Tuesday, February 28, 2012

MMR — Paul Krugman Does S = I + (S-I)


Read at Modern Monetary Realism
Paul Krugman Does S = I + (S-I)
by Cullen Roche

62 comments:

Matt Franko said...

Noooooooooooo!!!!!!

TomatoBasil said...
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TomatoBasil said...
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Dan Kervick said...

This is becoming sad. Don't encourage him.

paulie46 said...

Neil Wilson's last two blog posts seem to put all of the S = I + (S - I) in perspective - No Big Deal.

and the guys that have been accusing Bill Mitchell of obfuscation are now wearing no clothes but I don't expect a retraction.

TomatoBasil said...
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Detroit Dan said...

Thanks for the Neil Wilson reference, paulie. Neil Wilson is the new JKH in my book...

Unforgiven said...

Arrgh!!!! Can someone explain this to me? I just don't understand what the fuss is about.

My point of view is that there are two ways to sideline money. Gov't bonds or bank savings accounts within the FDIC cap. Everything else is investing and may the market have mercy on your soul.

TomatoBasil said...
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Leverage said...

What's the big fuss? Private sector can't NET SAVE without government spending.

off course for Krugaman 'for every debtor there is a creditor' so it doesn't matter if there are liabilities & assets in different economic actors. But in the real world households CAN'T net save without money entering the system via government deficits. So the private sector can leverage fiat money all it wants using credit money, but that leverage (investing) is a liability from someone, not net savings.

Very easy to grasp. Is MMR devolving into neokeynesianism or what (which was again devolving from actual keynesianism)? No big finding there, only arguing over semantics.

If the private sector had to cancel all the leveraged credit on top of credit it would end with zero saving if it weren't for government spending. That's how the system works, the difference between "investments" and "savings" it's telling you the structure and distribution of financial assets and the quantity of leverage in the system, nothing of this denies that private sector CAN'T net save without a government deficit.

What is important here in that there is a point when the structure of savings & leverage can't allow private sector expansion anymore. And that's because private sector can't net save without deficits, if it could then this problem wouldn't exist, plain and simple.

widmerpool said...

I'm a layperson who got into MMT. Wasn't paying attention for a while and I wander into the MMR website and its a filled with bile and venom.

Is this all because Bill Mitchell slighted Cullen?

I'm all for debate but a lot of this seems completely personal.

Unforgiven said...

So the crux of the argument is that MMR is saying that the private sector CAN net save without gov't deficits?

Doesn't make any sense to me.

geerussell said...

As far as I can tell, the crux of it is they are narratives about two different things.

MMT begins with a narrative about currency users vs currency issuers. To tell that story it sets the stage with the aggregate actors representing government, private domestic and external in the sectoral balance equation.

MMR seems to want to tell a story about the dis-aggregated private sector. It sets the stage with aggregated household, corporate and private banking sectors and proceeds from there using S=I+(S-I) to illuminate the story.

After watching multiple performances of both plays, I have found only overlapping, complimentary tales told from different perspectives. Though some playwrights in both houses seem to occasionally regard others who aren't performing their preferred story as committing a disservice to the public.

Unforgiven said...

Thanks, that helped. So it seems to be an issue of defining relationships as you leave the broadest macro level and start getting more granular.

Tom Hickey said...

The did not arise out of MMR but an ongoing discussion about S + I involving Steve Waldman and Steve Roth with JKH in the comments to their blogs over some time. From JKH's point of view, the issue is about sorting out the accounting. It was initially raised by JKH, who is one of the experts in the this area. It is not a frivolous undertaking.

Everyone admits that that when government injects funds into non-government through deficit, this increases the net financial assets of non-government.

Everyone agrees that all credit-debt relationships in non-government net to zero.

Everyone also agrees that investment is capable of increasing real assets that are owned by individuals. These individual holdings of real assets are financial assets, like equity shares. They are financial assets with without a credit-debt relationship, so they are also net financial assets (not summing to zero in aggregate).

The question is how this is reflected in national accounting. JKH's analysis suggests that S = I + (S-I). Here is the comment in which he first proposed it.

paulie46 said...

Tom,

The worst part about all of this is that during the discussion about what the "magic equation" really meant the character of the MMT founders was impugned in the process.

It's a great debate if one enjoys solving puzzles (and I do) but it's a bit over the top when people are characterized as participating in obfuscation, intellectual dishonesty, intentionally misleading,lying, etc. when there is an honest disagreement over what the "facts" mean.

FDO15 said...

Stephanie Kelton has described a budget surplus and a current account deficit as leading to a "net loss" for the private sector. This is wrong. It's the crux of the entire debate. MMT frames the sectoral balances equation to mean that the private sector can't increase savings without government spending. This is wrong. Categorically wrong. And it's because MMTers don't understand how (S-I) is broken down.

If you all don't understand this then go read some of JKH's comments, who is now calling himself an MMRist. You all don't have any idea how wrong MMT is on this stuff. But you keep drinking the kool-aid.

Leverage said...

FDO,

Private sector savings net to zero. Savings in financial assets, off course. Creation of financial assets leads to real production of goods & services, so the private sector leveraging itself (investment) can increase the number of assets and the flows in the economy (increasing production & activity). But this does not mean that the private sector NET savings (in a monetary economy that is NFA) increase too. Is simply leverage, a web of paper liabilities (often increasing in complexity which adds to risk and eventually collapse, but that's other matter). At the aggregate level there is no net savings, and if you brake down to micro level things get even worse off course (looking at the structure of savings & investments).

Do MMR'ers understand Say law is false? I hope they do because this is a constant amongst postkeynesian schools, which are the only ones that have macro right. Otherwise you are just falling into neokeynesianism or austrian economics. There is no need to repeat the same discussion that has been done sicne decades ago. Why do I say this? Because the only way one can treat this as any sort of "discovery" it's because it's mixing up real savings & investment with financial & monetary shenanigans, and because Say's law is false, that's a wrong thing to do.

There is a credit-debt relationship which reflects someone asset is someone else liability. This is always true, as it's the essence of commerce and a capitalist (non-barter) economy, an investment in a monetary economy means the transference of a financial asset and the creation of a liability and obligation. Then you can 'monetize' that new liability & instrument and leverage it, creating more credit in the process, but again having more liabilities in exchange. At some point that liability has to be paid in the unit of account, and in the current system that unit can only be created by the state.

This never increases net savings, it just increases the web of liabilities. So unless someone else 'exogenous' to the private web of liabilities (the government) creates the paper asset and puts it into the hands of the people there is no way that net savings are increasing, what you have indeed is an increase in the web of liabilities (yes, I'm repeating myself, but obviously some people has a problem getting it) of the private sector.

SocGen had a nice paper back in 2007 I think which explained how the leverage of 'money things' (credit, MBS, commercial paper, whatever) and the crash in the capacity to leverage by the private sector lead inevitably to the expansion of the fiat base -reserves and sometimes outright printing- (which we have seen in the last 4 years, with CB's owning 40% of GDP in paper assets). This is because the private sector is incapable of creating NET savings. Otherwise this problem wouldn't exist and financial crisis wouldn't ever happen (unless created by real supply shocks).

Honestly, I fail to see any big insight. But well, you can keep discussing facts and reality all you want.

Leverage said...

BTW the problem is this: you are taking a tautological accounting identity and you are confusing it with flows.

What this tautology tells you is a photography at some point but it does not tell you how you evolved from photography A at time X to photography at time Y. That's a dynamic that can't captured by a simple arithmetic equation or tautology.

Hence if you see the equation at time X and the equation at time Y and you conclude that savings are higher because there was investing, so investments are creating saving. No they aren't, what you have is assets creating liabilities through the process of leverage.

Keen models show how this dynamic works at the endogenous horizontal level (while they ignore or don't include yet the vertical level, which sometimes its importance is exaggerated by MMT'ers).

In reality it's about definitions to frame the debate, you can't call liabilities savings because of the dynamics of how the creation/destruction of these liabilities works, they are never going to be savings because their natural inflationary-deflationary cyclical nature, here is where is queue what I said about the SocGen paper back in 2007 or 2008.

The nature of instruments changes with the market conditions, so quasi-money can swift to useless paper and savings are destroyed in the process. So in the end it's only the paper which is the unit of account what can be counted for savings and everything else is just leveraged paper.

I may go as far as to say that all the credit money is not savings but just unrealized fiat by the government waiting to be realized at some point in time (that's why public debt of the issuer is considered money, you know for granted that is a form of inflationary money because you ALWAYS will be able to redeem it for money in the future), so it's always about the hierarchy of money-things.

Tom Hickey said...

Leverage, good points. I think one of the accounting question is how to account for the value of shares that are carried at book by firms and the market value of shares held by equity owners. There are actually many values corresponding to shares in addition to book value and market value. There's also the market value of the real asset (liquation value) and replacement value (cost of recreating the real asset at market prices for materials and labor). Is there any net financial saving created in the accounting?

I think that the JKH and consequent MMR claim is that MMT economists have obscured the accounting issues arising from the relationship of households and firms by combining household and firms into private domestic sector, at least in their statements for popular consumption.

PeterP said...

FDO,
"This is wrong. Categorically wrong. And it's because MMTers don't understand how (S-I) is broken down."

The power of accounting is such that you know for sure that S-I=G-T (in a closed economy) *no matter how S-I is broken down*. You can do whatever tricks you want and still S-I=G-T. Sorry.

fdo15 said...

Leverage, you have misinterpreted my entire point. First off, I am not an MMRist or MMTist.

But more importantly, this is what Kelton says regarding the sector balances:

"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."

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

This is totally wrong. The private sector does not experience a "net loss" in this situation. That's ridiculous. It implies that I>S is somehow a "net loss" and that the private sector financial position is always deteriorating if the government runs a budget surplus and current account deficit. The reality is that the private sector could be booming if I>S regardless of what the other sectors are doing. Ramanan has pointed to actual examples of this throughout history.

It's a basic misunderstanding that MMT makes all the time by focusing on (S-I) in the sector balances and not drilling down into S.

Leverage said...

"I think that the JKH and consequent MMR claim is that MMT economists have obscured the accounting issues arising from the relationship of households and firms by combining household and firms into private domestic sector, at least in their statements for popular consumption."

How this helps their case? If you break down the aggregate to the micro level you see it's even worse (and then is the problem of to what level are you going to break it down, where is the limit, dumping down every household in the same account is as problematic if not more, why not break by income share and assets holded for example?):

1) In one side you have a lot of liabilities to banks by households. And the assets used to leverage ("create savings by the private sector") now at market price just do not add up. So what you have there was a destruction of 'investments' there (which makes sense because bubbles destroy capital), the investments of households where destroyed (and that's why they now are underwater).

2) Again, on banks balance sheets you have a lot of savings in the form of assets which market value is below its initial value, so 'savings' where destroyed in the process.

3) At corporate level you have a lot of savings in the form of units of accounts which liability are at banks which hold 'savings' that are not savings anymore because the drop of the market value of such assets.

So indeed, you have a lot of paper created at the private sector, and all that paper derives its price from assets increasing or holding its value at market price.

To rest my case: in 2007 remove central banks from the equation, where would all these 'savings' rest? No where, all these savings would have been completely wiped out (that's what debt-deflation means). Defaulting is the act of 'unsaving' or destroying the value of liabilities and removing a piece from the web of liabilities, default takes places because 'investments' where unsuccessful so you can't monetize these (assets used to leverage creating more 'savings' in the process).

For something to be a net saving it must 'exist' independently of the dynamics of the market, this is not the case of private sector created savings, including credit money, which always depends on: a) market conditions; b) public institutions (central banks, governments, etc.) to keep value no matter what.

Leverage said...

"The reality is that the private sector could be booming if I>S regardless of what the other sectors are doing. Ramanan has pointed to actual examples of this throughout history."

I agree with this, but what is booming is credit, not savings. Private sector can expand the economy without the help of public sector, but MMT'ers now this because they say: if governments reduce the deficit or get into surplus, private sector has to LEVERAGE (increase credit-debt) to grow economic activity.

That's in line with what I've been saying in the other posts. Private sector can't create net savings, it can leverage. When private sector peaks credit (and it always does depending on the household capacity to leverage, based on incomes!) then it all blows up and private sector destroys 'saves'. That's a net loss (though probably not what Kelton was pointing out, but in the end is the same, is just about it happens now or later).

"It's a basic misunderstanding that MMT makes all the time by focusing on (S-I) in the sector balances and not drilling down into S."

Again,what you are calling S are not real savings, is just leverage. Is not pure 'units of account' introduced into the system, is an rehypothecation of assets creating the illusion of net savings, but are not savings. Is just leveraged fiat.

FDO15 said...

Wait a minute here Leverage. Are you stating that borrowing is the opposite of saving? Oh m god. Please tell me you wrote that whole comment incorrectly because if that is the basis of your argument then the MMT side is even more wrong than I initially presumed. If this sort of understanding of (S-I) is the level of accounting that MMT has regarding sector balances then the theory is even more confused than I initially thought. "net loss". What a joke. Borrowing is dissavings. Are you kidding me with this "analysis"? MMT would get buried by any rational accountant on this nonsense and anyone reading JKH's comments (who actually understands them) can see that he has already buried MMT under this nonsense.

I can't believe what I am reading here.

paulie46 said...

Leverage

"…Private sector can expand the economy without the help of public sector…"

I agree with this but you left out that if the government doesn't follow up with money creation to monetize the gains the gains will be lost when the economy implodes.

FDO15 said...

Most people don't monetize most of their net worth. It sits in a house or on secondary markets where it can be monetized in a matter of moments. You're backpedaling on the MMT position and making ridiculous excuses for their inaccuracies.

I can't believe what I am reading from MMTers on different sites. Unbelievable really.

paulie46 said...

FDO15

You seem to mis-understand what monetization means.

If you have made money on paper because of something that has added value to the overall economy the money to monetize that gain in value doesn't exist yet - the government must provide it before it can move to the cash side of the balance sheet.

Otherwise your gain would have to come out of someone else's pocket which is a net gain of zero dollars (and a zero gain in net value).

Question. Is it possible for the nation to save as a whole (savings accounts, mutual funds, etc.) simply by everyone borrowing money and saving it?

FDO15 said...

No, I am afraid I am not misunderstanding anything. I've been reading your comments on various website for 2 weeks now and your level of understanding on all of this is low. You seem to have just learned that (S-I) isn't what you thought it was and yet you're still going around talking to people like you know more than they do. Where do you MMTers get off when you say things like "net loss" to describe the private sector financial position? Do you even understand how bad that comment is? How wrong it is? And this is a professor of economics? Are you kidding me?

Most financial wealth doesn't get monetized. Have any of you ever run a business, bought a home or done anything that resulted in substantial net worth? Or are you all just pulling words out of some textbook inbetween the classes you're teaching? Most of the assets in this world are not monetized. And to imply that we need big budget deficits to facilitate this is putting the cart before the horse.

I can't deal with this level of misunderstanding. I see how MMTers like to fight dirty online and mislead people. I'll leave you to it.

PeterP said...

FDO 15,

Do an exercise for yourself: Start with monetary wealth of the private sector at X(any level), do a one period accounting with G-T=0 and S>0 and you will see that final_wealth=X. It did not increase.

The spending can increase, the GDP can increase, but it is necessarily driven by expanding credit, as the assets don't increase, so this situation would be called by a normal person "no saving" (because net saving is zero). And yes, Kelton was right, if G-T<0 the wealth stock necessarily DECLINES, to the dollar by this much, so this is a net loss, even if S>0. That is just a fact. The possible definitions of S (in a closed economy) that are equivalent are: S=Y-C-T, or S=I+(G-T). So S-I=G-T by definition, you cannot debunk a definition. And G-T is the net flow of funds into the private sector. So if S>0 and S-I<0 the wealth of the private sector *declines*. Yes, it can coincide with increased spending, out of debt, which is perfectly known to MMT and doesn't disprove anything.

Leverage said...

"I can't believe what I am reading here."

I'm not an MMT'er nor a MMR'er (through I fail to see much different things between both right now), you will have to ask Kelton for what she meant.

"Wait a minute here Leverage. Are you stating that borrowing is the opposite of saving? Oh m god."

No, that's not what I'm saying. What I'm saying is that when you borrow credit into existence you are not creating any savings, you are creating an asset AND a liability. And the way the money-credit system works when there is a deleveraging process (and here what matters are flows, not stocks) you are destroying what you are calling 'saves'. Can you explain me how could theoretically saves disappear (through it never does because governments backstop it with fiat) from the financial system if there are net saves? What happens if central banks don't buy financial assets equivalent to 40% GDP? Where do these 'savings' end?

If you can't believe reality I don't know what to say. That's how it works, it's a fact, not an opinion.

Leverage said...

(I'm not a MMT or MMR but I agree in part with both theories, for example I like how MMR looks a bit more on how they look at productivity and trade & current account balance.

With MMT I like the operative description of how the system works and I agree plenty on the theory of money, though not completely, I also agree obviously on the issue discussed here. I've reservations on the JG, but probably accept the general idea at least as a transitory mechanism (the devil is in the details anyway).

When it comes to description of monetary reality which is what matters I don't find much difference, yet at least. But MMR is just a blog project, when they produce sufficient literature with empirical data I will look into it)

Andrew said...

Are some confusing the value of things (how much money someone might give you for them), with money? Money can't be turned into a house and a house can't be turned into money. The only way you can "save" money is to stick it in the bank or under a mattress.

Money is created when a loan is made. Money is destroyed when a loan is repaid. What am I missing here?

FDO15 said...

Sorry, but you're all still missing the point. Kelton is categorically wrong. There is no necessary "net loss" when the government runs a budget surplus in a closed economy. The private sector could be undergoing an investment boom where real wealth is growing substantially. Government spending does not decide how wealth expands and contracts. It only does so in a meaningless nominal sense. So yeah, if you're saying taxing me $1 pulls $1 out of the private sector then I will respond with, duh. But MMT wants to imply that the private sector experiences a "net loss" because of this when that is not necessarily the case. I might have been taxed $1, but I might have invested $4 in a cow which now produces $2 worth of milk. Did I experience a "net loss" there? Of course not. I experienced a net gain and I am wealthier because of the output of the cow. Kelton is wrong. To claim otherwise is ridiculous.

PeterP said...

FDo,

"There is no necessary "net loss" when the government runs a budget surplus in a closed economy. The private sector could be undergoing an investment boom where real wealth is growing substantially."

OMG. No MMT-er claimed otherwise, do you get that? The fact remains that if the government runs a surplus the private sector *financial* wealth declines by exactly as much (in a closed economy). Try debunking that. Kelton was right, period. And she is well aware that in the same period the *real* wealth might have grown, heck, we just lived thru that during late Clinton years - the bubbles replaced the missing financial wealth. All was well until the bubbles burst.

You are erecting a strawman, you try to put a statement in the MMT-ers' mouths that they never made. MMT is very well aware that the real wealth is also wealth, the whole prediction of the crisis was based on that - the *real* housing wealth collapsed and not without consequences.

Trying to argue that MMT discounts the importance of real wealth while its most successful prediction was based on it is simply ridiculous.

Matt Franko said...

FDO,
Where did the guy who bought the milk off you get the $2?

Resp,

FDO15 said...

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.

FDO15 said...

Matt, the domestic private sector was in deficit in almost every quarter from 1997 until 2008. Yet net worth rose more than 100%. Where did those dollars come from?

Think about that for a few minutes. The answer might come to one of you can think beyond the myth that government spends wealth into the economy.

PeterP said...

FDO

You are getting emotional because you lost the argument.

"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 was correct, and? The financial wealth has to decline. She didn't say it couldn't be offset by an increase in real wealth, because it clearly can. In the same fashion declines in real wealth are not automatically offset by increases of financial wealth, as we saw in the housing bubble collapse. That is a strawman argument.

"SHE is the one who said the private sector experiences a "net loss"."

And SHE was correct.

"The private sector does not experience a "net loss" just because a budget deficit is less than a current account deficit."

It does, its financial wealth declines. But the real wealth can grow, every MMT-er knows that. And yes, it can grow so much as to offset the decline in financial wealth. Do you think it is an unknown fact?

"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."

LOL. Seriously? The net loss was in the financial component, accounting forces that. Check the components that you like so much - the increase of net worth had to be in real assets. Real wealth can do whatever, we all heard about speculative bubbles.

Still, S itself is not very informative.

I can show to you that with a balanced budget and positive "saving" S the wealth stock of the private sector can decline:

Enough if the prices of real assets go down.

Let's say there is no govt, so G=T=0 and S=I. In each period the private sector builds only 1 house, all identical. The present stock of houses in 100 houses, each worth 1/2 of some unit. Next period (period 2) one house is built and sold, price =1/3, then next period: price 1/4. etc. The "saving" in periods 1,2,3 is: 1/2, 1/3, 1/4... all positive. Yet since the houses are all identical, the next house sold cheaper than the last decreases the value of ALL existing houses. The number of houses in periods 1,2,3 is: 100, 101, 102..., and their worth: 50 (100*1/2), 33.67 (101*1/3), 25.5 (102*1/4)... - the real wealth declines! Wealth declines, all this with positive saving in each period. Wow, did I just debunk all of MMR?

paulie46 said...

FDO15 said…

"think about that for a few minutes"

Only takes a few seconds. Net worth |= net cash. There is a finite number of dollars in the non-government and deficit spending put every "net" dollar there.

What is a "net" dollar? Let all loans in the non-government settle. The number of dollars remaining is "net" dollars.

Here's an example of what's wrong with your net worth argument:

Buy a house for $100,000 with $20,000 down.
You had $20,000 cash and now you have $20,000 in equity - a $100,000 house and an $80,000 liability, with no cash. Net worth = $20,000.

Now assume your house appreciates the next day and you claim it on your balance sheet at $120,000 value. Your equity has gone up $20,000 to $40,000 bit you still have no cash. You won't until you sell at $120,000 and realize the gain.

The value (to the economy in the aggregate) won't be realized until the government creates the money, otherwise money will just move from one persons bank account to another. No net change in net worth.

II'm afraid I just wasted 5 minutes of my life.

Anonymous said...

Seems like FDO is confusing REAL assets with FINANCIAL assets.

MMTers always stress that that gov can be the only source of net FINANCIAL assets. I mean, what's so hard to understand?

FDO sounds like Austrians when they talk about saving in real assets when MMTers say only gov can create NFA.

FDO15 said...

If that's what Kelton meant then it's certainly not very clear. She doesn't use the words net financial assets or financial assets. Her whole piece is intended to imply that when the government tightens its belt the private sector will automatically suffer. That's obviously not true as some of you are now clearly contradicting the entire purpose of her article.

If you all admit that real wealth can increase outside of financial wealth then what's the point of writing articles like this which mislead? What is the point of focusing so much no net financial assets? It sounds like one of the cornerstones of MMT is just semantics since it tells us nothing about the real position of the private sector.

But I am sure some of you have a good story for all this that will make your mistakes appear benign.

Leverage said...

But I am sure some of you have a good story for all this that will make your mistakes appear benign.

the only one mistaken all the time in this conversation is you. I don't know which is your personal axe to grind, but if you have run out of real arguments just let's leave this conversation.

When MMT'ers talk about savings they are always talking about financial assets, because the only real savings in a monetary economy is that. In constantly mixing up real assets with savings you are just missing the big elephant in the room: when non-government sector expands usually need constant or rising asset prices 8and inflation) to sustain its 'savings' (which are not as discussed).

Yes, the private sector can leverage itself and in the process boost economic activity and consumption/demand, unfortunately this can't go forever, and going forever is a prerequisite for the 'savings' created by private sector to have any market value at all instead of being in a trash bin. So much for private sector create savings.

This is no conspiracy theory by MMT, it has been proven right time and time ago sine the creation of the modern banking system in the Renaissance. The last time that has been proved right is nowadays, with central banks having to place a bid in all the paper created by the private sector to avoid a collapse of 'savings' (which is the only purpose of why modern central banking was created in the first place) creating liquidity with their reflationary policies (to reflate the price of these financial savings created by the private sector).

Not hard really to understand, this conversation anyway is very old, you can easily track it at least back to Keynes.

PeterP said...

FDO

If that's what Kelton meant then it's certainly not very clear. She doesn't use the words net financial assets or financial assets. Her whole piece is intended to imply that when the government tightens its belt the private sector will automatically suffer. That's obviously not true
.


That is obviously true. Say you are robbed of property worth 100k. You automatically suffer, it doesn't matter if your stock portfolio gained 1M in the same period.

It would be truly idiotic to say, hey I gained on this robbery, in the end my net worth grew 900k!

Break it down: loss on robbery 100k, gain on stocks: 1M, net +900k. Same here: loss in financial wealth = T-G, gain in real worth: whatever the real assets appreciated, add the two, done. Yes, if T>G, you automatically suffer, this component is negative, period. Other component (real) may be positive, nobody ever denied that.

PeterP said...

Leverage,

When MMT'ers talk about savings they are always talking about financial assets, because the only real savings in a monetary economy is that.

I am not sure it is true. Real assets also count. But there is a big difference in whether their worth grows because eg. we have more houses, or the houses grow in value. The latter is usually unsustainable, the former is clearly a good thing and obviously sustainable, because nobody will take these houses away from us (unless building the houses saps our vital powers somehow). I think what MMT says that swings in real wealth can be mitigated by increasing financial wealth, but I don't think MMT says only the financial wealth counts. Bill Mitchell always stresses that is it the real output that ultimately counts, the financial assets are just a lubricant, an incentive for people to spend as much as needed to produce the maximal amount of real output possible.

FDO15 said...

Oh okay, so that 60 trillion in net worth doesn't matter just because it's not monetized??? Never mind that it's mostly roofs over our heads and corporations that employ everyone. All we need is the 15 trillion that the government has spent into the economy over the years because that's FINANCIAL WEALTH! Boy, you guys are a riot. You have the whole wealth creation story backwards. Let's get that government spending more so we can all become rich in financial assets!!!!!
Good day to you all. What a waste of time.

Unforgiven said...

You can decide that your real asset is worth whatever you want. If you have to sell it to pay taxes, then you find out its real value in dollars. Until then, it's marked to BS.

Tom Hickey said...

Real assets are not spendable until monetized nor financial claims on real assets spendable until realized, although increased net worth on paper may increase the wealth effect and people may spend more based on it. But spending requires using the unit of account as a medium of exchange, and this is the sine qua non of effective demand. Net financial assets in the form of cash, bank accounts and tsys are ultimately spendable and determine effective demand directly.

FDO15 said...

Tom, most of the spending in this country is done on credit. Not with currency or base money.

Is this really the level of understanding that MMTers have regarding these matters?

Leverage said...

Oh God, don't be thick and go hyperbolic on things please. No one is saying that government printing money is creating wealth:

"Tom, most of the spending in this country is done on credit. Not with currency or base money."

How does that credit get 'accounted', with an unit of account which is... In the end you always come to vertical transactions and the legal tender in the current system. Off course you don't need to monetize everything, but if there is deleverage and asset prices fall financial assets created by the private sector are destroyed.

That's a fact, so unless you find a way to have a forever expanding credit there is no way around it. Don't be thick, you're wrong, admit and move on.

FDO15 said...

"You're wrong, admit it and move on"

If say so. Here in reality, I proved you all wrong. But I will move on because arguing with you people is a waste of time. Enjoy your MMT kool-aid.

Anonymous said...

Why can't you recognize that in a monetary system, the financial balance of the private sector is extremely important?

All those houses you talk about that were built during the bubble years have depreciated in value and thousands of them sit vacant. Most of those corporations are currently not hiring nor expanding investment. Millions are unemployed and the economy can only manage weak growth. Why is that? Because the private sector can no longer tap easy credit in order to consume and the goverment hasn't replaced the spending power achieved through credit with enough NFA.

Anonymous said...

Why can't you recognize that in a monetary system, the financial balance of the private sector is extremely important?

All those houses you talk about that were built during the bubble years have depreciated in value and thousands of them sit vacant. Most of those corporations are currently not hiring nor expanding investment. Millions are unemployed and the economy can only manage weak growth. Why is that? Because the private sector can no longer tap easy credit in order to consume and the government hasn't replaced the spending power achieved through credit with enough NFA.

You can talk about real assets, but they will not be utilized without the lubricant of money.

Leverage said...

Please follow your own logic:

Why do we need central banks at all? Why were they invented? If the private sector can create an stable financial system by itself in which there can be net savings and no destruction (at aggregate level) of financial capital why do we have the current system?

Been there, done that (free banking in USA, Australia, etc.): even with total freedom the private sector is unable to create net savings because it always does end destroying them, that's because the private sector only creates financial assets through leverage, and when it deleverages it destroys financial assets. No net creation of savings, private sector 'savings' are always a zero sum game.

You only have proved something in your twisted view of reality (not that you gave any argument to start with, only pointing at an accounting identity and confusing it with flows & prices)! Not only now does the private sector fail to create NFA (and savings), it always has failed, it's damn terrible for it and has been sicne the ivnetion of modern banking! (Even in free banking times state charters and backstopping by the public where necessary otherwise ponzis would rise and fall all the time along with the 'savings' of the people, which were destroying in the process of deleveraging.)

Michael Sankowski said...

This discussion is the exact reason S = I + (S-I) is important.

This equation is where the real world and nominal world meet, shake hands and agree to do business.

One disagreement we have with MMT is the fact the entire MMT paradigm revolves around the govt issuance of NFA. The world doesn't revolve around government issuance of NFA. Those NFA are a crucial component of the real world, but not the only component.

We can in some ways view bubbles and their bursting happening in a breakdown between the real world and the nominal value of that real world.

There is no issuance amount of NFA which can prevent these bubbles from taking place, unless you think government issuance of bonds raises interest rates. I don't think thats is the case and neither does most of the MMT crowd.

I am thinking these bubbles are good things and a free lunch. It's a matter of making sure they do not break and are able to transfer their goodness to the next sector which needs a free lunch.

It all comes down to Samuelson 58 here. If the growth rate of a sector is above the non-inflation rate (and both MMT and MMR accept we can set the inflation rate in an economy) then we get free lunches until we run up against real world constraints like oil supply problems which then push the natural rate up.

It's a free lunch just sitting on the table, and Mosler saw it, but couldn't say it right because it's totally hard to say and think and even know it's there.

MMR- I think we see it a bit clearer because we had Warren shine a tiny light on it and us the way.

This equation of S = I + (S-I) is so helpful in thinking this because it makes clear the real/nominal distinction.

PeterP said...

M Sankowski,

One disagreement we have with MMT is the fact the entire MMT paradigm revolves around the govt issuance of NFA.

Which MMT-er said that MMT revolves around NFA? None. They stress that it is untimately the real output that matters. Please don't misrepresent MMT.

Those NFA are a crucial component of the real world, but not the only component.

Link please.
No MMT-er has ever said it was the only component.

MMR- I think we see it a bit clearer because we had Warren shine a tiny light on it and us the way.

You don't see anything clearer. Saying a lot of stuff on what MMT believes and getting it wrong is not seeing anything clearer. You are busy stirring up a fake controversy, that is all. None of the "discoveries" you made were unknown to MMT.

Hugo Heden said...

mike s,

> " This equation of S = I + (S-I) is so helpful in thinking this because it makes clear the real/nominal distinction "

I haven't followed the recent developments, so the equation doesn't tell me anything.. Can you explain? Or - is there a post or comment somewhere that does it?

Tom Hickey said...

Tom, most of the spending in this country is done on credit. Not with currency or base money.

Is this really the level of understanding that MMTers have regarding these matters?


The point is to influence effective demand at the margin when there is a shortfall that would result in unemployment or an overshoot that would result in inflation. Monetary policy deals with this indirectly through the interest rate while MMT deals with it directly with the amount of currency available at the margin, which is determined by saving desire of non-government.

Michael Sankowski said...

Hi Hugo,

go check out the most recent post over at MMR.

PeterP,

You have to remember I was huge fan/foot soldier of MMT and not an enemy even today. I've read hundreds of posts about MMT by MMTers, several of Scotts papers in excruciating detail for my posts on the no-ponzi fallacy, all of Warrens papers, several of Wrays papers on money and of course Kelton, Pavlina, Mitchell and others.

They talk about government NFA all the time. Warren's work deals with the private sector a bit. But I don't see any where any of the MMTers dealing with the issues MMR raises about private sector Saving.

So I don't have a quote about MMT revolving around government issued NFA. But anyone who does a decent survey would come away with the impression MMT is obsessed with government NFA. I was being kind by saying "revolves" - "obsessed" is probably more accurate.

This isn't a bad thing, because the importance of government deficit spending is woefully misunderstood by the wider econ profession.

But neither does it fully illuminate the public/private partnership we call civilization.

For example, let's ban an MMTer like Kelton from talking about government NFA and its impact on the economy when talking about MMT. What's left?

http://www.slideshare.net/MitchGreen/mmt-basics-you-cannot-consider-the-deficit-in-isolation

It's a good presentation and one I consider to be useful when thinking about the economy. But it's not the only way to think about the sector balances and it ignores the foreign sector almost entirely. It seems really slippery too because it seems to imply the private sector can't save without the government running a deficit.

It's pretty much impossible to look at the iconic MMT bar chart of the sector balances and come away with a balanced view of how the private sector drives the vast majority of economic activity without government doing a darn thing.

You might take all of this to think I don't like government at all and that couldn't be farther from the truth!

Tom Hickey said...

Mike, as Scott has said, Post Keynesians have dealt with other facets of macro and also horizontal money in Circuitism, which MMT as a development of PK takes as a foundation to build upon.

The MMT economists have specialized in what Warren has stated as the government's monopoly (and its implications in terms of operatons and policy) and "taxonomy," i.e., the vertical-horizontal relationship of consolidated cb and Treasury functions (vertical) and the private banking banking system based on public-private partnership. Since not much had been done on this area and the group of MMT economists is still rather limited, it has occupied their time.

This investigation has shown how an understanding of vertical-horizontal distinction and monetary operations, coupled with SFC modeling, the sectoral balance approach, functional finance, and Minsky's work, resolves the trifecta of production, FE & PS, which other Post Keynesians were not able to do in a way that promises loose FE and stable price level (excluding supply side issues such as arise from an oil monopoly).

PeterP said...

Michael,

Thank you for a reasoned response.

I think one has to remember that MMT is a response to the complete confusion about money spouted by the mainstream. So you start with the simplest cases and only talk about finance. I remember it was a revelation for me that when the government has a surplus, the private sector has a deficit! I think we have all been there. To ram this powerful message through our heads, you need to only talk about the financial balances, otherwise you won't explain anything. So this is the educational side of this.

Again, I would stress that MMT is well aware of the real wealth. But this part of wealth cannot be managed, so when real wealth declines, the government can only watch as it drags the whole economy into depression. I think the schemes of the govt pushing up the real wealth are unfeasible - the govt cannot bid for houses! That is why you talk about the NFA - it is a tool for a swift response to restore the wealth and mood to spend. MMT says frequently that NFA should be added and subtracted from the private sector by automatic stabilizers, with the least discretionary decisions from govt apparatchiks possible. MMT stresses all the time that the limits of the economy are real, not financial.

Calling the talk of NFAs an "obsession" is using an emotion-laden word unnecessarily. What other tools do we have apart from adding/subtracting NFAs?

So MMT sees real wealth as central, the swings of its value as a source of recessions etc. Therefore I think you are (maybe inadvertently) misleading people into believing that MMT ignores real assets. It is simply not true. And MMR adherents do believe that, it is obvious from this thread. They were mislead by you. I don't think you guys need to frame your message as an opposition to MMT, some real damage has been done already, some misinformation took root. I am not asking you to admit it, but think about it.

Regards.

Tom Hickey said...

@ PeterP

In addition, MMT's chief opponent is monetarism. MMT proposes a replacement for monetary policy with fiscal policy. It must therefore show the superiority of fiscal policy in doing what monetary policy is charged with doing under the Fed's mandate, which is to maximize production and employment while preserving price stability.

Monetary policy uses changes in the interest rate to influence the the saving desire, while MMT's fiscal approach uses changes in non-govt NFA to adjust sectoral balance approach and functional finance iaw changes in saving desire.

MMT also replaces the buffer stock of unemployed that monetary policy uses,which results in permanent idle resources, with a buffer of employed, in order to avoid the economic drag of persistent idle resources.