real assets. That’s not in the interests of the non-government.

    • Dan M. says

      I agree that enough NFA’s causes fragility, but I feel like MMT has implies the vertical money as the driver of growth, when it merely functions to service and cushion the private sector contracts that drive our economy.

      By netting savings with investment and ignoring the FMV of the REAL productive assets on our balance sheets, MMT has misrepresented the very nature of our wealth and private sector value creation.

  16. Dan M. says


    I agree with the general gist of what you’re saying, but…

    To your last point about 1997-2008, I agree with most of what you’re saying, but I think the draining of NFA’s during that time left us in a VERY fragile state in 2008 when much of that Net worth was realized to have been overpriced.

    So one might be slightly careful using that as an example, if only to toss in the caveat that we would have been much better off in 2008 had we had that NFA cushion.

    But that’s almost the point, in my opinion… the NFA’s act as a CUSHION… not the driver of balance sheets.

    Sound off if you disagree or wish to massage my points.

    • Michael Sankowski says

      I hugely and massively agree with this. Private sector lending and equity is subject to nominal revaluations and even real revaluations.

      The government NFA can help with stability in some cases. But it’s also the case more NFA during the bubble times doesn’t prevent the bubble.

      • Dan M. says

        From what I remember reading of MMT liturature, they attribute the housing bubble/collapse as a failure of the vertical sector not giving enough (though they probably fairly attribute a lot of it to the horizontal sector having too much deregulation). I think I’ve specifically read something from MMT that asserts that if we’d have had more (S-I) in the economy, people wouldn’t have had to leverage into housing so much.

        Well I see the housing bubble as being a baby almost entirely of piss-poor motivations around the horizontal sector, not just “not enough vertical money.” Homeowners, realtors, home sellers, flippers, loan providors, wall street and 401k investors all wanted their piece of the pie and didn’t properly analyze the risk or nature of the contracts that were involved. I don’t think more NFA’s would have prevented the huge moral hazards that existed within the wall street machinations between homeowners and the eventual bond holders.

        Where the vertical portion could have helped, probably was in preventing 20%-30% drops in home prices from utterly devastating the rest of our economy. If one looks at the loss of NFA’s from 1997-2008, if we’d simply deficit spent to the degree we had a trade deficit, we’d have had an extra $44,000 of (S-I) per household at the end of that period. Maybe that would have been too much, or left the shores anyway through increased demand, but it at least gives you a hypothetical visualization of the effect of draining the economy of NFA’s when crisis finally hits.

        If we can suppose JUST HALF that amount of additional cash & T-bonds on our household balance sheets ($22k) in 2008 when the housing market crashed, I think it wouldn’t have been nearly as systemic as it proved to be. Sure, housing may have appropriately dropped 30% still, but that NFA cushion would have changed the whole nature of other sectors of the economy.

        Who knows, maybe the gov’t should WAIT until events like 2008 happen to purposefully give people the NFA’s they are so-demanding, but I think by the time you arrange fiscal policy to get them out there too much damage has been done to other sectors that didn’t deserve a battering when housing crashed.

      • Steve Roth says

        @Michael (and Dan M.): “Private sector lending and equity is subject to nominal revaluations and even real revaluations./The government NFA can help with stability in some cases. But it’s also the case more NFA during the bubble times doesn’t prevent the bubble.”

        It seems that both private lending and public spending can, rather than spurring consumption and investment, “leak” into bubble-ized financial asset prices via spiralized buying/selling. Just as they can leak out into external lending.

        In each case, failing to purchase real goods (whether consumption goods for immediate consumption, or investment goods for long-term consumption/further production).

        PV ≠ MY, because increased M can funnel into financial asset prices.

        IOW: higher velocity/transaction volume in the financial-asset markets does us no good; no surplus from trade (human utility) is generated. And Fama/French showed us long ago that it takes very low volume and very few traders for financial assets to arrive at the “right” price, IOW for money to be “efficiently” allocated.

        Velocity in the market for real goods, OTOH, is everything. Because real goods are consumed, and so must be produced to refill inventories.* More transaction volume, more buying, more demand, is where producers’ rewards come from, what incentivizes them to produce — and to invest and hire so they can produce. Making the log roll faster, making the log bigger, so more people can stand on it and run harder.

        * The production-to-transaction-volume ratio for financial assets is infinitesimal. For real goods, it’s basically 1:1.

  17. FDO15 says

    Posted this comment at Norman’s site also.

    No one is putting words in anyone’s mouth so don’t try the typical MMT “strawman” response that you all use every time you’re backed into a corner. I quote Kelton verbatim. She said:

    “Whenever the government’s deficit is too small to offset a deficit in the current account, the private sector will experience a net loss. The result my ruffle your feathers, but it is an unimpeachable fact.”

    SHE is the one who said the private sector experiences a “net loss”. The private sector does not experience a “net loss” just because a budget deficit is less than a current account deficit. That’s ridiculous.

    In fact, here’s some data for you. Between 1997 and 2008 the current account was not offset by the budget deficit in 39 out of the 42 quarters. And household net worth rose more than 100% over the same period. There’s your “net loss”, huh?

    Case closed.

  18. FDO15 says

    It looks like they’re deleting my comments over at the Mike Norman website because I exposed their fraudulent accounting. These people are dangerous with their ideology.

  19. FDO15 says

    I’d also add that MMTers think I>S is bad because it results in some mythical “net loss”. They have it all wrong.

    • Michael Sankowski says

      I do think it’s important to note when I > S it can cause massive imbalances, esp when the growth is extremely fast.

      The more I think about the 1990’s and 2000’s, the sicker I get. Greenspan knew he was causing housing bubble and was aware of the tech bubble.

  20. FDO15 says

    I see where the MMTers get it all wrong now. They think borrowing is dissaving. That’s why they downplay the horizontal. That’s why they say crap like “net new financial assets” and try to say that the horizontal level doesn’t add net new financial assets. Yeah, they add new financial assets all the time and this really adds to savings. Most people don’t monetize their house or the majority of their net worth so that explains why the balance between horizontal money and vertical money is so wide.

    MMT has this totally wrong!

    • Joseph Laliberté says

      Interesting comment. Could you please show all of us how horizontal activity can generate net new financial assets (without using mark-to-market)? This would be an important contribution to the debate. thanks.

      • Dan M. says

        I don’t think he’s saying the create new net financial assets so much as they create new financial instruments that represent, at their core, a claim on REAL productive assets that didn’t exist until the horizontal system facilitated their development.

        For instance, if I take on a mortgage of 100% of the cost to build a factory on a lot ($300,000), the financial instruments created net to zero, but the collateral that backs them nets to $300,000. This means both savings and investment have increased. This means the private sector can engage in saving.

        Notice how that without the horizontal system, I wouldn’t have had the rousources to build the factory, and thus it was the net asset/liability creation that facilitated the factory.

        • Dan M. says

          I’m just going to keep on blathering on and let the smarter people here correct me, because my brain is starting to work.

          If the horizontal process (which, admittedly, nets to zero) both FACILITATED the building of, and is SECURED by the factory, you’ve put a backing behind that new money in the form of REAL wealth that wouldn’t be there without the money (mortgage instrument) AND a route to take ownership of that REAL wealth in the instance of default.

          Now one could look at this situation 1-dimensionally and say “No new NFA’s were created” and judge the situation based on that, but we have, through contracts, created REAL wealth and a link to that wealth.

          So you’ve not only created real productive wealth with this transaction, but created a monetary vehicle (the mortgage) with some real solid clout, as it’s directly linked to the ownership of the REAL asset. It is becoming more clear to me that MMT attempts to downplay this process, and pretend it doesn’t create any gain (hence the term “net loss” ascribed to any situation where NFA’s leave our domestic books).

          So I think we really have to think about what has been created when a horizontal contract linked to real wealth occurs. It appears to me that this is the lifeblood of the net worth of the economy.

        • Michael Sankowski says

          Dan M. – this is the point exactly.

          If I borrow $100 and create something worth $1,000,000 from goods and services purchased with that $1,000, this is worthwhile and should be supported.

          This is one of the major points of MMR – It’s hard to explain in a concise way but we’re getting there.

        • Dan M. says


          Yes this is really where the contracts formed on the horizontal level drive our economy. Further, to think about the pure money portion of it, the financial asset you’ve created that, true, IS offset by a financial liability, is often secured by the productive REAL asset in some way, creating a legal link (by the same government issuing NFA’s) between the Financial Asset that the horizontal level produced and the productive asset that is real wealth.

          Now if the gov’t is reenforcing that link of securitization that gives the horizontal money more clout than it were to have, otherwise, viewing it as some fragile beast without leagues of NFA’s is not completing the story. The money holds up as long as the productive assets they’re linked to hold up in value. Only when the collateral falls strongly in value do you significantly weakent the status of that monetary asset (thinking 2008 and MBS’s).

          I guess what I’m getting at is not only should we be paying attention to the REAL assets in the economy that get developed with the aid of the horizontal level, but we should pay more attention that much of the horizontal money is LEGALLY GLUED to those productive assets, so to say “it all nets to zero” is ignoring the nuances of the horizontal arrangements, and judging them as if they didn’t have that glue. That glue to the real economy, and the valuation of the assets their glued to, is what drives the stability of the horizontal sector, and therefore the need for NFA’s.

        • Michael Sankowski says

          The MMT crowd forgets to mention the importance of the private sector all the time. It happens too frequently.

          I do think this makes their analysis more and not less difficult. It’s hard to shoehorn everything all that needs to be done into the government.

          By ignoring the private sector, it makes it really hard to promote thinking which has any recognition of private credit and equity. It’s like it doesn’t exist except to be regulated more.

        • Cullen Roche says

          Yeah, and in the case of the Kelton article which FDO cited, it’s flat out misrepresented. I agree with FDO that there is no such thing as the private sector experiencing a “net loss” in her example. A net loss of what? Net loss of financial assets? Well yeah. That’s what happens when the govt taxes us. We don’t need the sector balance to tell us that. But her article gives the appearance that the private sector position is deteriorating when the reality could be that I>S and the private sector’s position is booming. One view will give you the impression that govt drives wealth (or that we’re automatically in big trouble if the govt doesn’t spend) while the other will give you the real picture which is that the pvt sector drives wealth and govt facilitates net financial asset accumulation. You have to be very precise about this stuff. They’re even sloppier on the monopolist argument, but that’s a whole other (much bigger) bag of worms in my opinion….

  21. JKH says

    Tom Hickey, with several objective and constructive comments about this issue at Norman’s. He’s actually taken a careful look at it, in an attempt to understand it, and does so pretty much. Doesn’t surprise me; he’s generally fair and responsible in his approach to contentious discussions such as this one.

    • Michael Sankowski says

      Yes, I am a fan of Tom. He’s trying to understand and been fair for a long time to many people.

    • Cullen Roche says

      Tom is always very fair. Nice to see some people being level headed about all of this rather than lashing out. It’s not personal. We’re just trying to portray the conversation in a more balanced form.

  22. Joseph Laliberté says

    Sorry, english is not my first language, what is “FU”?

    • davidg says

      Sorry Joseph, “FU” is Wynee Godley’s shorthand for business retained earnings.

      • Ramanan says

        That book goes with me wherever I go since the past 3 years. Yet, only recently I noticed the peculiarity of the notation FU.

      • davidg says

        I thought JKH had explained that earlier in this thread but I think now it was from another.

  23. Cullen Roche says

    I’ve been thinking some more about that Kelton quote (and subsequent conversation in the comments). It PERFECTLY highlights what we’re trying to discuss with MMT and how it frames the argument incorrectly.

    For readers who are still confused here. What MMT wants to do is bring the govt back “to center stage”. That’s the basis of the entire chartalist position. So what they often do with the sectoral balances is give the reader the impression that we’re hopeless without govt spending. This is why they’ve latched onto the balance sheet recession work that I’ve been pushing. In an environment like this where the pvt sector is paying down debt the MMT sectoral balances position works perfectly. The govt is the only sector that can offset the negatives in the other 2 sectors. So MMT has looked very good in the last few years because of this. But it’s not a permanent effect. In fact, it’s INCREDIBLY unusual.

    The fact that Kelton describes the pvt sector position as a “net loss” is telling. That’s not just wrong. It’s not even close to being right. CP calls them out in the comments and rightfully so. I am embarrassed for having published the piece on my website. I guess I need proof readers with a PhD in econ!

    The point we’re trying to show with S = I + (S-I) is that S can grow outside of (S-I). It’s a rather misleading point to highlight (S-I) in the SBE and conclude that the pvt sector is experiencing a “net loss” if the govt is in surplus and foreign is in deficit. IT’S A HUGELY IMPORTANT THING TO UNDERSTAND!

    MMR is bringing things back to reality. And the reality is that the pvt sector can grow without deficit spending. That doesn’t mean we’re necessarily against deficit spending, but we should not wander into an understanding of the monetary system thinking that we are all helpless fools who need govt spending to succeed. It’s the EXACT opposite. The govt needs us to be productive to be able to mobilize resources in the first place. The emphasis here cannot be misplaced. MMR wants to bring more balance to these points showing that yes, govt spending can be very helpful, but let’s not put the cart before the horse here in terms of how growth occurs.

    Nice find FDO. And Brett Fiebiger, if you’re reading – you’re welcome.

    • JKH says

      I’ve been looking at that Fiebiger paper quite closely, for the first time

      share connection?

      • Cullen Roche says

        I’ll be interested in your thoughts on it. I didn’t find much meat there that we haven’t seen before. He’s basically making the “political constraint” and “no overdraft” arguments. I don’t think those are weaknesses in MMT necessarily. The meat for me is in understanding how the idea of the state theory leads to the monopolist which leads the vertical which downplays the horizontal which leads to certain policy proposals. I think there’s a big heaping mess of assumptions in all of that that can be shredded if one were to drill down into it all and connect the dots.

        • JKH says

          I agree his emphasis is on the technical wonkery of the reserve system, not the strategic monopoly issue. But there may be more there on the technical side than meets the eye. He’s actually gone deeper than Lavoie in that area. I’d like to spend more time on it, at some point.

        • Ramanan says

          Definitely my thoughts that he has gone deeper pinpointing to some pushy arguments made :)

        • Cullen Roche says

          Let me know what you think because you’re obviously better versed on this side of things than I am. Thanks.

    • Dan M. says


      Don’t interpret this post as disagreeing, but coming back to the importance of (S-I), when we see large booms of the horizontal level (roaring 20’s, late ’90’s in stocks,’ 2000’s in housing), it’s the lack of the vertical piece to step in and lubricate that that usually gets us into these huge messes afterward, is it not?

      I don’t think we should lose that piece… that during booms in investment, this is no time to allow (S-I) to shrink just because “the horizontal level is taking care of things,” right?

      The I can help increase total S, but if there’s not enough (S-I) lubrication the system will lock up with a slight interference, and then “I” will just get slammed right thereafter, making the huge run up in “I” earlier less of an accomplishment, as homes get foreclosed on and factories sit empty.

      Like I said, I don’t disagree, but just want to make sure that we’re on the same page regarding the necessity of NFA’s in the economy.

      • Cullen Roche says

        I think that’s a dangerous interpretation Dan. Excuse me if I am misinterpreting your comment, but what you’re essentially saying is that more govt spending during an investment boom will make things better?

        • Dan M. says

          This seems to be in unison with your “TC Rule” post that deficits need to happen for an economy to grow.

          I am surprised we seem to be disagreeing here.

        • Michael Sankowski says

          The TC rule is the start and rather than the end of thinking about fiscal policy.

        • Dan M. says


          Not necessarily. Simply that NFA’s should exist in a domestic economy at a certain ratio of the horizontal size (investment). So, yes, if you remove the foreign sector (for now to make things easier), deficits should continue to be run to “feed” the economy enough “lubrication” to all the horizontal contracts. This is my “general impression,” and by no means am I 100% sure of this.

          The example of all of our depressions being after fiscal surpluses, and all of our surpluses resulting at least severe recessions is telling. You’re not saying that we should have been running surpluses in the 1920’s and 1990’s are you?

          I thought MMR and MMT were in agreement that NFA’s should not be run down simply because a growing economy appears to have the ability to pay more taxes and possibly run surpluses.

          Thanks in advance for clarifying my thinking here.

        • Cullen Roche says

          I’m not calling for surpluses. I guess I am taking a “it depends” approach. Like right now, we need huge deficits because of the balance sheet recession.

        • Dan M. says

          Well what about the 1920’s (assuming no gold standard) or the late ’90s-2008? My general position would be that while we may have had some malinvestment during those times, the draining of NFA’s from the economy hurt our ability to cope with any kind of economic shock.

          Wouldn’t the history of surpluses and subsequent depressions lead us to the point that maintaining a healthy stock of NFA’s in the economy during boom times is desired?

          Please point out where you think we may be in disagreement here.


        • wh10 says

          Well I thought Cullen at least used to be in favor of the interpretation that the Clinton surpluses were bad, even during the 90s boom.

        • Cullen Roche says

          I am in favor of that interpretation. I don’t see how you’re coming to the conclusion that I don’t think that….

        • Cullen Roche says

          So here’s my perspective. Let’s take the 90’s for instance. What happened? The economy boomed as the innovation boom was sparked by the internet. Americans felt richer than they really were because asset prices were distorted. A lot of people were getting rich for no rational reason. Personal consumption expenditures rise to a 20 year high as a result. The current account blows out and Clinton goes on his budget surplus escapade not realizing that he was going to hurt the economy in doing so (by not offsetting the demand leakage via the CAD). And what happens when the asset prices come back to earth as the boom/bust cycle reverses (mostly psychological I’d say)? Americans are suddenly poorer than they believed, consumption craters, and the govt responds to the environment with spending.

          The point I am trying to show is that this was a very specific event. I don’t think that Clinton running a budget deficit to offset the CAD would have necessarily stopped the bubble from popping. It was the irrationality that drove the boom/bust cycle. Not the govt. The housing bust was no different.

          So, I am saying “it depends”. Each economic environment is its own event. It’s like getting sick. You wouldn’t treat every high and low in your health with the same response.

          That might not be very clear….Let me know if you’d like me to elaborate.

        • davidg says

          this is it. I used to think those surpluses were bad too, maybe they were, maybe they weren’t. Could be they were needed to put a drag on the boom, could be that the public sector has no business getting in the way of the boom. But the larger point is what G does when “private I” tanks. They need to increase public I to offset the decrease in private I. I won’t venture to assume MMR and MMT agree on this, but I sure as hell hope so.

        • Dan M. says


          I agree that once the collapse has happened you have to clean up the pieces with public investment, spending, tax cuts, etc, but since the private sector tends to react free of reserve constraint, would more NFA’s in the economy DURING the boom done anything other than allow a more stable drop (thinking more in 2008 & 2009 than in 2001). I’m not viewing the NFA’s as being inserted during a bubble for the purpose of sustaining the bubble (the bubble’s very nature is to form without “reserve” considerations, it would seem), but to give the rest of the economy something to rest on if/when the malinvestment rears its ugly head.

          This way, peoples’ homes can fall $30k in value, and some construction workers might lose their job, but the whole system of credit doesn’t lock up all at once.

        • Dan M. says

          No that’s quite clear, but I think we can hash this out a bit further for more clarity. I totally agree with about everything you said. I guess I’m confused, then as to why you thought my line of thinking was “dangerous” above, where I insisted that we need to keep enough (S-I) lubrication in the system during an investment boom.

          I am not saying the 2000 crash or 2008 crash shouldn’t or wouldn’t have happened, but if we’d been padding our economy with enough NFA’s I don’t think they’d have been as sysetmic as they proved to be… especially the latter… I mean the 2000-2002 crash was bad, but we made up for one bad measure of wealth (unruly stock prices) with another (unruly home prices) to get our horizontal sector to continue to expand. During this process, our CAD was FAR in excess of our fiscal deficit year after year until 2009 when that reversed. So in 2007 when housing was looking shaky, our balance sheets really went to crap.

          Yes, housing should have dropped, but IMO if we’d have been more aware of the role of (S-I) and NFA’s in the late 90’s through 2008 we’d have not seen the utter blow to all the other parts of the economy that the housing crisis ended up causing. Our balance sheets would have been more stable, and able to sustain a housing dip or a lost-job.

          Obviously there were other demons at work in the last 15 years, but I think not running large enough deficits exacerbated what could have been more tame asset pricing adjustments.

        • Cullen Roche says

          My point is that I don’t think a deficit would have stopped the bubble from bursting so it’s “dangerous” to imply that a deficit would have). I could be totally misconstruing your point there though so I apologize if I am. Now, a deficit DEFINITELY could have padded the downside. And I think Clinton definitely made things worse by running his surplus. But I think it’s important to note that running a deficit wouldn’t have necessarily stopped the bubble from bursting. It’s a dangerous thought (at least in my opinion) because it assumes that you can control a fast car by driving faster (which is what big deficits would have done in the 90’s). And this is the problem with managing the economy. It’s easy to pad the downside, but it’s damn near impossible to stop the car from spinning out of control when it’s going 100 mph and starts to slide…..

        • Dan M. says


          Good, we’re in agreement. I think bubbles form for varieties of reasons, but rarely are they going to be driven by the base-money in the economy (both formation and popping). They are often based on the horizontal level and therefore pretty free of the vertical level. However, when the rest of the productive economy leans itself upon the assets being overpriced, when those prices collapse, it sure helps to have a stock of NFA’s to lean itself against. I think the housing bubble still would have happened and popped, but that our balance sheets would have been in a much better position to absorb that popping if we had.

          It’s obvious that the housing crash has utterly decimated other areas of the economy that, I feel, it didn’t need to, and with the “proper padding,” wouldn’t have to the degree it did.

          I would add that because bubbles are difficult to spot, when we do have these investment booms (1920’s, 1990’s, 2000’s in housing) we should be making sure that we’re properly padding any eventual hit our balance sheets might take with the proper amount of NFA’s… they may not be needed (see 1950’s-1960’s), but as long as they don’t grow out of control in relation to the potential GDP of the economy, I think it’s safe to say we should be putting them out there.

  24. Steve Roth says

    Oh, so you guys noticed that one too…

  25. Joseph Laliberté says

    Some MMTers have asked what JKH (or CP) are really saying “new” in few sentences with their emphasis on S and I rather than (S-I). Here’s my two cents (I would be delighted if I succeed in insulting both MMTers and MMRers with this example… 😉

    Assume that corporation A purchased an equipement made by corporation B (paid in cash for simplification purpose) in accounting period 1. Corporation B ships the equipment straight from inventory to Corporation A. Then no new net financial assets is created in the domestic non governmental sector, therefore (S-I) is unchanged. However, in this example, both S and I increases (corporation A increases I, and corporation B increases S by the same amount). Therefore, (S-I) does not say much about the strenght of the private sector. I could complicate this example by relaxing the assumption that the equipment came straight from inventory and have the household sector involved through the wage channel… but I promised few sentences.

    • JKH says

      sounds good to me

      not insulted at all; quite the reverse

    • Joseph Laliberté says

      Forget to add that, in reference to a previous discussion, I see as absolutely critical the guarantee by the State to convert banks’ liabilty into State liability for private transactions to exist and thrive in the long run (private transactions of the type illustrated above). Sorry for pushing this point again, but there is a crucially important vertical component to S and I, even if on the surface the whole thing appears as a strictly horizontal thing occurring between private parties. I think MMR needs to clarify its position on this aspect more formally, by tomorrow if possible -just kidding.

    • davidg says

      Actually, I’m not sure JKH would agree with that statement. In your example, Corp A paid cash for the thing, which means it was bought with FU from a previous period, so in your example the purchase A made was spending with no new I. The I may have come depending on how Corp B produced the equipment, but that is not specified in the example. Would be interested to know if that is a correct interpretation or not.

      In addition, and as a point made to the larger points made in this thread and other recent threads: however you want to define savings, as I becomes S thru leakages in demand, all the financial assets in the world do net to zero, so new I must outpace the flow of S in order for the economy to grow. Those negative equity corporations which telescope into the household sector require revenues to fund that negative equity position. While I may agree that MMT conveniently brushes aside business I as a driver of S (although I vehemently disagree that it is unaware of it), the larger point they make (IMO) is that G’s need for revenue to offset that I is, in a sense, relaxed, unlike businesses. They therefore become the investor of last resort. And that’s not a minor point, either.

      • Joseph Laliberté says

        You are correct, change in inventories would count in the
        previous period I ( when the equipment was actually produced, not when it was sold). I would need to change my assumption regarding the equipment coming staight from inventory, but I do not think it would change the overall conclusion (I used this assumption for convenience so that I do not have to get into the impact on household savings).

        If equipement was produced by corp B in period 1 and sold to corp A, you would have an equal increase in both I and S (assuming labour save their entire wage resulting from the production of the equipment). So at end of period 1, the transaction would not have an impact on (S-I), but would have an impact on both S and I equally. The strenght of the private sector is improved through the impact on S, even if (S-I) does not change as a result of this transaction.

        I agree with your point regarding MMT

        • davidg says

          Joseph, glad you agree on my 2nd point. Also, I agree with your next comment at 11:05 (below) about the state converting private liabilities into state liabilities, although I would caution that they really have no choice in the matter. Not providing the necessary reserves would “FU” the payment system, although here I am referring to “FU” in a totally different sense.

          Also, here is a quote from CP in the link Cullen provides above which succinctly makes my 1st point: “businesses have both investment and consumption spending. So, not all business spending is included in I. Think about it, if “I” included business consumption spending, then what happens with the equation Y = C + I + G? You are then double counting consumption spending in C and I.”

          By the way, I don’t think either CP or SF are necessarily wrong in that thread. They’re simply talking at cross purposes, which I’m finding a lot lately. Time to find better things to do.

      • Dan M. says

        I thought Jo’s description seemed correct. What is “FU?” Why is buying a machine with cash not “Investing?” If you built the machinery with your hands and used it would that be “Investment?” If Jo’s example isn’t Investment, did the “Investment” occur when the machine entered company B’s inventory as a finished product?

  26. Oliver says

    Posted this at the winterspeak thread. seems the action has moved here…

    Michael Hudson at the MMT conference in Rimini:
    The basic thrust of our argument is that just as commercial banks create credit electronically on their computer keyboards (creating a bank account credit for borrowers in exchange for their signing an IOU at interest), governments can create money. There is no need to borrow from banks, as computer keyboards provide nearly free credit creation to finance spending.
    The difference, of course, is that governments spend money (at least in principle) to promote long-term growth and employment, to invest in public infrastructure, research and development, provide health care and other basic economic functions. Banks have a more short-term time frame. They lend credit against collateral in place. Some 80% of bank loans are mortgages against real estate. Other loans are made to finance leveraged buyouts and corporate takeovers. But most new fixed capital investment by corporations is financed out of retained earnings.

    There is the I in MMT. The problem, also with Krugman’s graph, is that the usefulness of any measure depends greatly on its quality. Just measuring I vs. S or net S or any other monetray measure says absolutely nothing about the long term viability or quality of anything happening in an economy. It’s a supply side myth that I is always good and net S is a always evil. I is only always good for the financial sector but for all the rest of us, without a decent qualifier, we just don’t know. Furthermore, for for any open economy with a large trade deficit like the US, one would have to look at the ‘investor of last resort’, i.e. China and Germany, to have a full view of what’s going on. Most real investment in fixed capital was and is happening in those places that make the goods that the US consumes. One way one might look at it, is that the investment within the US, i.e. McMansions, was being leveraged (for lack of a bettwer word) off of the residual gvt. securities that the trade deficit left behind in the US banking system because there was no demand for further useful produce to be filled, nor any quality control to make sure that the I being forwarded by banks was funding anything useful. Does that make sense?

    • JKH says

      Think of the private sector wealth portfolio as consisting of two asset categories:

      (I, (S – I)) (both of these in “stock” form)

      Then think of portfolio management theory, which (without going into any detail) uses techniques to “optimize” the risk/return of that portfolio.

      Nothing here about normative judgments that I is always good and (S – I) is always bad. Not at all. Nowhere have we said that.

      • Oliver says

        I understand that, I think. And I also don’t want to argue politics. On the other hand I do think that this is somehow where the differences lie.

        Whether the path of investment is optimal, depends on two factors:

        1. Financial sustainability (fragility). A relative / quantitative argument – doing things right.

        2. The ability of investment to fulfill future needs / the congruence of investors’ expectations with what actually pans out. An absolute / qualitative argument – doing the right things.

        1. is where S-I comes in as a stabilising and enabling factor. This is where MMT, MMR, Godley et al are compatible imo, except for the caveat of deficits feeding into the CA, where MMT parts form the others. I myself am somewhat undecided on this last point, but that’s not important. So, ignoring the external sector for a moment, point 1 postulates that generally S>I is more stable than SI or SI) and simultaneously assume a fully repressive position in a legal (qualitative) sense to make sure that fragility doesn’t build up in the first place.

        I agree one can argue that this is pie in the sky thinking, even outright dangerous with respect to the external sector, and that reality will always require mix of all sorts of measures, including S>I at points well below full employment. But I do think it is a good mental framework to start out from. One needs a hierarchy in thinking, too and there is always a large scope for the normative. Standard economics is lazy and way behind the rest of the social sciences in this respect.

        • Oliver says

          And something went wrong in my first post above:

          than SI or SI) was supposed to read S is smaller than I.

        • Oliver says

          I also understand that I haven’t decomposed the domestic private sector into corporate and households. I am aware generally, that a state in which the corporate sector is a net borrower of funds from households is a healthier stance than the opposite one (in which the US has been for a while), and also one in which it can be said that households are saving (in corporate papers), assuming gvt. & external are in balance. I don’t think this invalidates the general case that gvt. deficits or the CA will be needed to do some ‘accomodating to bridge uncertainties’ to stabilise the structure (I think).

  27. JKH says

    as predicted, several references to liquidity trap so far

  28. JKH says

    But I’d disagree a bit with CP where he says:

    “The value of S-I means little. But, the absolute values of S and I are very meaningful, and the bigger the better.”

    (S – I) is meaningful, as per MMT.

    But (S – I) alone is insufficient information.

    (S – I) doesn’t give you the value of S and I.

    So SFB alone is insufficient information.

    Knowing S and I also gives you (S – I) as a derivative (which CP may have been inferring; I don’t know).

    The entire portfolio structure of S, I, and by derivation (S – I) is important.

    That’s why Krugman’s graph is valuable.

    • JKH says

      that concludes a quick run through of that thread

  29. Colt says

    To be honest I’m a little confused about what exactly the this ‘S-I vs. S=I+(S-I) argument, so maybe someone could help clarify it if I lay out my interpretation of what MMT says about the sectoral balances equation.

    So we know from the formula that (I – S) + (G – T) + (X – M) = 0. Now if we assume a closed economy, the formula is now (I – S) + (G – T)= 0. Thus (G-T)=-(I-S).

    Now lets assume the government starts running constant budget surpluses. Because of the vertical nature of government spending, these surpluses mean the government is destroying net financial assets from the economy. MMT says that if this happens, the private sector must run a ‘deficit’ to compensate for this loss of assets.

    But if we think about this in terms of the formula, the government surplus means that the left side of the (G-T)=-(I-S) equation is a negative number (because taxes are greater than spending). Thus in order to be equal, (I-S) must be a positive number so the right side is negative too. This simply means that (S-I)<0 and thus Savings<Investment.

    The way I view this is in terms of credit. If savings is less than investment, there is a funding gap between the two. The banks will not have enough financial assets through deposits to fund the amount of investment it wishes to provide credit for. However, MMT says lending isn't reserve constrained so the bank will be able to come up with the reserves either through interbank lending or from borrowing from the fed. This is where the vertical and horizontal view of money come back to haunt us. Lending is horizontal spending meaning that it will not create any new financial assets since there is always a liabilities side that must cancel out. As a result, if the government continuously runs surpluses, the amount of net financial assets in the system will continue to deteriorate (or with a balanced budget remain the same). This is where the Private Sector 'deficit' runs into trouble. The bank lending based on the additional reserves has basically been a promise that in the future there will be additional net financial assets created and this will allow the loans to be paid off. However, if the government doesn't actually inject these into the system, there is nowhere else it can come from (in a closed economy) and as a result this lending will be unsustainable and will lead to "bubbles" and defaults and credit crunches like we've seen recently.

    Thus, it is necessary for the government to run deficits or else the system will rely completely on credit which is not a net financial asset and is not sustainable.

    To me, this seems like a clear explanation for how the sectoral balance equation operates, but since there seems to be some debate I am assuming I have interpreted something wrong and would appreciate it if anyone could point me in the right direction.



  30. JKH says

    I liked this comment from that thread:

    “MMTers, be careful with your accounting terminology and conclusions. The equations work, and they are not trivial. They are in fact crucial to grasping why the prophets of doom have been wrong. TPC’s calls on things like QE have been right, and so MMT has demonstrated predictive capacity as well as explaining how the monetary system actually works in the USA. I’m betting on it.

    That being said, once you “get it”, don’t dump on or ignore guys like CP. Consider him like the defense lawyer cross examining the plaintiff’s expert (in this case Professor Kelton). He’s made some good points. The plaintiff’s lawyer (i.e., TPC; SF) should get up and, on re-direct examination, rebut the defense argument and rehabilitate the witness. He doesn’t laugh and tell the jury, “this guy doesn’t get it.” When that happens, the jury thinks: plaintiff’s counsel doesn’t have an answer.

    CP is forcing plaintiff’s counsel to defend its position. He’s doing us all a favor.”

  31. JKH says

    And CP then says:

    “If you want to maximize the strength of the private sector, you maximize S. Maximizing S is not the same as maximizing S-I.”

    That’s right as a statement about maximizing net worth, and very insightful.

    • wh10 says

      Does that mean maximizing some combination of I and (S-I)?

      • JKH says

        yes, by construction, maximizing S would be maximizing the sum of I and (S – I) – that doesn’t tell you much on its own, but its a fact, and maybe gets you thinking about the path of I and the path of (S – I) and the possible interaction between the two over time

  32. JKH says

    Then CP says:

    “Scott totally disagrees and argues that S is not a real measure of saving (he falsely believes it doesn’t deduct business spending). He argues that in MMT, S-I is the real measure of saving and what we should focus on. In my previous comment, I explained why this is false logic, and if MMT is based on this, then it’s in deep trouble.”

    That’s pretty much the same story behind as S = I + (S – I)

  33. JKH says

    From that referenced PRAGC thread, Fullwiler:

    “So S is not really “saving.” And S-I isn’t correctly named “saving less investment.” The correct label for S-I is that it is equal to “income less spending.”

    I’m surprised to see that.

    He’s definitely redefining saving as net saving there, and saying that normal definition saving (which offsets investment at the global level) isn’t saving at all – it’s “spending” but not saving. That’s also what Mitchell has done by inference in the two references that Ramanan is familiar with.

    As per my earlier comment above, in such a world, global saving equals zero by identity.

    Can’t have it both ways, S is either saving or it’s not.

    I’m surprised. Don’t recall seeing that from him previously.

    • Cullen Roche says

      Yeah, that’s not a pretty back and forth.

  34. spc says

    Krugman says
    “This wasn’t exotic theory invented on the fly, it was basic IS-LM, the sort of thing every macroeconomist should know.”
    I lol’d….
    Since IS-LM is “classroom gadget” I’m a bit leery when it comes to outcomes based on this pile of econo-trash.

    Liquidity trap ???!!! … Jessssus .
    Krugman lives in his own echo chamber.

  35. FDO15 says

    Add on Randall Wray’s 29 trillion dollar mess and you have to wonder if any of the top MMTers even understand accounting.

    • Cullen Roche says


      Let’s try not to make the comments personal. I’ve warned you over at Pragcap for this. Please don’t make me do it again here. We’re trying to cool the MMR vs MMT fight. Not throw gasoline on it. Thanks.

      • JKH says

        That’s the high road and the right road for sure.

        (Although objective assessment as a $ 29 trillion “mess” is quite warranted.)

        Seconded on “non-explosion” phenomenon. You’ve demonstrated extraordinary patience, given behavior that is effectively troll and extreme, I’d say. The high road is easier to establish once that’s been cleaned up.

      • FDO15 says

        Sorry. I am just getting tired of MMTers acting like they know everything when they get some pretty basic stuff wrong. I don’t know how your head hasn’t exploded yet during some of these arguments. You have much more patience than I do.

  36. FDO15 says

    Cullen, I found the conversation I referenced earlier. Everyone should read this because it perfectly highlights the problem we’re discussing and how MMT misrepresents S-I.

    Here is Kelton stating an obvious inaccuracy as an “unimpeachable fact”:

    “Again, this is simply a property of the sectoral balance sheet identities. Whenever the government’s deficit is too small to offset a deficit in the current account, the private sector will experience a net loss. The result my ruffle your feathers, but it is an unimpeachable fact. ”

    Someone correctly calls her out in the comments and Fullwiler comes to her defense and then gets body slammed.

    The description of a “net loss” is terribly wrong. But MMT uses the sectoral balances equation to imply that the private sector can’t save unless there is a deficit. In the comments you’ll notice Fullwiler describe debt as a “deficit”. Do MMTers not understand the horizontal level at all? This is a tenured professor describing debt as a “deficit”. WHAT?

    I would read the entire comment section. The comments by CP are where the meat is. He pretty much murders the MMTers on all of the misconceptions discussed in these posts. His best comment:

    “I’m explaining to you why S-I is the wrong measure of the private sector financial position.”

    Yes, the right measure is S=I+(S-I). Damning comments for anyone who wants to pin down top MMTers on this. Kelton and Fullwiler both get it wrong.

    • JKH says

      The problem always starts with the conflation of the corporate sector and the household sector into the private sector. That’s the medium through which “I” gets netted out via SFB, which then makes the whole discussion about the nature of saving radioactive. S = I + (S – I) is a way of rescuing “I” from that conflation.

      • Ramanan says

        Nice phrase radioactive. Summarizes.

        The equation definitely rescues I.

        IMO the conflation continues for the external sector and the usage of “private sector” such as this where I attempt something:

        • JKH says


          I spend so much effort trying to make it through the domestic traffic jams on this subject, that I still haven’t gotten to your favorite part! But I will one of these days.

          Meanwhile, you are clearly in good hands at that particular linked site where you’ve been fighting the good fight, as also noted here:


        • Ramanan says


          That’s okay. No hurries. No hurries at all. Patience is good. I know you’ve told this before.

          But I’ve always thought that in situations where the budget is in balance or surplus or when two currencies are involved, there is scope for maximum confusion by the people causing the traffic jams – such as terming the sector which involves foreign governments in addition to foreign firms as “private sector”.

    • Ramanan says


      CP:”“I’m explaining to you why S-I is the wrong measure of the private sector financial position.”

      I just briefly scanned through the comments by CP and will do it more carefully. And he does indeed point out to incorrect statements made which is good.

      The most important point of the analysis of sectoral balances is this IMO:

      Take the case of the United States’ private sector – the household sector in particular. It did have a good positive saving and its net worth kept increasing before the crisis both due to Saving and due to Capital Gains. However this measure is a short-sighted measure of inherent risks. There were indeed people looking at the data and claiming that nothing is wrong.

      A negative financial balance (as opposed to saving) implies that a sector is a net borrower of funds from the rest of the world. Now if it continues to do so, it’s liabilities keep rising. And because of this, the balance sheet becomes more fragile as its financial assets/liabilities ratio is deteriorating. This can be troublesome when the burden of servicing this debt hits and will tend to reduce private expenditure relative to income – for example (behaviorally). A fall in private expenditure relative to income led to a feedback effect and this had the effect of leading to a severe recession.

      So one needs a balance. It is not right to say that a negative S-I is bad or worse “net loss” – finally more credit creation is good. On the other hand simply using S is also not the right thing (as was probably done by CP).

      • Ramanan says

        “So one needs a balance.”

        By balance I mean balanced mind. :) not financial balance.

        • JKH says

          also called portfolio management

        • Cullen Roche says

          John Carney chimes in.

        • JKH says



          or reading/chatting with MMR?

        • John Carney says

          I hadn’t seen that you guys were following this same thread. But it’s reassuring to see that we’re headed down this path together.

        • Cullen Roche says

          Hey John. Nice piece you wrote there. Now put on your flame retardant suit because the MMTers will likely attack you like crazy. We got your back though and we’ve got the accounting right. :-)

        • JKH says

          I think this will be an interesting path.

        • Cullen Roche says

          I find it most interesting that MMR seems to be attracting attention from a diverse group of people. The fact that it’s compatible with you, Ramanan, Carney, etc is telling. It speaks to all people….Good start I’d say.

        • JKH says

          excellent start

    • Cullen Roche says

      I remember this conversation. Funny you mention that guy CP. We emailed a bunch and he explained a bunch of MMT fallacies to me. Mostly about the CAD. His comments were one of the main reasons why I never published any work on the CAD. I just didn’t know if MMT had it right. But now that I look back his comments he was right. I even emailed him a few weeks ago about all of this. Never heard back. Super smart guy. Runs a big investment firm over in the UK. I wish he’d chime in here because he had the MMTers nailed down pretty good.

      • Ramanan says

        Cullen, any links on CP and the CAD?

        • Cullen Roche says

          I’ll have to dig around the other site and get back to you. I’ll try to post tomorrow because I am on an ipad now. I know he sent me a huge email on it so maybe I’ll post parts in the comments tomorrow.

  37. FDO15 says

    I think it’s helpful for people here to better understand how the private sector can save without government deficit spending because that’s the implication we get from MMT and it’s wrong.

    1) Countries can be net exporters. MMT says current account deficits aren’t a problem because you can spend over the demand leakage. So their answer is more deficit spending. But the country could also become a net exporter to save. Operationally, this is what MMT calls “off balance sheet deficit spending” because the government funds the currency exchange through net new financial assets.

    2) The private sector can issue its own form of financial assets that increase real wealth and can be monetized. Though it’s true the assets don’t create net new financial assets and can only be monetized upon creation of net new financial assets it should be noted that monetization occurs after wealth creation. Wealth creation is almost entirely funded by horizontal money creation through private banks.

    3) Prices can adjust to account for increases in productivity, but this is increasingly dependent on wages adjusting as well which can be a slow and often impossible process. Not a great solution here though austrian economists will proclaim otherwise.

    4) The central bank can engage in off balance sheet deficit spending through the overpaying of assets and the purchase of foreign currency which results in an increase in net financial assets.

    Anything to add?

    • JKH says

      “The private sector can issue its own form of financial assets that increase real wealth and can be monetized.”

      Right. Technically, that’s occurring when the private sector issues financial assets to itself – i.e. when the corporate sector (also including the banking sector) issues to the household sector, including accrual of household wealth through increases in the market value of those claims, which is a revaluation of cumulative household saving, in effect. So the underlying I is being monetized in value through to the household sector. Otherwise, net issuance of financial claims (used to fund investment) to the foreign sector or even to the government would reflect marginal saving by those sectors, but not by the private sector.

  38. Detroit Dan says

    Any significance to this graph? Krugman still seems relatively clueless with his talk of a liquidity trap and “basic IS-LM” (yawn). We have a longstanding problem of increasing returns to investment (through tax policy changes and loose regulations) leading to overinvestment leading to high asset prices. This will ultimately be self-correcting as asset prices come in line with underlying consumption.

    So what’s the significance of the investment trend?

    • JKH says

      I don’t have the answer to that right this minute, but just wanted to point out how great a question it is.

      In fact, it’s the point of it all. Reducing the conversation to sector financial balances alone doesn’t go directly to that question.

  39. Claude Wheeler says

    EXCRESNS would be a nice addition to that chart.

  40. Dan M. says

    WTF, I’m still cloudy on “saving” and “investment”:

    If I take out a loan to go on Vacation, does the monetary system measure that as “investing” since a horizontal transaction took place?

    If I have a factory built with cash, is the financial sector going to miss that as “investing” because I didn’t go into debt?

    I think this site has to give us a more “For Dummies” run down on the domestic private sector S & I… everyone tends to get X-M and G-T, but S-I is a little fuzzy

    My main confusion is what seems to be the improper assignigning of the term “Investment” to any credit-expanding private-sector activity, and igonoring activities that don’t expand credit.

    • JKH says

      “WTF, I’m still cloudy on “saving” and “investment””

      They are the standard economic definitions. Some may suggest they should be changed, but we’re not assuming or recommending that.

      “If I take out a loan to go on Vacation, does the monetary system measure that as “investing” since a horizontal transaction took place?”

      No. That’s consumption. Horizontal can fund either investment or consumption.

      “If I have a factory built with cash, is the financial sector going to miss that as “investing” because I didn’t go into debt?”

      No. It’s still represented in the horizontal system, because the starting point was a corporate cash asset and an equity claim liability. Both of those are financial assets held by the corporation and its shareholders respectively. The cash was then used to make a real investment, which would have created income payments to factors of production, etc.

      “My main confusion is what seems to be the improper assigning the term “Investment” to any credit-expanding private-sector activity, and ignoring activities that don’t expand credit.”

      That’s not done here. Households can fund investment directly from saving (e.g. real estate), which is not credit expanding. Corporations can fund investment from saving (retained earnings), which is not credit expanding, although it does result in a corporate sector net financial liability as part of the horizontal nexus, offset by a household sector net financial asset (claim on book value of the stock). Conversely, credit expanding activity can fund consumption as well as investment.

      • Steve Roth says

        @JKH: “Households can fund investment directly from saving (e.g. real estate), ”

        Don’t you mean residence-building/remodeling? RE/land purchases aren’t treated as investment, rather more like financial-asset purchases.

        • JKH says

          Mostly new housing – the value of new residential real estate recorded in the GDP accounts is an investment flow that becomes part of the total residential housing stock.

          Overall, the residential housing stock is a real investment (stock) component of household assets, marked to market, which when combined with household NFA (and maybe some relatively minor additional pieces of additional household investment stock) equates to cumulative household saving, marked to market.

          Trade in existing homes is conceptually part of the flow of funds, not macro level saving.

      • Joseph Laliberté says

        Corporations do not fund investment with retained earnings. In your last paragraph you may want to say that they fund investment with internally generated cash. Also, this stock of internally generated cash is not saving, but rather more akin to past operating cash flow minus past capital expenditures, or (S-I) in stock form.

        • JKH says

          Thanks. We’re probably not that far apart. Here’s how I was looking at it:

          In the first order of things, earnings are credited to the retained earnings account when income statement items are reconciled to balance sheet statements at the end of an accounting period. That’s before payment of any cash dividends, which other things equal are also a deduction to retained earnings account.

          So, for a given income statement period, the net income flow into retained earnings account is earnings not paid as dividends. During that period, earnings also generally result in balance sheet cash at the first stage, or at least as the default balance sheet result if nothing else is done with the earnings. I.e. cash is generally the initial balance sheet (stock) asset that connects across accounting statements with the flow of income into retained earnings account. At that point, if there is no further change, the flow into retained earnings (or the flow of earnings not paid as dividends) is considered a source of funds and cash is considered a use of funds, as per a sources and uses of funds statement covering that accounting period. I.e. the flow of income not distributed as dividends is also a flow of funds in the form of a change in the stock of retained earnings.

          Now suppose instead that within the same accounting period the same cash is used to purchase investment goods. By the end of the accounting period, investment goods will now show up as a use of funds (instead of the original cash) and the income flow into retained earnings will show up as a source of funds for the same accounting period. Net result is that by the end of the accounting period you have investment as a stock and retained earnings as a stock, offsetting each other as balance sheet items.

          Also, earnings not paid as dividends is considered saving at the corporate level. Thus, saving has funded investment at the micro level.

        • Joseph Laliberté says

          I see what you are saying. So far so good. I need another clarification though, you said:
          “Corporations can fund investment from saving (retained earnings), which is not credit expanding, although it does result in a corporate sector net financial liability as part of the horizontal nexus, offset by a household sector net financial asset (claim on book value of the stock). ”

          I can see why it would result in a corporate sector net financial liability, which would be offset by the household sector net financial asset (I guess you are implicitly referring here to wage “leakage” from the corporate sector to the household sector as a result of the investment). I do not see how the resulting net financial assets from the financial sector would be “claim on book value of the stock” though. Could you explain? Thanks

        • JKH says

          Retained earnings increase the book value of common shares. Shareholders have a claim on that value in liquidation, adjusting for residual effects of liquidation transactions. That value is also reflected on a more viable basis in the marked to market value of the stock, as valued by the stock market. The relationship between book value and market value is obviously not 1:1, but the impact of retained earnings on book value will definitely be incorporated in the market’s valuation of the stock, and therefore in the value of household NFA. The market knows that the firm has retained some of its earnings, it knows what the book value is, and it uses that information in valuing the stock (along with a lot of other things, of course, including what the company’s strategy is for using the money from earnings that it has retained.)

        • FDO15 says

          Retained earnings is profit not paid out in dividend form and reinvested in the company.

  41. JKH says

    The Harless story is quite consistent with the MMR story.

    First, he gets the definition of saving right:

    “Like “to rest” or “to fast,” the verb “to save” is defined not by what you do but by what you don’t do. “To save” means “to receive income and not to spend it.” … the act of saving is itself entirely passive… Savings are defined as unconsumed income. Thus “savings equal income minus consumption.” You do the algebra.”

    That’s the standard definition of saving (he messed up by using the plural, but that’s minor). Harless is smart enough to know you can’t change that definition without committing suicide by inconsistency.

    Second, he deliberately doesn’t deal with sector imbalances at all:

    “In the simplest case, where there are no inventories, depreciation, government, or foreign trade, it is trivial to prove that “savings equal investment.””

    The fact that he doesn’t deal with sector imbalances means he doesn’t touch on the issue of a sectoral mismatch between S and I. If he did, he would.

    He uses S = I because he’s doing a single sector economy, not because he’s changing the definition of saving.

    • JKH says

      BTW, the reason saving must be defined the way that it is – as an income residual – is that we have a monetary economy. And in a monetary economy we must allow for mismatches between saving and investment by sector. We must allow for financial intermediation between business and household sectors, between those sectors (or their private sector combination) and the government sector, and between all of those sectors and the foreign sector.

      Conversely, if you define investment as being funded by “spending” from income rather than being funded by saving from income, then it is impossible for there ever to be any such thing as global saving once you’ve added up the sectors. There is only saving and dissaving between sectors. Nobody can save unless it’s at the expense of somebody else dissaving. That seems like nonsense as a concept of global saving. But that’s exactly what’s suggested by sector financial balances if you interpret that equation as an equation of saving – instead of financial saving, which is how Krugman correctly refers to it in the case of the private sector.

      • Steve Roth says

        I though of a metaphor that sort of illuminates this:

        Think of a water park, with huge quantities of water being pumped up and run down.

        If you look at that park as a black-box “sector,” with the other sector being the water company, all you see is evaporation and a small amount of flow from the water company to the water park.

        It’s as if all the Fun-generating water pumping inside the park wasn’t even happening.

        The metaphor doesn’t match nearly perfectly (Fun is consumed instantly, so it’s not Investment, and etc.), but it puts across the idea that zooming in and out on different sectors, and consolidating them in different ways, reveals and obscures different dynamics.

        • Dan M. says

          I like that.

          Though for some reason I simply look at it as the economy consisting of two pieces, a real piece (real wealth creation), and the monetary piece (contracts that facilitate the real wealth production). The monetary piece all nets out because it’s not assets in and of themselves, but simply contracts that facilitate the real asset creation, so if all you pay attention to are the contracts that net to zero (especially if you simply net them and don’t look at gross figures), it’s like looking at the cover of a script to decide how good a movie will be after production.

  42. Cullen Roche says
  43. MMRist says

    New here. Can someone explain this to me like I am a 6 year old. Why is the MMT approach wrong? What is so enlightening about this equation?Thanks.

    • PeterP says

      MMT approach isn’t wrong. The whole ruckus is because MMR tries reeeeeally hard to find a “flaw” in MMT, that is all. MMT says that we should look at and care about accumulation of wealth as the causal factor (this is S-I, not S), and also care about the investment I.

      The confusion is due to idiotic definition of “saving” “S” in economics. While it is the official definition, calling S “saving” is a misnomer, it is the accounting record of investment, nothing else. S can exist with zero accumulation of both financial and real assets, so it is nowhere near what normal people call “saving”.

      I found this very enlightening:

      If the economy consists of people selling and reselling investment assets, it will have plenty of S=I, yet no financial assets will be accumulated and the quantity and value of investment real assets will be constant too, accumulation is zero. So to get excited about S>0 is just unwise.

      To “save” (colloquially understood) is to spend less than income, or accumulate dollars (closed economy for simplicity):

      Net Saving (colloq. = accumulation) of the private sector = (income of the private sector) – (spending of the private sector) – taxes = Y-(C+I)-T=C+I+G-C-I- T=G-T

      this by accounting is equal to S-I.

      Net saving (accumulation)= G-T = S-I

      So the accumulation of dollars, which is the colloquial understanding of “saving” is S-I, not S. MMT calls this S-I “Net Saving” and claims this is the important factor, not S itself.

      In other words, instead of constructing the accumulation (net savings) from S and I, we could use Net Savings and investment “I” as the primary objects and then define S (if we cared, which we shouldn’t):

      S = Net Savings + I.

      Why would anybody assign any particular importance to this combination is beyond me. The first component is the money set aside (unspent income), the other is *spending* on investment so it is adding apples to oranges .

      • AK says

        PeterP – my thoughts exactly.

        I have refrained from commenting specifically on the “S = I + (S-I)” revelation thus far, because I could not for the life of me figure out what new point – or even, what new clarification – was being made. (NB: That is no disrespect to JKH – his exposition is an eloquent and correct one – I just don’t feel it adds all that much).

        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.

        Given that the private sector is an amalgamation of individuals with different risk appetites, we can surmise that both risky investments and risk-free “net savings” are desired by the private sector in differing ratios at different times.

        I would be delighted if someone could point out to me (i) why I should be too excited about this observation and (ii) where MMT has ignored/obfuscated this.

        • Cullen Roche says

          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….

        • Ramanan says

          “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 says

          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.

        • Ramanan says

          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.

        • AK says

          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.

        • Ramanan says


          “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.

        • AK says

          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.

        • Ramanan says

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

        • Cullen Roche says

          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 says

          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????

        • AK says

          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!

        • AK says

          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 says

          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.

        • Cullen Roche says

          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….

      • JKH says

        So as noted further below, if you propose to change the definition of saving such that expenditure on global investment counts as “spending” and does not correspond to global saving, then global saving must identically be equal to zero.

        At the same time, there is in excess of $ 100 trillion in financial assets on the books of household balance sheets globally.

        So the implication according to your desired definition of saving is that this $ 100 trillion of household financial assets, net of liabilities, is a reasonable measure of (cumulative) household saving (marked to market).

        At the same time, cumulative global saving must be zero according to your revised definition.

        Are you really comfortable holding those two beliefs simultaneously?

        • AK says

          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.

        • John Carney says

          I pointed this out right here:

          “It’s worth keeping in mind that it is just as true to say that the entire world itself cannot “net-save financial assets” anymore than the private sector can. Everyone’s financial asset is someone else’s liability. Viewed on a planetary scale, net financial savings is completely impossible. Unless, you know, we start trading with Newt Gingrich’s moon colony.”

        • Dan M. says

          His point on whether the gov’t should bend to the whim of what people want (the ability to net-save) goes both ways.

          During investment booms, when people could care less about treasury instruments, I wonder if the gov’t should still keep a buffer stock out there in spite of the private sector’s lack of apparent demand for that instrument.

        • JKH says

          Good point.

          It’s always wise to check out the view from 40,000 feet, or a quarter of a million miles, as it were.

      • Cullen Roche says

        Actually, MMT’s design to bring the state back to “center stage” is wrong. There’s no “money monopolist”. There’s no “Without a government deficit, there would be no private saving.” There’s no rationale for setting prices. There’s no rationale for the job guarantee. That’s the whole point. When you visualize the picture correctly (which S=I+(S-I) helps you achieve) you can easily connect the dots on all of this and see why MMT’s desire to bring the state “back to center stage” is wrong. But honestly, we’re not trying to convince MMTers nor do we even want to convince MMTers. We’re just trying to present a more realistic version of the way our monetary system works.

        • leroy says

          That’s just nonsense. Give us a break.

        • Cullen Roche says

          What is nonsense about it?

  44. Dan M. says

    Shouldn’t the gap have gotten wider in 2010 and 2011 with fiscal deficits far in excess of the trade deficit?

    • Ramanan says

      Makes sense:

      If you see the graph, the last data point is missing for Q4. So use Q3

      Government deficit is not there in the data but from Fed Z.1, Govt deficit ~ 1470bn, CAB minus 447bn

      So the sum is $1025bn which is close to $950bn for Q3 and won’t match due to discrepancies which will be corrected later to a lesser discrepancy.

      Is that what you were asking?

      • Dan M. says


        Not really… basically, we’ve been running $1 Trillion + Fiscal deficits every year since 2009, and our trade deficit has hovered between $300 & 550 billion every year.

        If (S-I) is truly a factor of trade surplus/deficit and fiscal surplus/deficit, then the gap between the blue line and the red line should have expanded by $500 Billion or more in 2010 and 2011.

        Is there a delayed effect between some of this stuff? It doesn’t seem to match my figures for the size of fiscal & trade deficits during the past decade.

        • Ramanan says

          Dan M,

          Seems consistent with numbers here (Table F.8)

        • Dan M. says


          I don’t know both what specific years you’re trying to measure, or what amounts you are specifically saying they are “consistent with.” Do you mind being a bit more specific?

          If you follow those two links, you’ll find that in 2010, we had a $1.3 trillion fiscal deficit, and a $500 Billion trade deficit. That SHOULD mean that the GAP between the blue and red line would GROW by $800 Billion. It did no such thing. It stayed about even. Could someone please explain to me where I’m going wrong?

        • Ramanan says

          Dan M,

          The gap is the difference. It doesn’t grow by that number $800bn

        • Dan M. says

          I was thinking the graph was in terms of accumulation (a balance, not a flow). Therefore the gap (to me) should have grown over that period.

          Thanks for clarifying!

        • beowulf says

          The trade deficit was $700B in 2007, its actually been smaller since then (last year it came in at just under $600B).